Summary:
McCauley raised state law claims against Home Loan Investment Bank (“Home Loan”) for unconscionability and fraud, due to multiple factors, including a hurried closing, the inducement by inflated appraisal, the disparity between the size of the loan and the value of the home, and an “exploding” ARM. Home Loan moved to dismiss on the basis that the Home Owner’s Loan Act (“HOLA”) and related regulations at 12 C.F.R. § 560.2 pre-empted these state law claims.
The District Court analyzed each aspect of the unconscionablity claim separately, ultimately finding that each was in the nature of the laws pre-empted by 12 C.F.R. § 560.2(b). The Court of Appeals agreed holding that to do otherwise would impose new, substantive requirements on mortgage lenders “those state laws establishing a basic framework for commerce, such as laws prohibiting deceptive practices.” (Laws prohibiting deceptive practices are not pre-empted.)
As to the claim that a fraudulent appraisal was used to induce the contract, however, the Court of Appeals held that this allegation amounts to “an affirmative deception by the issuer of her mortgage” and does not fall within the pre-empted laws by § 560.2(b). The pre-emotion analysis then turns to whether the fraud claim affects lending, and if so is within the types of state law that § 560.2(c) excludes from pre-emotion. As fraud is a tort claim, it falls with § 560.2(c)(4), and determining that it is pre-empted “would preclude fundamental state regulation of deceptive practices in which unscrupulous savings and loan associations might engage.”
Home Loan alternatively argued that the fraud claim should be dismissed for failure to state a claim. To demonstrate fraudulent misrepresentation, a plaintiff must prove
(1) that the act claimed to be fraudulent was the act of the defendant or induced by him;
(2) that it was material and false; that plaintiff relied on it and was justified under the circumstances in relying upon it; and
(3) that he was damaged because he relied on it.
See Folio v. City of Clarksburg, 655 S.E. 2d 143, 150 (W. Va. 2007). As McCauley alleged that she believed her home had been valued in an fraudulent amount. Further, even if Home Loan had no duty to notify McCauley of the value of the home, the allegation that Home Loan had provided such notification, was sufficient for justifiable reliance.
Lastly, Federal Rule of Civil Procedure 9(b) requires that fraud be plead with particularity, which requires that "the ‘circumstances’ required to be pled ... are ‘the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what
he obtained thereby.’" Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999) (quoting 5 Charles Alan Wright and Arthur R. Miller, Federal Practice and Procedure: Civil § 1297, at 590 (2d ed. 1990)). As Home Loan was aware of the claim and surrounding circumstances sufficient to prepare a defense at trial, the “time, place and contents” of the fraud were sufficient.
Commentary:
Given the number of inflated appraisals preceding (and causing) the mortgage crisis, were it not for Statutes of Limitations, which in North Carolina is three years from discovery, N.C.G.S. § 1-52(9), this would be a very common cause of action. It would be difficult to argue that such an inflated value was discovered since Housing Crash in the Fall of 2008. Hopefully, the mortgage lending industry is more cautious with its appraisals now. (Insert sarcasm emoticon.)
For a copy of the opinion, please see:
McCauley v. Home Loan Investment Bank- Home Owner’s Loan Act Preemption of State Law; Pleading Fraud Allegation.pdf
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