Summary:
The McClendons sought to purchase a home built by Jim Walters Homes (JWH) and financed by Walter Mortgage Company (WMC). Both the construction and the financing went through several permutations, with the size of the house, the amount of the loan, and the loan interest rate, increasing several times. Ultimately, the McClendons owned a home they had difficulty affording, faced foreclosure, filed bankruptcy and brought an Adversary Proceeding against WMC, alleging usury and multiple mortgage financing violations and unfair and deceptive acts and practices.
The first issue addressed was that the alleged usurious financing occurred more than two years prior to the instigation of the Adversary Proceeding. While the Statute of Limitations for usury is two years, “an otherwise untimely action may be revived under the doctrine of recoupment when brought defensively” and “is never barred by the statute of limitations so long as the main action is timely.” Recoupment applies in bankruptcy cases as well, with “proofs of claim serve a role similar to a plaintiff s original cause of action outside the bankruptcy context.” Accordingly, while the Statute of Limitation may bar affirmative relief based on the usury claims, recoupment allows reduction of the claim of WMC.
The McClendons asserted that the WMC mortgage was an unlawful rate spread home loan under N.C.G.S. § 24-1.1F. Usury consists of four elements:
(1) A loan forbearance of money;
(2) an understanding that the money loaned shall be returned;
(3) payment or an agreement to pay a greater rate of interest than that allowed by law; and
(4) a corrupt intent to take more than the legal rate for the use of money loaned.
Hodge v. First Atl. Corp., 10 N.C. App. 632, 636-37, 179 S.E.2d 855, 858 (1971). Malice is not required, instead “merely the intention to take the interest which is called for in the loan or forbearance agreement.” Western Auto Supply Co v. Vick, 303 N.C. 30,47, 277 S.E.2d 360, 371 (1981).
Under N.C.G.S. § 24-1.1F, however, a lender’s has a duty of care to make a reasonable and good faith determination that the borrower has the ability to repay a loan. This is a very fact specific determination, but must include “making inquiries into a borrower's credit history, income, employment, existing debt obligations, and other financial resources available to the borrower.” The lender may further verify the ability to repay through reviewing “a borrower's financial status by way of tax returns, payroll receipts, bank records, third parties, or any reasonable alternatives.” Lastly, N.C.G.S. § 24-1.1 F( c)( 4) requires additionally that a lender use "reasonable commercially recognized underwriting standards and methodologies" to assess further a borrower's ability to repay. Accordingly, WMC failed to comply with either the requirements of commercially recognized underwriting standards nor a good faith effort in establishing the McClendon’s ability to pay. That the McClendons agreed to the loan provisions was irrelevant.
After finding that the mortgage was usurious, the Bankruptcy Court held that the contract was illegal as written. Pursuant to N.C.G.S. § 24-2, the McClendons were entitled to “twice the amount of interest paid” during the four years preceding the bankruptcy. (The doubled interest is an affirmative remedy and not revived by recoupment.) The claim of WMC was consequently reduced by $64,538.28. No interest would be paid on the remaining secured claim of $59,497.57.
The McClendons also asserted claims against WMC under N.C.G.S. § 75-1.1, which states that "[u]nfair methods of competition in or affecting commerce, are declared unlawful." A mere breach of contract is not an unfair or deceptive trade practice, but, in something of a tautology, consist of conduct "which a court of equity would consider unfair” or “manifesting an inequitable assertion of power or position." A recovery based on a claim for usury and also based on an unfair and deceptive trade practice, when addressing the same conduct, is inappropriate under North Carolina case law.
That choice of remedies, notwithstanding, the Bankruptcy Court held that the refusal by WMC to extend the due date for the McClendon’s first mortgage payment, after occupancy of the home was delayed due to errors by JWH constituted an unfair and deceptive trade practice distinct from the usury claim. Damages, which were trebled, were set in the amount paid by the McClendons prior to their actual occupancy, for a total of $3,724.53.
Attorneys fees were also awarded, in the amount of $25,563.41, as such a recovery “is based on wholly different acts on the part of a defendant, namely, the failure to act to resolve the matter privately.”
Commentary:
While the Bankruptcy Court found that the actions of WMC were particularly egregious, awarding $93,826.22 in damages appears to still have been rather difficult, as the opinion takes pains to caution against this being taken as “an invitation for debtors in bankruptcy actions to bring frivolous proceedings for violations of unfair and deceptive trade practices.”
For a copy of the opinion, please see:
McClendon v. Walter Home Mortgage- Usury and Unfair & Deceptive Trade Practices.pdf
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