Court: No fraud in refi to a higher rate

Law of the Land

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Feb. 24, 2010

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Law of the Land

Tara-Nicholle Nelson
Inman News

Homeowners Patricia Ostolaza-Diaz and Jose Luis Diaz-Goyes had two Bank of America mortgages plus a home equity line of credit, also with Bank of America, on their Virginia home, according to court documents.

They reportedly received an unsolicited call from a mortgage broker who claimed he was from Bank of America and could refinance their loans into a lower monthly payment. The broker was working with Countrywide Home Loans and allegedly knew that the new loan arrangement would result in a higher monthly obligation to the homeowners.

At closing, homeowners were provided with and signed all the required disclosures and documents, including a truth-in-lending statement that accurately stated the actual post-refinance monthly payment obligations. As time went on, homeowners could not afford the monthly payments and, eventually, foreclosure was instituted on their home.

The homeowners filed suit against Countrywide Home Loans, alleging fraud, intentional infliction of emotional distress, and violation of the Truth-In-Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA).

After Countrywide removed the case to federal court, the district court dismissed all claims. Homeowners appealed, specifically reasserting their fraud and intentional infliction of emotional distress claims.

In evaluating homeowners' appeal, the Court of Appeals first set forth the elements of a successful fraud claim under Virginia law. Homeowners were required to show: "(i) a false representation (ii) of a material fact, (iii) made intentionally and knowingly, (iv) with an intent to mislead, and (v) reliance by the misled party, (vi) which results in damage to the misled party."

The appellate court ruled that, as a matter of law, homeowners could not possibly prove that they had reasonably relied upon any misrepresentation by Countrywide's mortgage representative, because "at closing, they were presented with documents that unambiguously spelled out the terms of the loan and contradicted (his) oral statements."

In this unpublished opinion, the Court of Appeals went on to cite a precedential opinion setting forth the rule of law in Virginia that reasonable reliance cannot exist where the party claiming fraud had in their possession a written document contradicting the fraudulent statement, even if they failed to read the document.

Next, the court turned its attention to homeowners' intentional infliction of emotional distress claim. In Virginia, the court explained, this cause of action requires that "(i) the wrongdoer’s conduct was intentional or reckless, (ii) the conduct was outrageous and intolerable, (iii) the alleged wrongful conduct and emotional distress are causally connected, and (iv) the distress is severe."

For homeowners to meet the element of outrageousness, Countrywide's behavior would have to have been "so outrageous in character, and so extreme in degree, as to be regarded as atrocious, and utterly intolerable in a civilized community."

The Court of Appeals found that, even taken in the light most favorable to homeowners, the Countrywide loan representative's behavior was simply not egregious enough to meet the required level of outrageousness.

Making intentionally false representations and refinancing the homeowners' loan with the result of payments they could not afford does not, the court ruled, "rise to the level of actionable conduct."

Accordingly, the Court of Appeals affirmed the lower court's ruling dismissing the homeowners' case in its entirety.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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