Published on:

RESPA Class Action Defense Cases-Pierce v. NovaStar: Washington Federal Court Rejects Defense Claim In RESPA Class Action That NovaStar Purchased Loans On Secondary Market But Finds Triable Issues As To Whether Lender Violated RESPA

District Court Grants Plaintiffs’ Motion for Partial Summary Judgment as to Whether in Connection with Plaintiffs’ Loans NovaStar Fell Within the Bona Fide Secondary Market Transaction Exemption Afforded by RESPA (Real Estate Settlement Procedures Act), but Triable Issues of Fact as to the Adequacy of NovaStar’s Disclosures of Yield Spread Premiums (YSPs) Precluded Summary Judgment on RESPA Claims

Plaintiffs filed a class action against NovaStar Mortgage alleging that it failed to adequately disclose yield spread premiums (YSPs) – payments made to mortgage brokers by lenders “as an incentive to induce borrowers to enter into mortgages with higher interest rates” – on its good faith estimates, in violation of Washington’s Consumer Protection Act (CPA). Pierce v. NovaStar Mortgage, Inc., 489 F.Supp.2d 1206, 1208 (W.D. Wash. 2007). The district court certified the litigation as a class action, id., at 1208-09. Plaintiffs’ lawyer filed a motion for partial summary judgment on the ground that NovaStar’s conduct was “per se unfair or deceptive under the CPA” and thus violated the Consumer Loan Act (CLA), id., at 1209; defense attorneys opposed the motion, arguing that it purchased the loans “in a bona fide secondary market transaction,” id., at 1210. The district court rejected the defense argument as to whether the disclosures were required, but agreed that triable issues of fact existed that precluded summary judgment.

The class action complaint alleged that in May 2004 plaintiff Larry Brown sought to refinance his home loan through NovaStar Home Mortgage, and Brown maintained that he was “not aware of any distinction between NovaStar Home and NovaStar Mortgage or that NovaStar Mortgage agreed to pay a fee to NovaStar Home” but that the payment of that fee “significantly increased interest rate on his loan.” Pierce, at 1209. NovaStar Mortgage’s “Loan Approval Summary” to NovaStar Home described the latter as a “customer,” stated the initial interest rate on Brown’s adjustable rate loan would be 8.2%, and discloses that NovaStar Mortgage would pay NovaStar Home a broker fee of 3% of the loan amount. Id. This summary also revealed that the interest rate on the loan in the absence of the YSP would have been 6.45%, id. The class action alleged that Brown never received a good faith estimate; an allegation NovaStar disputed. Id., at 1209-10. Brown signed the promissory note on May 28, 2004, and that same date NovaStar Home transferred the loan to NovaStar Mortgage through an allonge. Id., at 1209. The loan was funded through a “UBS warehouse loan,” and then transferred to a Wachovia Bank line of credit, id., at 1210. The loan documents provided to Brown “[did] not clearly distinguish between NovaStar Home and NovaStar Mortgage,” id.

As to plaintiff Ralph Martinelli, the class action complaint alleged that in April 2005 he sought to refinance his home through West Valley Mortgage and signed a good faith estimate (GFE) that stated the initial interest rate on his adjustable rate mortgage would be 8.8% and disclosed a 2% mortgage broker fee, payable to West Valley. Pierce, at 1210. The GFE also estimated “Compensation to Broker” as “YSP (0-3%)” but did not include a dollar amount, id. NovaStar Mortgage subsequently issued a purchase commitment to West Valley that identified a 1.5% payment from NovaStar to West Valley but Martinelli’s HUD-1 did not disclose this 1.5% fee, id. The class action complaint alleged further that Martinelli signed the promissory note on May 13, 2005, and that same date West Valley transferred the mortgage to NovaStar Mortgage through an allonge. Id. NovaStar Mortgage argued that it purchased the loan “in a bona fide secondary market transaction on May 23, 2005”; the loan had been financed through a NovaStar Capital warehouse credit line. Id.

Plaintiffs moved for partial summary judgment as to (1) whether NovaStar Mortgage violated the CLA, with respect to Brown’s loan, and (2) whether NovaStar Mortgage was required to comply with RESPA with respect to both Brown’s and Martinelli’s loans. Pierce, at 1211. After summarizing the CLA and CPA, see id., at 1211-12, and noting that the CLA requires compliance with RESPA, id., at 1212, the district court analyzed and rejected NovaStar’s “bona fide secondary market transaction” defense. Bona fide secondary market transactions, which involve the purchase by investors of closed loans, are exempt from RESPA. See 24 C.F.R. § 3500.5(b)(7). Loans that are financed through “table-funding” – that is, “a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds,” 24 C.F.R. § 3500.2 – do not qualify as secondary market transactions, see 24 C.F.R. §§ 3500.2, 3500.5(b)(7). The federal court’s analysis led it to conclude that the transactions were subject to RESPA because they did not qualify as bona fide secondary market transactions. Id., at 1212-14

The district court declined, however, to grant summary judgment in favor of plaintiffs on the RESPA claim. The district court recognized “RESPA requires that borrowers be provided a good faith estimate listing the ‘amount or range’ of settlement charges within three days of receiving a loan application” and that YSPs must be disclosed to borrowers. Pierce, at 1214-15 (citations omitted). But the court found that triable issues of material fact existed as to (1) whether Brown received a GFE from NovaStar in connection with his loan, and (2) “whether YSP disclosures in a range beginning with zero are inadequate.” Id., at 1215.

Finally, plaintiffs sought summary judgment based on NovaStar’s failure to disclose the YSPs on the borrowers’ HUD-1 statements in further violation of RESPA. Pierce, at 1215. Defense attorneys argued that “such a claim is outside the current definition of the class, which centers on the adequacy of disclosures on good faith estimates rather than HUD-1 Settlement Statements”; the district court agreed, and refused plaintiffs’ request to redefine the class to include this claim “[b]ecause it appears for the first time in the reply, the defendant has been deprived of an opportunity to respond to this argument.” Id.

NOTE: The class action covered a borrower if she fell within the following definition: “(1) You entered into a federally-regulated mortgage loan that was subject to the requirements of Washington law and secured by property within the State of Washington, at any time from December 30, 2001, to the present; (2) NovaStar paid money to your mortgage broker…in return for negotiating a higher interest loan for you; (3) Neither NovaStar nor the broker adequately disclosed to you the Payment on a good faith estimate dated no later than three days after the date on which NovaStar received the loan application or, if your application was received fewer than three days before you signed final loan documents, the date on which you signed final loan documents; and (4) You paid the mortgage broker compensation in the form of an ‘origination fee’ or ‘broker fee’ in addition to the Payment that NovaStar paid to the broker.” Pierce, at 1208-09.

Download PDF file of Pierce v. NovaStar