Class Action Complaint Alleging TILA Violations for Failing to Disclose “Key Terms” Associated with Negative Amortization/Option ARM Loan Satisfied Rule 23 Requirements for Class Action Certification California Federal Court Holds
Plaintiff filed a class action against U.S. Financial Funds, with whom she had refinanced her home loan, alleging violations of the federal Truth in Lending Act (TILA) and asserting various California statutory and common law claims; specifically, the class action complaint challenged disclosures made by defendant “in connection with the terms of a residential mortgage product that was sold to Plaintiff.” Lymburner v. U.S. Financial Funds, Inc., ___ F.3d ___ (N.D.Cal. January 22, 2010) [Slip Opn., at __]. According to the allegations underlying the class action complaint, plaintiff refinanced her home loan in 2006, obtaining an Option ARM loan. Id., at 1-2. The initial payments due on the loan reflected a “substantially discounted initial interest rate,” and while the interest rate could adjust monthly, the minimum monthly payment was fixed for five years. Id., at 2. U.S. Financial served as plaintiff’s mortgage broker and originated the loan, id. The loan documents disclosed the maximum interest rate that would be charged, as well as the maximum “unpaid principal that might result from negative amortization.” Id. The class action complaint alleged that just before her retirement in October 2006, defendant contacted her and advised that it could reduce her monthly mortgage payment to $700; plaintiff agreed to the loan without realizing that the principal amount owing on the loan could increase. Id. (The loan documents inflated plaintiff’s income; she initialed this page of the loan application and asserted that “the higher numbers did not strike her as being incorrect.” Id.) When plaintiff received her first bill and discovered the 9% interest rate and negative amortization, she tried to refinance the loan and made two mortgage payments before successfully refinancing her loan in April 2007. Id., at 2-3. The class action alleged that the failure to disclose “the key terms of the loan” violated TILA and constituted fraud under California’s Unfair Competition Law (UCL). Id., at 3. Plaintiff’s counsel moved to certify the litigation as a class action. Id., at 1, 3. The district court initially indicated that it planned to grant class action treatment, but ordered the parties to meet and confer concerning the proposed definition of the class because the court believed it to be inadequate. Id., at 1. Based on a joint letter proposing a new definition of the class, the federal court granted the motion for class action certification. Id.
The district court began by analyzing the adequacy of the proposed definition of the class, which focused on whether the loan documents disclosed that the interest rate “may” change (instead of “will” change), and that negative amortization “may” result (instead of “will” result). See Lymburner, at 4-5. The court held that the proposed class is ascertainable, particularly given that defendant used only one set of loan documents. Id., at 5. The federal court concluded at page 5 that “class membership can be ascertained by looking at the documents, particularly in light of the joint revised class definition.” The numerosity test in Rule 23(a)(1) for class action certification was met because the class contained at least 100 members, id., at 5. The district court also rejected defense challenges to the commonalty test in Rule 23(a)(2) because plaintiff’s class action was not premised on any representations made to her orally but, rather, on the disclosures contained in the written loan documents. Id., at 5-6. And the court rejected defendant’s claim that plaintiff’s claims were not “typical” as required by Rule 23(a)(3) because of differences in the remedies available to class members. Id., at 6-7. “Plaintiff’s claims are based on loans issued by Defendant allegedly without proper disclosures.” Id., at 7. Further, there was no evidence that defendant treated plaintiff differently or that her loan documents were materially different from those of other class members. Id. Accordingly, the typicality requirement was satisfied. Id. Finally, the court held that plaintiff satisfied the adequacy of representation test of Rule 23(a)(4). See id., at 7-8.
Turning to the requirements of Rule 23(b)(3), the district court found that class action treatment was warranted. The predominance test was met for each of the class action claims, see id., at 8-11, and a class action was the superior means of redressing the wrong alleged, see id., at 11-12. Accordingly, the district court granted plaintiff’s motion for class certification. Id., at 13-14.