Trial Court Properly Granted Defense Summary Judgment Motion in Class Action Alleging Bank Violated California’s Unfair Competition Law (UCL) by Calculating Interest on a Monthly rather than Daily Basis because Federal Law Permits this Method, it is Consistent with Industry Conduct and it is Required for Sale of Loans on the Secondary Market California Court Holds
Plaintiffs filed a class action against their mortgage lender, Wells Fargo, alleging violations of California’s unfair competition law (UCL) based on the fact that it failed to charge monthly interest based on the number of days in the month, and failed to disclose that it treated each month as one-twelfth of the year, regardless of the number of days in the month. Puentes v. Wells Fargo Home Mortgage, Inc., ___ Cal.App.4th ___, 72 Cal.Rptr.3d 903, 906 (Cal.App. 2008). The class action complaint alleged that plaintiffs obtained a 30-year fixed-rate mortgage from Wells Fargo, evidenced by a promissory note on a multi-state form approved by Fannie Mae and Freddie Mac; the promissory note provided for equal monthly payments and stated, “Interest will be charged on unpaid principal until the full amount of Principal has been paid. I will pay interest at a yearly rate of 6.500 [percent].” Id. The class action further alleged that plaintiffs paid off the loan only seven months later, but, that “[i]n determining the amount of interest owed to retire the obligation, Wells Fargo treated February, as it did for each of the previous full months of the loan, as one-twelfth of a year, or approximately 30.4 days.” Id. After the trial court granted plaintiffs motion for class action treatment of the lawsuit, defense attorneys moved for summary judgment arguing that “[the] interest calculation was consistent with the terms of the note, federal regulations and the uniform nationwide practice of the mortgage industry, and thus as a matter of law cannot constitute an unfair business practice under the UCL.” Id., at 907. The trial court granted the motion, and the Court of Appeal affirmed.
The multi-state form used by Wells Fargo had been approved by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Company (Freddie Mac). Puentes, at 906. In addition to the disclosures in the promissory note, the Truth in Lending Act (TILA) disclosure stated “[i]f you pay off your loan early you will not receive a refund of the part of the finance charge that you have already paid.” Id. Nonetheless, plaintiffs alleged that they and the putative class members “paid Wells Fargo ‘interest for non-existent days … in the year of early pay off of their residential mortgage loan.’” Id., at 906-07. Based on their view that the bank’s formulation “resulted in charges for 182.5 days during the five full months of the loan instead of the actual 181 days,” they alleged that Wells Fargo “overcharged them $71.98 in interest for days not actually in the loan period, thereby breaching the promissory note by imposing a yearly interest rate of approximately 6.549 percent.” Id., at 907. The trial court granted the defense motion for summary judgment based on federal preemption, and on its finding that the bank’s interest calculation was reasonable under the terms of the note and “comported with industry standards and was not an unfair business practice.” Id.
Plaintiffs argued that the “yearly rate” under the promissory note meant that interest would be “charged on a per diem basis for 365 days,” but that by treating each month as containing an equal number days Wells Fargo was charging interest “based on [a] fictional 30.4-day month.” Puentes, at 908. The Court of Appeal agreed with the defense that Wells Fargo’s promissory note and amortization schedule complied with Regulation Z, which implements TILA. Id. Regulation Z “requires that lenders use certain formulas for computing interest at a yearly rate, based on the common period, or ‘unit-period,’ that occurs most frequently in the transaction.” In this case, that unit-period was a month because the note and the TILA disclosure required monthly payments, which means “there are 12 unit-periods per year” and “[a]ll months shall be considered equal” despite the fact that the actual number of days in the months differ. Id. (citations omitted). Defense attorneys argued that “since its interest calculations are pursuant to federal regulations, its practice is not actionable.” Id. The appellate court found it unnecessary to resolve the issue of whether Wells Fargo’s interest calculations constituted a breach of contract under California law because the UCL claim requires that the calculation be “‘unlawful, or unfair, or fraudulent.’” Id., at 909 (citations omitted).
The Court of Appeal held that, viewed from the perspective of a “reasonable consumer,” the interest calculations were not fraudulent: the promissory note “called for monthly payments of principal and interest in equal amounts,” so calculating interest for each month based on one-twelfth of a year “[was] not likely to deceive members of the public.” Puentes, at 909. As for whether the interest calculation was “unfair,” the appellate court explained that the method not only was consistent with federal guidelines, but that “‘[it] is the same one that has been used by approximately ninety-nine percent of residential mortgage lenders in this country for the past half century or more.’” Id., at 911 (italics added by court). The appellate court also observed that if plaintiffs had sought to pay off their loan at the end of January rather than February, then “under the uniform 30.4-day month they would have been charged for 152 days of interest for the full months of the loan rather than the 153 actual days.” Id., at 912. Because the interest calculation could benefit either the bank or its customers, the court held that “Wells Fargo’s practice was not immoral, unethical, oppressive or unscrupulous, as the company realized no net monetary benefit by using the uniform month.” Id.
Moreover, the undisputed evidence established that Wells Fargo sells most of its loans on the secondary market, and this would not be possible if it calculated interest in a manner inconsistent with Fannie Mae and Freddie Mac guidelines. Puentes, at 913. As the appellate court concluded at page 914, “The consumer benefit of Wells Fargo’s adherence to Regulation Z and Appendix J in calculating equal monthly payments – and not recalculating interest during the year of payoff to retrospectively make monthly payments unequal – far outweighs the de minimus injury to some consumers who, like the Puenteses, may pay for a day or two of additional interest than if actual days in the month were used.” Accordingly, the court held that the trial court properly granted summary judgment, id. In so doing, the Court of Appeal found it unnecessary to address the federal preemption issue, id., at 914 n.9.