“Courts Act to Protect Borrowers on Option-ARM and Subprime Loans”
In two decisions handed down on January 28, 2008, Monaco v. Bear Stearns Residential Mortgage Corp., and LaSalle Bank, N.A. v. Shearon, courts on opposite sides of the country put a pro-borrower interpretation on loan documents and state consumer protection statutes in order to save borrowers from defaults on option adjustable rate (“option-ARM”) and subprime home mortgage loans.
In Monaco, a federal court in California found that standard option-ARM loan documents are “ambiguous,” potentially subjecting the lender to liability for trying to enforce the loan’s terms. Making matters more difficult for the lender, the court further held that the lender’s alleged violation of the federal Truth In Lending Act (“TILA”) could create liability under California’s Unfair Competition Law (“UCL”), which provides for greater penalties than allowed under TILA, even though the borrower’s TILA claim was barred by the statute of limitations. In Shearon, the first reported case on New York’s “High-Cost Home Loans” law, a New York court threatened to invalidate a subprime home loan and mortgage because the lender financed an excessive amount of loan fees and points and failed to make a “due diligence” inquiry as to the borrower’s ability to repay.
This Stroock Subprime Task Force Special Bulletin looks at the Monaco and the Shearon decisions and their implications for lenders.