The opinion of the court was delivered by: S. James Otero, District Judge.
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS; AND GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO STRIKE
This matter is before the Court on Defendants Bear Stearns Residential Mortgage Corporation and Bear Stearns & Co.'s (collectively, "Defendants") Motion to Dismiss Portions of the First Amended Complaint and Motion to Strike Portions of the First Amended Complaint, both filed November 28, 2007. Plaintiffs Joseph A. Monaco, Anita M. Monaco, and James Brandt (collectively, "Plaintiffs") filed Oppositions to both Motions, to which Defendants respectively replied. The Court found the matter suitable for disposition without oral argument and vacated the hearing set for January 14, 2008. Fed.R.Civ.P. 78(b). For the following reasons, the Court GRANTS IN PART and DENIES IN PART Defendants' Motion to Dismiss and GRANTS IN PART and DENIES IN PART Defendants' Motion to Strike.
In April 2006, the Monacos refinanced their home, obtaining an Option Adjustable Rate Mortgage ("ARM") loan from Defendants. (First Am. Compl. ("FAC") ¶ 1.) In April 2007, Brandt refinanced his home, also obtaining an Option ARM loan from Defendants. (FAC ¶ 2.) Plaintiffs' loans were secured by their primary residences.*fn1 (FAC ¶¶ 1-2.)
Plaintiffs' loan documents include a promissory note (the "Note") and a Truth in Lending Act ("TILA") Disclosure (the "TILA Disclosure"). The Note and TILA Disclosure are form documents, with blanks left for the inclusion of transaction-specific terms, such as the loan amount. According to Plaintiffs, the material terms of the Monacos' loan documents are "substantially identical" to those contained in Brandt's loan documents.*fn2 (FAC ¶ 2.)
The Note states that, in return for a loan, "I promise to pay U.S. $258,000.000 (this amount is called `Principal'), plus interest, to the order of Lender." *fn3 (FAC Ex. 1 at 1 § 1.)
Regarding interest, Section 2 of the Note, entitled "INTEREST," states "I will pay interest at a yearly rate of 1.000 %." (FAC Ex. 1 at 1 § 2.) Section 2 further states that "[t]he interest rate I will pay may change in accordance with Section 4 of this Note." (FAC Ex. 1 at 1 § 2.) Section 4, entitled "ADJUSTABLE INTEREST RATE," states that the rate "will change" on the date when the first payment is due and "may change" on the first day of every month thereafter. (FAC Ex. 1 at 2 § 4(A).) Section 4 states that the rate "will never be greater than 9.950%" and "will never be lower than 3.500 %." *fn4 (FAC Ex. 1 at 2 § 4(C).)
Regarding payments, Section 3 of the Note, entitled "PAYMENTS," states "I will pay principal and interest by making a payment every month." (FAC Ex. 1 at 1 § 3(A).) Section 3 further states "I will make these payments every month until I have paid all of the principal and interest and any other charges described below that I may owe under this Note. Each monthly payment will be applied as of its scheduled due date and will be applied to interest before Principal." (FAC Ex. 1 at 1 § 3(A).)
Initial monthly payments are "in the amount of U.S. $829.83 " (FAC Ex. 1 at 1-2 § 3(B))-an amount that would fully amortize the loan if the 1% interest rate remained in effect during the entirety of the loan's term (FAC ¶ 122). Section 3 states that this amount "may change" pursuant to Section 5. (FAC Ex. 1 at 1-2 § 3(B)-(C).) According to Section 5, entitled "PAYMENT CHANGES," monthly payments will change annually, if at all, to the amount needed to fully amortize the loan at the preceding month's interest rate.*fn5 (FAC Ex. 1 at 2-3 § 5(A)-(B).) Section 5 further states that, if monthly payments are "not sufficient to cover the amount of the interest due[,] then any accrued but unpaid interest will be added to Principal and will accrue interest at the rate then in effect. This process is known as negative amortization." (FAC Ex. 1 at 2-3 § 5(A).)
Section 5 also provides that the borrower may be provided with one of three increased payment options: (1) interest only-i.e., "pay only the amount that would pay the interest portion of the monthly payment at the current interest rate"; (2) fully amortized-i.e., "pay the amount necessary to pay the loan off (Principal and interest) at the Maturity Date in substantially equal payments"; and (3) fifteen year amortized-i.e., "pay the amount necessary to pay the loan off (Principal and Interest) within a fifteen (15) year term from the first payment due date in substantially equal payments." (FAC Ex. 1 at 3-4 § 5(F).)
The TILA Disclosure states, among other things, that the loan has a variable rate feature, that the current index rate is 3.888%, and that there may be a prepayment penalty if the loan is repaid early. (FAC Ex. 1 at 7.) It also includes an estimated payment schedule, with payments increasing annually. (FAC Ex. 1 at 7.)
On August 28, 2007, Plaintiffs filed the instant action on behalf of all California consumers who were sold Defendants' Option ARM loan. Plaintiffs claim they were led to believe by Defendants that the low initial interest rate on their loan would be fixed for three to five years and that their minimum monthly payments would be applied each month toward interest and principal, resulting in amortization. Instead, Plaintiffs were immediately charged a much greater interest rate and their monthly payments were unable to cover interest, resulting in negative amortization. Based on these allegations, Plaintiffs assert seven causes of action.
First, Plaintiffs claim that Defendants violated TILA by: (a) failing to disclose the actual interest rate; (b) failing to disclose negative amortization; (c) failing to disclose that the initial rate is discounted; and (d) failing to disclose the composite interest rate. Second, Plaintiffs claim that Defendants violated California's Unfair Competition Law (the "UCL") by violating TILA, as described above. Third, Plaintiffs claim that Defendants violated the UCL by engaging in unfair, fraudulent, and deceptive business practices. Fourth, Plaintiffs claim that Defendants breached the Note by adjusting the initial interest rate shortly after loan origination and by applying monthly payments only to interest. Fifth, Plaintiffs claim that Defendants breached the implied covenant of good faith and fair dealing on the basis of the same violations that support the breach of contract claim. Sixth, Plaintiffs claim that Defendants violated the UCL by forcing Plaintiffs to sign unconscionable loan contracts. The seventh cause of action seeks declaratory relief on the basis of the prior allegations.
In light of the First Amended Complaint, Defendants have brought two motions. First, Defendants move to dismiss: (a) the first cause of action as to the Monacos; and (b) the second, fourth, and fifth causes of action as to all plaintiffs. Second, Defendants move to strike: (a) allegations about the Note that appear in the first cause of action; and (b) ...