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Reagen v. Aurora Loan Services

November 9, 2009


The opinion of the court was delivered by: Oliver W. Wanger United States District Judge



Before the court for decision is Defendant Aurora Loan Services, Inc.'s ("Aurora") motion to dismiss Plaintiff Wanda Reagen's Complaint for failure to state a claim. Plaintiff, who entered into an "Adjustable Rate Note" loan agreement, brings this suit against Aurora, Aegis Wholesale Corporation ("Aegis"), and Capital Line Financial, LLC ("Capital Line") for violations of law related to disclosures about the loan.*fn1 Specifically, the Complaint alleges violations of the Truth in Lending Act, 15 U.S.C. § 1601 et seq., and California's Unfair Business Practices Act, as well as financial elder abuse. Defendant Aurora moves to dismiss the Complaint in its entirety.


On May 12, 2006, Plaintiff refinanced her existing home loan and entered into an "Adjustable Rate Note" agreement with Defendants Aegis and Capital Line, the loan originator and broker. (Compl. ¶ 8.) Plaintiff alleges that Defendant Aurora purchased the loan after the transaction was complete, with full knowledge that it was a "negative amortization loan" containing patent disclosure violations. (Id. ¶ 12.)

Plaintiff alleges that Capital Line promised a loan with low interest payments and substantially lower monthly payments, but was in fact charged with a loan "designed to allow lenders and mortgage brokers to deceive consumers." (Id. ¶ 10-11.) According to the Complaint, Capital Line and Aegis qualified Plaintiff for a negative amortization loan, but neither explained nor provided adequate disclosures on the negative amortization feature. (Id.) Plaintiff claims that the "statement provided to Plaintiff reveals that the loan contains a variable rate feature but makes no mention that the loan will negatively amortize." The Complaint further alleges:

Plaintiff made it clear that she would not be able to make the minimum payment. Defendant Capital Line assured Mrs. Reagen that she could do so without consequence. Predictably, Plaintiff was confused and alarmed when she discovered that by making the minimum payment, interest was deferred and the principal balance had increased. Negatively Amortized loans put borrowers at a higher risk of default as negative equity is generated through minimum payments. For this reason, most consumers are unaware or do not fully understand the impact of the loan terms in negatively amortized loan. Mrs. Reagen is a victim of this misleading business practice. (Id. ¶ 10.)

Plaintiff's suit primarily challenges the disclosures that were provided with the loan. In particular, Plaintiff alleges that the disclosures related to negative amortization were misleading and unclear. The "Adjustable Rate Note" provided that, in return for the loan, Plaintiff promised to pay a principal of $360,000. (Id., Ex. 1, ¶ 1.) The principal amount might increase as provided in the Note, but would never exceed 115% of the principal amount Plaintiff originally borrowed. With respect to interest rate, the loan provided:

(A) Interest Rate

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 1.750%. The interest rate I will pay may change....

(B) Interest Rate Change Date

The interest rate I will pay may change on the first day of July, 2006, and on that day every month thereafter. Each date on which my interest rate could change is called an 'Interest Rate Change Date.' ... The interest rate may change monthly, but the monthly payment is recalculated in accordance with Section 3.

(C) Index

Beginning with the first Interest Rate Change Date, my adjustable interest rate will be based on an Index....

(D) Calculation of Interest Rate Changes

Before each Interest Rate Change Date, the Note Holder will calculate my new interest rate by adding THREE and 45/100 percentage point(s) (3.450%) ('Margin') to the Current Index. The Note Holder will then round the result of this addition to the nearest one-eighth of one percentage point (0.125%). This rounded amount will be my new interest rate until the next Interest Rate Change Date. My interest rate will never be greater than 9.9500 %. Beginning with the first Interest Rate Change Date, my interest rate will never be lower than the Margin.

(Id., Ex. 1, ¶ 2.)

The Note provides a number of terms with respect to monthly payments, that the initial minimum monthly payments until the first Payment Change Date would be in the amount of $1,286.08 unless adjusted under Section 3(F). (Id. Ex. 1, ¶ 3(B).) The Note discloses that this monthly payment may change as required by Section 3(D) beginning on the first day of July 2007 and on that day every 12th month thereafter. Additionally, the payment would change any time Sections 3(F) or 3(G) required Plaintiffs to pay a different monthly amount. (Id. Ex. 1, ¶ 3(C).)

Paragraph 3(D) explains the calculation of monthly payments. It provides that, unless 3(F) or 3(G) applies, the amount of a new monthly payment effective on a payment change date would not increase by more than 7.5% of the prior monthly payment. This limit was known as the "Payment Cap." Id. Ex. 1, ¶ 3(D). Unless 3(F) or 3(G) requires payment of a different amount, the new minimum payment would be the lesser of (1) the amount provided by the "Payment Cap" and (2) the amount sufficient to repay the unpaid Principal that Plaintiffs are expected to owe at the Payment Change Date in full on the maturity date in substantially equal payments, also known as the "Full Payment." (Id.)

Paragraph 3(G) provides that Full Payment was required as the Minimum Payment on the tenth Payment Change Date and each succeeding fifth Payment Change Date, until the monthly payment changed again. Id. Ex. 1, ¶ 3(G). Paragraph 3(F) provids, in effect, that once the unpaid Principal reaches the Maximum Limit (115% of the originally-borrowed Principal), Plaintiffs were required to pay the Full Payment amount as the Minimum Monthly Payment. (Id. Ex. 1, ¶ 3(F).) Additionally, after the first Interest Rate Change Date, the lender could provide Plaintiffs with up to three additional payment options greater than the Minimum Payment: an interest-only payment, a fully amortized payment, and a 15-year amortized payment. (Id. Ex. 1, ¶ 3(H).)

The note also discloses how the unpaid Principal might increase:

Since my monthly payment amount changes less frequently than the interest rate, and since the monthly payment is subject to the payment limitations discussed in Section 3(D), my Minimum Payment could be less than or greater than the amount of the interest portion of the monthly payment that would be sufficient to repay the unpaid Principal I owe at the monthly payment date in full on the Maturity Date in substantially equal payments. For each month that my monthly payment is less than the interest portion, the Note Holder will ...

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