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Norlito Soriano v. Countrywide Home Loans

June 30, 2011


The opinion of the court was delivered by: Lucy H. Koh United States District Judge


Code § 17200 et seq.). Trial took place on June 6, 2011. Having considered and weighed all the 21 evidence and having assessed the credibility of the only witness, the Court now makes these 22 findings of fact and conclusions of law as required by Fed. Rule Civ. P. 52(a). June 1, 2009, after the Plaintiff added claims arising under federal law in his Third Amended ("RESPA," 12 U.S.C. § 2601 et seq.), the Truth in Lending Act ("TILA" U.S.C. § 1601 et seq.),

In this action, Plaintiff Norlito Soriano (Plaintiff) brings suit against Countrywide Home Loans, Inc. (CHL) for violation of California's Unfair Competition Law ("UCL," Bus. & Prof.

I. Introduction and Procedural Background

Plaintiff initially filed a complaint asserting only California law claims in Santa Clara County Superior Court on January 24, 2008. Dkt. No. 1. The matter was removed to this Court on Complaint. Specifically, Plaintiff asserted claims under the Real Estate Settlement Procedures Act and a UCL claim based in part on the RESPA and TILA claims. Id. CHL (and another defendant, 2 who has since been dismissed from the case) moved to dismiss the Third Amended Complaint.

Judge Ware, to whom this case was previously assigned, dismissed the TILA and RESPA federal 4 claims but granted Plaintiff leave to amend those claims. See Dkt. No. 17. 5

Plaintiff then filed a Fourth Amended Complaint (4AC), reasserting the federal TILA and RESPA claims and a UCL claim based in part on violations of both federal laws. CHL moved to 7 dismiss all of the asserted claims other than the TILA claim. This time, Judge Ware denied the Motion to Dismiss the federal claims, but dismissed with prejudice all the state law claims (except 9 for the UCL claim premised on the alleged RESPA and TILA violations). See Order dated Feb. 5, were Plaintiff's RESPA and TILA claims, and the UCL claim based on the underlying RESPA and TILA claims. reconsideration, the case was narrowed to the UCL claim. The UCL creates a cause of action for 15 business practices that are 1) unlawful, 2) unfair, or 3) fraudulent. Cal. Bus. & Profs. Code § 16 17200. Each "prong" of the UCL provides a separate and distinct theory of liability, Lozano v. AT 17 & T Wireless Services, Inc., 504 F.3d 718, 731 (9th Cir. 2007). Plaintiff asserts UCL violations 18 based on the first two prongs. First, under the "unlawful" prong of the UCL, Plaintiff claims that 19 Plaintiff's home mortgage loan. Second, under the "unfair" prong of the UCL, Plaintiff claims that 21 CHL acted unfairly by failing to give Plaintiff notice of payment changes as required by TILA's 22 implementing statute, Regulation Z, and by the disclosures associated with Plaintiff's mortgage.

In addition, Plaintiff argues that CHL acted unfairly because it failed to honor the terms of the Note 24 by raising the interest rate charged to Plaintiff in March, 2007. 2010 (Dkt. No. 28). Accordingly, the remaining causes of action after the February 5, 2010 Order

Through a series of motions, including motions for summary judgment, clarification, and CHL is liable, as an assignee, for alleged violations of TILA which occurred during origination of 20

II. Findings of Fact

On November 1, 2006, Plaintiff executed a promissory note, by which he borrowed $281,400 from Alliance Bancorp. Def.'s Ex. 1 (Note) at 1. The Note financed Plaintiff's property 28 at 574 Quady Lane, Madera, California, 93637. Id. The Note secures a Deed of Trust (Deed), also executed on November 1, 2006, and recorded against the Quady Lane property. Def.'s Ex. 2 2

(Deed). Plaintiff did not argue or submit evidence indicating that CHL was involved in negotiating 3 or executing the Note or Deed. $711.54, unless the payments are adjusted pursuant to Section 3(F). Note ¶ 3(B). These payments 7 are sufficient to pay off the principal and interest due in substantially equal payments over a 40-8 year period (the amortization period). Note ¶ 3(B). Beginning on January 1, 2008, and continuing 9 every year on that day, the monthly payment can change. Note ¶ 3(C). This is a "Payment Change principal in substantially equal payments over the remainder of the amortization period. The new monthly payment will not increase by more than 7.5% of the previous minimum payment (the The loan documents include a number of different forms, all of which were signed by Plaintiff on November 1, 2006. The Note states that the "initial" monthly payments will be Date." Id. The payment will change to an amount that would be sufficient to repay the unpaid "payment cap"), but this restriction has exceptions, noted below. The monthly payment can also 14 change more frequently depending on certain circumstances, discussed below.

change beginning on January 1, 2007, and every month thereafter (in other words, the interest rate 17 can change beginning two months after the loan was signed). See Note ¶ 2. Starting on January 1, Rates H.15" published by the Federal Reserve Board), plus 3.75 percentage points, rounded to the 20 nearest .125%. Note ¶ 2(D), (E). The interest rate may be re-calculated each month. Note ¶ 2(E). The Note states that the initial interest rate on the loan is 1%, but that this interest rate can 2007, the interest rate may be set based on an Index interest rate (defined as the "Selected Interest

The Note states that the principal amount of the loan may change, but will never exceed 110% of the original principal. Note ¶ 1. Elsewhere, however, it states that the principal may 23 exceed 110% if the borrower makes only minimum payments and if the interest rate increases; in 24 this event, a new minimum payment sufficient to repay the unpaid principal in full over the 25 remainder of the amortization period, based on the interest rate in effect during the prior month, 26 will apply. Note ¶ 3(F). In this event, the 7.5% payment cap does not apply. given four different "payment options." Note ¶ 3 (H). The four payment options are defined as

The Note states that starting with the first date the interest rate is changed, Plaintiff will be follows. First is a "Minimum Payment," which is the minimum amount the lender will accept as a 2 monthly payment. The Minimum Payment will be provided after the first interest change date (as 3 early as January 1, 2007) and every month after that. The Minimum Payment will not decrease the 4 principal balance. Note ¶ 3(H)(1). If the Minimum Payment is not enough to cover the interest 5 due, negative amortization will occur, and the loan balance will increase. Id. Second is an 6

"Interest Only Payment," which will cover interest, but will not decrease the principal balance of 7 the loan. Third is a "30-year Amortized Payment," which will pay off the principal and interest in 8 substantially equal payments by the "maturity date." Fourth is a "15-year Amortized Payment," 9 which will pay off the principal and interest in substantially equal amounts within a fifteen year 10 term. Id.

Minimum Payment that exceeds the payment cap). Note ¶ 3(G). This means that the Minimum Payment will become the amount necessary to pay off the remaining principal over the remainder 15 of the amortization period. Note ¶ 3(C). Rider (Balloon Rider) which states that it "is incorporated into and shall be deemed to amend and 18 supplement the Mortgage Deed of Trust." Def.'s Ex. 2 at CHL00117-122. Like the Note, the 19 Balloon Rider states that the interest rate applied to the principal may change as of January 1, 2007, 20 and that the monthly payment may change starting January 1, 2008, or earlier if the unpaid 21 principal balance exceeds 110%. See Balloon Rider at CHL 00117-18; Note at ¶¶ 2 - 3.

For the Northern District of California

On the fifth annual Payment Change Date, and every succeeding fifth Payment Change

Date, the "Full Payment" will become the "Minimum Payment" (even if this results in an increased

United States District Court

In addition to the Note itself, Plaintiff executed a document titled Adjustable Rate Balloon

Plaintiff also executed a document titled Balloon Payment Disclosure. Def.'s Ex. 3 (Balloon Disclosure). This document states that the "loan provides for 359 monthly payments of 24 principal and interest in the amount of $711.54 each. Assuming that all of the monthly payments 25 have been paid exactly on the date that each is due, a final balloon payment of the then outstanding 26 principal balance plus all earned interest remaining unpaid estimated to be in the amount of $186,191.38 shall become due and payable on DECEMBER 1, 2036." Balloon Disclosure. The

Balloon Disclosure also states "I . . . acknowledge that these provisions have also been orally 2 explained to me." Plaintiff signed the Balloon Disclosure under this statement.

provides information regarding the different payment options available depending on various 5 circumstances, as defined in the Note. Def.'s Ex. 4 (Variable Rate Disclosure). This document 6 states that "[f]or the first twelve months of your loan, your payment will be based on the Initial 7

Interest Rate, loan amount and loan term. Your payment may change every twelve months, 8 beginning with the thirteenth payment." Variable Rate Disclosure at CHL00235. The Variable 9

Plaintiff also signed a "Variable Rate Mortgage Balloon Loan Program Disclosure," which Rate Disclosure also states "[y]our interest rate under this ARM can change every month, 10 beginning with the first regularly scheduled payment and each month thereafter." Variable Rate Def.'s Ex. 5 (TILDS). This statement shows that Plaintiff's payment schedule would be: $711.54 14 monthly for 12 months; $764.91 monthly for 10 months; $2,280.16 monthly for 337 months; and a 15 final payment of $186,191.39 on December 1, 2036. Id. Regarding the first 12 monthly payments 16 of $711.54, at least the first of these would be principal and interest payments, but, as soon as the 17 interest was raised pursuant to ¶ 2(B) of the Note, these payments would become Minimum Payment Change Date, the Minimum Payment could be increased by 7.5% pursuant to ¶ 3(D) of 20 the Note. $764.91 represents a 7.5% increase from $711.54. Assuming the interest rate was raised 21 in January 2007, the second set of 10 monthly payments of $764.91 would also be Minimum

Payments, insufficient to pay both principal and interest due. As a result, after 22 months of 23 making the listed payments, the principal balance on the loan would reach the 110% increase cap 24 as stated in ¶ 3(F) of the Note. At this point, ¶ 3(H) of the Note states that a new Minimum 25 Payment will be set in an amount that "would be sufficient to repay my then unpaid principal in 26 full over the remainder of the Amortization Period in substantially equal installments at the interest 27 rate in effect during the preceding month." In the TILDS, this amount is estimated to be $2,280.16 28 monthly payments for 337 months. The final "balloon" payment of $186,196 is shown due on Disclosure at CHL00234.

Plaintiff also signed a document titled "Federal Truth-in-Lending Disclosure Statement." Payments insufficient to pay for both principal and interest. As of January 1, 2008, the first December 1, 2036. The Note states that if any balance remains on this date, it is due in full the 2 same day. ¶3(A). The TILDS states that the loan contains a variable rate feature and that 3

Plaintiff testified that he did not read the loan documents before he signed them. Plaintiff

5 testified that the only information about the loan that he gained from any of the documents was 6 from the Balloon Disclosure, and that the only information he took from this document was that his 7 loan payments would be $711.54 monthly payments of principal and interest.

"[d]isclosures about the variable rate feature have been provided to you earlier." Id. 4 Plaintiff's loan was ultimately transferred from the original lender, Alliance, to a third party

(GMAC Mortgage), and then transferred again to CHL on February 1, 2007. Def.'s Ex. 6. While 10 the loan was serviced by Alliance and GMAC, Plaintiff was billed $711.54 monthly for December 2006, January 2007, and February 2007, in accordance with the 1% interest rate in effect during

that time. Def.'s Ex. 8 at CHL 00064; Pl.'s Ex. 100-CHL 00277. When CHL took possession of 13 the loan, it appears that Plaintiff had already paid his mortgage for the month of February 2007 in 14 response to a bill from GMAC. Id. The parties agree that beginning in March, 2007, CHL applied 15 a new interest rate of 8.75% to Plaintiff's loan. However, CHL introduced no evidence that it 16 provided Plaintiff with any notice that his interest rate had increased in March. The only evidence 17 of record shows that on January 25, 2007, when CHL sent notice to Plaintiff that it would take over 18 servicing of his loan, it included a payment coupon without a due date listing $711.54 as "next 19 payment." Def.'s Ex. 6. No payment options are listed on the payment coupon. Because the 20 interest rate had actually been raised, however, $711.54 was no longer sufficient to pay principal 21 and interest due. Plaintiff made two payments of $711.53 on March 7, 2007. letter, Plaintiff's counsel states Plaintiff's belief that there has been an error in servicing his 24 account because the principal of his loan has increased despite his monthly payments of $711.54. 25

Id. Citing the Balloon Disclosure, the letter states Plaintiff's understanding that $711.54 should be 26 sufficient to pay both interest and principal. Id. CHL never provided a substantive response to this 27 letter. Rather, CHL first requested that Plaintiff's counsel provide proof of Plaintiff's consent for 28

On September 20, 2007, Plaintiff's attorney sent a letter to CHL. See Def.'s Ex. 8. In this

CHL to discuss the loan with counsel. See Pl.'s Ex. 11. When counsel forwarded an authorization,

CHL responded with a letter providing a phone number for Plaintiff or counsel to contact with 2 questions. Pl.'s Ex. 14. 3 documents each titled "Adjustable Rate Mortgage (ARM) Payment Adjustment Notice." Def.'s 5 Exs. 11, 14, 15. These documents state that the Minimum Payment due on the Note will be 6 adjusted on January 1 of the following year, and state what the new monthly Minimum Payment 7 will be. For January 1, 2009, the Minimum Payment would increase to $822.28. Def.'s Ex. 11.

January 1, 2011, the Minimum Payment would increase to $950.25. Def.'s Ex. 15. any of the asserted grounds because he has failed to show that he suffered any injury-in-fact as a 14 result of the allegedly unlawful or unfair acts. The California Supreme Court has recently held that 15 if a party can prove "a personal, individualized loss of money or property in any nontrivial amount, 16 he or she has also alleged or proven injury in fact" and has therefore demonstrated standing under 17 the UCL. Kwikset Corp. v. Super. Ct., 51 Cal. 4th 310, 325 (2011). The loss of money or property 18 must have a "causal connection" to the claimed UCL violation. Rubio v. Capital One Bank, 613 F.3d 1195, 1204 (9th Cir. 2010) (finding that plaintiff sufficiently alleged injury-in-fact for UCL 20 standing based on a lender's failure to disclose the Annual Percentage Rate (APR) on her credit 21 card, resulting in loss because the undisclosed increase in APR forced her to either close the 22 account and lose the credit, or pay increased interest rates). At trial, in response to a specific 23 question from the Court regarding his standing, Plaintiff argued that he had suffered injury-in-fact 24 as a result of the TILA claim because CHL charged him more money than was disclosed. The 25 problem with this argument is that Plaintiff testified at trial that he only read one of the many 26 disclosures associated with his loan, and that he didn't even read that one disclosure in its entirety.

the portion of the Balloon Disclosure document suggesting that the loan payments would be set at

On November 14, 2008, November 16, 2009, and November 16, 2010, CHL sent Plaintiff

For January 1, 2010, the Minimum Payment would increase to $883.95. Def.'s Ex. 14. For 9

III. Conclusions of Law

a. Standing

United States District Court

For the Northern District of California

CHL argues that Plaintiff has failed to prove that he has standing to bring a UCL claim on Plaintiff testified that he did not read the TILDS, or any of the loan documents, except for

$711.54 principal and interest payments monthly for 359 months. If Plaintiff were able to claim 2 damages under TILA*fn1 , he would be limited to claiming statutory damages, as he cannot show 3 reasonable reliance based on any alleged TILA violation. As Plaintiff argues, in the Ninth Circuit, 4 the consumer must show that he would not have entered into the transaction had proper disclosures 5 been made. "[I]n order to receive actual damages for a TILA violation . . . a borrower must 6 establish detrimental reliance." Gold Country Lenders v. Smith, 289 F.3d 1155, 1157 (9th Cir. 7

2002). Detrimental reliance may be proven by evidence that the borrower "would either have 8 secured a better interest rate elsewhere, or foregone the loan completely," if complete disclosures 9 had been made. Plaintiff cannot meet this standard because he admits he did not read the 10 disclosures that were made. Therefore, even if Plaintiff could prove a TILA violation, he could not show that he was damaged by it. Even if the Balloon Disclosure could serve as the basis of a TILA

violation (which the Court concludes it cannot, below), Plaintiff's alleged reliance on one 13 statement in that disclosure to the exclusion of every other document associated with the loan is 14 unreasonable, and would be insufficient evidence of detrimental reliance to support a claim for 15

TILA violations because he testified that he did not read nearly all of the documents associated 17 with his loan. Because Plaintiff cannot show that he lost money or property as a result of the 18 alleged TILA violations, he lacks standing to bring a UCL claim predicated on these violations.

TILA damages. Plaintiff cannot show any loss of money or property resulting from the alleged

Plaintiff's standing argument regarding the "unfair" prong of the UCL is easier to address.

Plaintiff did not argue that he lost any money or property as a result of CHL's alleged failure to 21 give notice of the March 2007 increase in interest, or any other payment increase. Although

Plaintiff argued that CHL unfairly failed to honor the terms of the Note by increasing the interest 23 rate, as discussed below, Plaintiff has introduced no proof that the interest rate increase was

contrary to the terms of the Note. Moreover, the undersigned judge, as well as the previously-25 assigned United States District Judge, Judge Ware, and the Superior Court Judge, Judge Cabrinha

all found that the Note authorized the rate increase. Accordingly, the Court finds that Plaintiff 2 lacks standing to bring a UCL claim predicated on the allegedly unfair failure to provide notice.

theoretically possible that Plaintiff could prove standing to bring his UCL claims at the start of 5 trial. In other words, had Plaintiff successfully proven a TILA violation, he might also have been 6 able to prove a loss of property or money stemming from the violation. Because the Court's 7 conclusion about Plaintiff's standing is somewhat related to its finding that Plaintiff's UCL ...

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