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Jeffrey Schulken, et al v. Washington Mutual Bank

July 20, 2011


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



Jeffrey Schulken and Jenifer Schulken (collectively, "Plaintiffs") bring this putative class action against Washington Mutual Bank ("WaMu") and JPMorgan Chase ("Chase") (collectively, "Defendants"), alleging violations of the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601, et 20 seq., and its implementing statute, Regulation Z, 12 C.F.R. 226.1, et seq.; violations of California's Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code §§ 17200, et seq.; and breach of 22 contract. Generally, Plaintiffs allege that Defendants improperly suspended and reduced credit 23 limits on home equity lines of credit ("HELOCs").

Plaintiffs filed a motion for class certification on June 2, 2011, as scheduled in the Case Management Order entered by this Court on February 9, 2011. See Dkt. No. 69. Also on June 2, 2011, the Court held a Case Management Conference (CMC). At the CMC, Plaintiffs stated that 27 they intended to amend their Third Amended Complaint to change the class definitions to match the definitions submitted in their motion for class certification. The Court asked the parties to 2 stipulate to the proposed amendments if possible. On June 9, 2011, Plaintiffs filed a motion for 3 leave to file a fourth amended complaint (4AC). Mot., Dkt. No. 90. The hearing on this motion 4 was set for September 8, 2011. The Court finds this matter suitable for decision without oral 5 argument, and hereby VACATES the September 8, 2011 hearing. See Civ. L. R. 7-1(b). For the 6 reasons set forth below, the Court GRANTS-IN-PART and DENIES-IN-PART Plaintiffs' motion 7 for leave. 8

The proposed 4AC adds significant factual detail to the allegations in the Third Amended Complaint (TAC). In addition, the 4AC adds several claims and amends the original class to define two classes, each with one subclass. The TAC asserted that Plaintiffs obtained a $250,000 HELOC from WaMu in October, 2005. TAC ¶ 10. The HELOC was secured by their primary 13 residence, and Plaintiffs allege it was used primarily for personal family and household purposes.

TAC ¶ 17. On September 25, 2008, the United States Office of Thrift Supervision seized WaMu 15 and put it into FDIC receivership. TAC ¶ 11. After this, Chase purchased and assumed "all 16 mortgage servicing rights and obligations of" WaMu, including the Plaintiffs' HELOC account.

On March 13, 2009, Plaintiffs received an "Income Verification Request" letter from Chase requesting certain financial information. TAC ¶ 18. In response to the letter, Plaintiffs submitted 20 financial information. TAC ¶ 19. On March 19, 2009, Plaintiffs discovered that their HELOC had 21 been suspended. TAC ¶ 20. The following day, Plaintiffs received a letter from Chase stating that 22 their HELOC had been suspended for failure to submit the financial information requested on March 13, 2009. TAC ¶ 20. Plaintiffs alleged that their income did not materially change or 24 decrease at any time, and that the Defendants had no reasonable basis to conclude that Plaintiffs 25 would be unable to meet the terms of their HELOC. TAC ¶ 23.

consisting of "All WAMU and Chase HELOC borrowers in the United States who had their 28 respective HELOCs reduced or suspended due to WAMU's or Chase's conclusion that the TAC ¶ 12. 18


On the basis of these allegations, Plaintiffs sought (in the TAC) to represent a class borrower would be unable to fulfill their payment obligations due to a purported material adverse 2 change in financial circumstances." TAC ¶ 26. On behalf of this class, Plaintiffs asserted the 3 following claims for relief: 1) a declaration that Chase violated TILA and Regulation Z based on 4

Chase's suspension of HELOC accounts in the absence of a material change in income or a 5 reasonable belief that borrowers would be unable to repay their debt obligations; 2) actual and 6 statutory damages for the same TILA and Regulation Z violations asserted in the first claim; 3) 7 actual and statutory damages under TILA and Regulation Z for Defendants' failure to give notice 8 of the specific reasons that HELOC accounts were suspended; 4) damages for breach of the 9

HELOC contracts based on suspension of HELOC accounts without any material change in income 10 or reasonable belief that borrowers would be unable to repay their debt obligations; and 5) HELOC reinstatement and restitution for UCL violations based on unlawful acts (violations of TILA andRegulation Z), unfair acts (suspending accounts without advance notice), and asserted fraudulent 13 acts (allegedly false statements or material omissions made when Chase communicated with 14 customers about suspended HELOC accounts).

In the 4AC, Plaintiffs expand upon the allegations in the TAC. Plaintiffs allege that the Income Verification Letters were sent to borrowers under the "4506-T Program," a program 17 designed to reach borrowers ineligible for other HELOC-suspension programs designed by Chase 18 to suspend HELOCs. 4AC ¶ 7. Plaintiffs allege that under the 4506-T Program, Chase requested 19 that customers fill out an IRS Form 4506-T (a Request for Transcript of Tax Return) and recent 20 paystubs. 4AC ¶ 8. Plaintiffs allege that Chase then suspended the accounts of all "Incomplete 4506-T form, but not both). 4AC ¶ 11. Plaintiffs allege Chase also suspended the accounts of "Non-Responders," those who failed to submit any response to the Income Verification Letters 24 within 14 days. Id. A third group of customers provided both signed 4506-T forms and paystubs.*fn1

Responders," customers who provided only one of the requested items (either paystubs or the For these customers, Chase calculated a Debt-to-Income ratio (DTI) based on the submitted 26 information. 4AC ¶ 13. If the DTI was below a certain threshold, the account was not suspended(or was reinstated) after a "reasonableness review." 4AC ¶ 14. If the DTI was above a certain 2 threshold, Chase suspended the HELOC automatically. Id. If the DTI was between these two 3 thresholds, Chase compared the present DTI to the DTI at origination. These customers' HELOCs 4 could be suspended based on factors including their disposable income and their relationship with 5 the bank. Id. 6

7 household expenses, and "occasionally, but by no means primarily," to pay for expenses relating to 8 the family daycare the Schulkens ran out of their home since 2000. 4AC ¶¶ 17-18. Plaintiffs 9 allege that they received an Income Verification Letter on March 17, 2009, and that they returned it 10 to Chase the same day with a signed 4506-T form and an annotation that they are both self-

In the 4AC, Plaintiffs allege that they used their HELOC to pay for personal, family and

employed. 4AC ¶ 21. Plaintiffs allege that two days later, they found that Chase had suspended their HELOC. 4AC ¶ 21. On March 21, 2009, they received a letter from Chase stating that the 13 suspension was based on Chase's inability to verify the Plaintiffs' financial information, because 14 they did not submit paystubs. 4AC ¶ 21. 2009, the Plaintiffs received a letter from Chase stating that their HELOC would remain suspended 17 because Chase determined that Plaintiffs had insufficient income to satisfy their debt obligations. 4AC ¶ 25. Plaintiffs contacted Chase to dispute this, arguing that their income had "hardly 19 changed" since they opened the HELOC account. 4AC ¶ 26. Chase responded that because the 20

Plaintiffs' monthly income at origination was listed as $11,500, their present income was 21 materially lower. 4AC ¶ 27. The Plaintiffs responded that they had never earned $11,500 monthly, 22 and that WaMu must have intentionally misrepresented their income if their loan application stated 23 this. 4AC ¶ 28-29. Plaintiffs allege that the "vast majority" of HELOC accounts processed 24 through the 4506-T Program were "stated income" loans in which the borrower's income had not 25 been objectively verified at origination. 4AC ¶ 29. Plaintiffs further allege Chase's awareness that 26 comparing customers' verified present incomes to their stated incomes would "be more likely to 27 falsely demonstrate adverse changes in borrower financial conditions when none actually had 28 occurred," and intentionally used this method of DTI comparison to "increase the likelihood of

After this, the Plaintiffs provided additional financial information to Chase. On March 31,issuing a suspension." 4AC ¶ 29, 33. Plaintiffs allege that their income had not materially 2 decreased since origination of their HELOC, that they had never missed or been late with a 3 payment on the HELOC, that their home had not significantly decreased in value, and that they had 4 substantially paid down the principal balance on the account since origination. 4AC ¶ 31. 5

Plaintiffs allege that their HELOC contract allowed Chase to request "a current financial statement, a new credit application, or both," but that this language did not authorize Chase to 7 request the 4506-T form or paystubs, or to suspend their account when they failed to produce this 8 information. 4AC ¶ 34. Plaintiffs allege that other potential class members' HELOC agreements 9 were silent about submission of additional information, and thus that Chase was not authorized to 10 request such information from those customers, either. 4AC ¶ 34. ne the following classes and subclasses:

Based on these allegations, Plaintiffs defi

Inability to Verify Class:

All HELOC borrowers nationwide who were parties to the Schulken HELOC Contract and whose HELOCs Chase blocked through the 4506-T Program when the customers did not provide either a complete IRS Form 4506-T, paystubs, or both, upon Chase's request.

Inability to Verify California Subclass:

All Inability to Verify Class members whose homes securing the HELOCs are located in California.

Stated Income Class:

All heritage WaMu HELOC borrowers nationwide whose HELOCs were originated based on stated incomes but who were blocked by Chase at any time through the 4506-T Program based upon a determination by Chase that the borrowers' verified current financial information showed a material adverse change in financial ...

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