Thomas v. Citimortgage (In re Thomas), 476 B.R. 691 (Bankr. D. Mass. 2012)

Massachusetts has enacted a Predatory Home Loan Practices Act (Chapter 183C), which among other things requires that lenders making “high-cost” mortgage loans must (i) obtain a certification that the borrower has received counseling and (ii) reasonably believe that the borrower has the ability to make the scheduled loan payments.  Otherwise the loan is unenforceable.  Thomas turned on whether the Massachusetts statute was preempted, which in turn depended on who was considered the original lender in a table-funded loan.

Well before her eventual bankruptcy, the debtor contacted Allied Home Mortgage Capital Corporation for a loan to refinance the mortgage on her home.  Allied made arrangements for the loan with Flagstar Bank, FSB.  Flagstar gave the debtor a “purchase commitment letter” that said the proposed refinancing met its requirements for purchasing a loan.  Allied was identified as the “originator” in the letter.  The letter also referred to Allied as the “Broker” and required it to “approve and/or close” the loan.

The debtor executed a promissory note payable to Allied on May 8, secured by a mortgage in favor of Mortgage Electronic Registration System (MERS) as nominee for Allied and its successors and assigns.  On May 8 Allied also notified the debtor that servicing was being assigned to Flagstar.  On May 12 (after expiration of the three-day Truth In Lending Act rescission period) Flagstar wired money to a bank, which was apparently used to pay off the existing mortgage.  Flagstar also received physical possession of the note on May 18, which Allied assigned to it without recourse.

  • Chapter 183C defines “high-cost loans” to include home mortgage loans where the total points and fees are more than the greater of $400 or 5% of the loan amount.
  • At the federal level, the Truth in Lending Act was amended in 1994 by the Home Ownership and Equity Protection Act (HOEPA) to give additional protection to consumers, including requiring additional disclosures for certain loans where points and fees are in excess of the greater of $400 or 8% of the total loan amount.
  • Loans not in compliance with Chapter 183C are unenforceable, while loans not in compliance with HOEPA are subject to rescission under the Truth in Lending Act.
  • In this case, the loan exceeded the Chapter 183C threshold, but did not exceed the HOEPA threshold.
  • The court found that Chapter 183C was preempted for federal savings associations and federal savings banks under the Home Owners’ Loan Act of 1933 (HOLA).

So, if Allied was considered the original lender, Chapter 183C was not preempted (since it was not a federal lender) and the loan was unenforceable; while if Flagstar was considered the original lender, Chapter 183C would be preempted (since Flagstar was a federal savings bank) and the loan would be enforceable (and not subject to rescission).

The court commented that the “only conceivable basis” for concluding that Flagstar was not the original lender was because it table-funded the loan.  Table funding was described as a “settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds” (quoting HUD regulations).  The court asserted that this made Flagstar the “functional equivalent” of the original lender.  Consequently, it found that Chapter 183C was preempted and the loan was enforceable.

Two points of interest:

This case was decided before the effective date of Dodd-Frank amendments to HOLA.  According to the court, the amendment significantly reduced the scope of preemption under HOLA so that the broad preemption applied in Thomas is no longer in effect.  Thus, today federal lenders need to be more concerned about local regulatory schemes since some of them may no longer be preempted by HOLA.

It is also interesting to note that the debtor’s attempts to declare the loan unenforceable were based entirely on state law, and did not rely on “strong-arm” powers or other rights given under the Bankruptcy Code.  However, a bankruptcy proceeding does provide a ready-made forum for litigating issues.  So it is not unusual to see non-bankruptcy causes of action brought in a bankruptcy proceeding that would not have been pursued absent bankruptcy.