A wave of class action lawsuits against major builders and their affiliated finance companies may be rising within Pennsylvania’s federal courts, with the possibility for copycat lawsuits being filed nationwide. Though some industry-watchers have long speculated about such an assault by the plaintiff’s bar, the anticipated proliferation of these bet-the-company lawsuits may take many by surprise. Such a suit has already been filed. In Laughlin, et al. v. NVR Inc. and NVR Mortgage Finance Inc., filed in the Western District of Pennsylvania (a copy of which we can provide upon request), plaintiffs are residential mortgage borrowers who purchased a home from NVR Inc. (“NVR”). The purchase was financed through a mortgage loan with NVR’s affiliated lender, NVR Mortgage Finance, Inc. (“NVRMF”). The transactions in question are fairly commonplace. For the convenience of their customers, residential home builders frequently form or affiliate themselves with finance companies. By making home purchase loans available through their affiliates, these builders are able to offer their customers a “one-stop shop” for the purchasing and financing of a new home.
In Laughlin, plaintiffs allege that the affiliated arrangement between NVR and NVRMF violated Section 8 of the Real Estate Settlement Procedures Act (“RESPA”), 12 USC § 2607, which prohibits the giving of business referrals for value or the splitting of settlement charges in connection with a residential mortgage loan transaction where no value is conferred. While admitting that “affiliated business arrangements,” such as that between the defendants in Laughlin, are normally exempt from RESPA’s provisions, plaintiffs allege that such exemption disappears because the homebuyer is “required” to use the affiliated finance company. Citing to the Department of Housing and Urban Development’s (HUD) expansive informal reading of the phrase “required use,” plaintiffs claim they were “required” to use the NVRMF because otherwise NVR would have charged them an additional $18,903 to purchase their home. (Another way to describe the exact same transaction is that plaintiffs received an $18,903 discount on the price of the house because they borrowed through the affiliated lender.) Plaintiffs sue on behalf of themselves and an alleged nationwide class of borrowers.
Plaintiffs seek civil remedies for an alleged violation of RESPA, of penalties amounting to three times the amount of any charge paid for the disputed settlement service. If viable as an individual action, Laughlin and its progeny would present serious legal threats to defendant builders. Moreover, if any of these suits could meet Rule 23’s requirements for class certification, the accumulation of treble damages would be draconian.
Importantly, however, HUD’s formal definition of “required use” does not include package deals that offer borrowers discounts below the prices that are otherwise generally available. For each borrower who accepted the package, the question becomes whether the borrowers who obtained their financing from another source or perhaps did not require financing, paid the non-discounted price of the house. If so, then it would seem that the package offered a true discount. In addition, if properly defended, there is every reason to believe that individual facts may be shown to predominate these proceedings, a factor weighing strongly against class certification. Given the harsh political environment in which mortgage lenders currently find themselves, Laughlin and its anticipated copycat suits could even potentially attract the attention of federal and/or state regulators, regardless of the underlying merits of the suit.
Construction companies with affiliated lenders would be well served to seek legal advice with respect to the potential issues raised by these suits.