If there’s one message to be gleaned from the Supreme Court’s recent decision in Bumpers v. Community Bank of Northern Virginia, it’s this: When it comes to mortgage lending, consumers better shop around.
And not just for the best interest rates and payment terms.
Now the onus is on you, borrower, to find the best deal for all those ancillary charges that show up on that mysterious closing form – fees for the title company for example, or a loan settlement provider or even an appraiser.
It’s on you to question each and every one of those charges. No longer can you assume that services you’re being charged for have actually been provided.
And it’s also on you to consider and accept each and every one of those charges as part and parcel of your decision to sign on to the loan.
Because if you don’t, you’re out of luck if you later discover you’ve been duped and want to sue for consumer fraud.
That’s the upshot of Bumpers, a 5-2 decision written by Justice Paul Newby in which, consumer advocates say, the court upended one of the most consumer friendly laws in the nation.
“North Carolina overall has been far more protective of its consumers than any other southern state,” said Margot Saunders, a former North Carolina consumer law attorney and now counsel to the National Consumer Law Center. “Chapter 75 [the state’s unfair and deceptive practices act] and the liberal interpretation of that law that the courts had required were very powerful tools.”
Compared to other states’ consumer protection laws, North Carolina’s was uniformly one of the best, she added.
That’s likely to change now, though.
“As a result of Bumpers, countless North Carolina consumers who are the victims of unfair practices, whether from predatory lenders as in Bumpers or in other contexts, will be without any remedy,” said Chris Olson, a consumer law attorney in Raleigh.
Bumpers involved a straight forward claim of loan packing — the padding of a loan package with unnecessary or duplicative fees — long a facet of predatory lending condemned by consumer protection agencies and advocates.
Bumpers received a mailer touting second mortgage loans from Community Bank of Northern Virginia in 1999. After calling the bank and sending requested documents, Bumpers learned that he had been approved for $28,450 loan with a 16.99 percent interest rate.
At the bank’s direction, he closed the loan at a women’s lingerie store with the help of a notary public there. Among the documents presented for his signature were the HUD forms disclosing fees being charged in connection with the loan. Those included a $1280 loan discount fee charged by the bank, typically paid by a borrower to buy a lower interest rate (also known as “points”), and some $1200 in fees for services allegedly provided by the title company on the bank’s behalf.
Bumpers signed the documents and later received the loan proceeds, minus the fees, in the mail.
Two years later, Bumpers and others filed a class action against the bank, alleging that it had charged loan discount fees for discounts it never provided and padded loan packages with excessive title company fees in violation of Chapter 75.
Bumpers’ attorney, Jerry Hartzell of Raleigh, said that more than 600 North Carolina consumers were victims of the bank’s practices.
The case then wound its way through the state and federal courts here, and as part of multidistrict litigation in federal court in Pittsburgh in which Community Bank (bought by PNC Bank in 2006) had been implicated in a nationwide predatory lending scheme.
In 2008 the case landed back in North Carolina, and in April of that year a trial court in Wake County found that the bank had violated state Chapter 75 by charging a loan discount fee without providing a loan with discounted interest and by charging excessive title company fees.
In 2011, the Court of Appeals affirmed that ruling as to the loan discount fees but sent the excessive fee claim back to the trial court for further proof.
The legislature enacted Chapter 75 to provide a remedy for consumers who had been deceived but could not establish the more difficult elements of proof required for a fraud claim.
“Reliance” is one such element, requiring the consumer to prove that he relied on alleged misrepresentations when he entered into a transaction. It is also an element that courts here have refused to require for a Chapter 75 claim, because to do so would be to defeat the very purpose of the statute.
“If you insert reliance back into the Chapter 75 equation, you’ve essentially converted the claim back to a fraud claim,” Margot Saunders said.
But that’s essentially what the majority in Bumpers did.
“We agree with Community Bank that a claim under [Chapter] 75 stemming from an alleged misrepresentation does indeed require a plaintiff to demonstrate reliance on the misrepresentation in order to show the necessary proximate cause,” Newby wrote.
The court reached this conclusion by accepting the bank’s argument – reiterated by the Chamber of Commerce in an amicus brief filed in support of the bank – that Bumpers’ claim was a misrepresentation claim.
That’s not what Bumpers had asserted in the case, though. He claimed that he was overcharged a fee for something he never got.
And that’s how the Court of Appeals construed his claim.
“The essence of plaintiffs’ claims regarding the loan discount fee are not that they were induced by a misrepresentation made by defendant, but rather that they were charged for product that was never delivered,” Judge Sanford Steelman wrote for a unanimous panel.
But Newby disagreed. “A claim for overcharging is not distinct from one based on misrepresentation,” he wrote.
Justices Robin Hudson and Cheri Beasley both dissented in separate opinions, saying that the court had mischaracterized Bumpers’ claim as a misrepresentation.
Beasley added that the majority’s decision had disastrous consequences for consumers. The court’s ruling “opens the door to an array of new fees intended to pad a company’s bottom line rather than to reflect the fair cost of a good or service provided by the consumer,” she wrote.
As examples, she added:
Under the majority‘s reasoning, a bank may charge a paper statement fee to a customer who has selected electronic monthly statements offered by the bank, a safety deposit box rental fee to a customer who has not rented a safety deposit box, and a teller transaction fee on a transaction for which the customer only used the ATM. As long as the customer had some other reason that he might have chosen to do business with the bank, such as being an existing account holder, he can never show that, but for the misrepresentation, he would not have conducted business with the bank. The customer would have to show that he or she would have avoided the transaction entirely. The customer has no recourse because the fee was not a part of his decision-making process, despite the existence of an unethical and unfair practice that charges the consumer a fee for a good or service he did not receive. It is fundamentally unfair to pay a fee for a good or service and receive nothing corresponding to that fee in return.
“We’re disappointed in the outcome,” Jerry Hartzell said. “Of the eleven judges who considered this case, six of them agreed with our position (the trial judge, the three judges at the Court of Appeals, and two judges on the Supreme Court). Unfortunately what matters was how many of the Supreme Court justices saw matters our way, and we only got two when we needed four. We regret the outcome but don’t know how we could have pursued the case any more vigorously.”
Matthew Sawchak, who represented the bank, did not return a call for comment. However Marcey Zweibel, a spokesperson for PNC Bank, said the bank does not comment on legal matters.
Consumer advocates uniformly agree that the court’s decision is confounding and strikes a blow to consumer rights in the state.
“It’s a terrible decision for North Carolina,” Margot Saunders said, puzzled at what the court now expects.
“How do you prove reliance?” she asked. “You paid a discount fee to buy down the interest rate, and the lender doesn’t buy down the rate – what else is there to show? That is deception, and there shouldn’t be any need to show reliance, because there’s nothing but reliance.”
Saunders added that the West Virginia Supreme Court recently reached the opposite conclusion in a case involving a similar loan discount fee situation, Quicken Loans v. Brown, holding that reliance was needed for a fraud claim but not for a claim under that state’s unfair and deceptive practices act.
“The Bumpers majority improperly injects a reliance element into North Carolina’s Unfair Trade Practice Act,” Chris Olson said. “That makes an unfair trade practice claim tantamount to a fraud claim which is both more difficult to prove and next to impossible to pursue on a class action basis. Bottom line – consumers in North Carolina just lost the most effective vehicle they have had for checking unfair, unethical, and overreaching business practices.”
Perhaps just as troubling is the anti-consumer sentiment woven throughout the opinion and what that portends for future consumer actions. Newby portrays the relationship between the borrower and lender as at arms-length, presuming that both share access to the same information and are at equal footing throughout a loan transaction.
And rather than impose upon the lender the obligation to make truthful disclosure, he puts the onus on the borrower to question whether disclosures are accurate.
“Bumpers completed this loan transaction without first asking about the amount of the discount he was receiving or considering whether another lender would have offered better terms, though he was aware he was free to do so,” Newby wrote.
Referring to the claim of excessive title company charges, he added, “As with the loan itself, Bumpers declined to shop around for a less settlement service provider, even though he was aware he was free to do so.”
“The whole idea of showing reliance in these situations is absurd,” said Margot Saunders. “It’s a murky box. There’s no transparency, there’s no real shopping, there’s no ability of even the most sophisticated consumers to parse all of the details and all of the multiple moving parts in a mortgage and get a good deal.”