Boschma v. Home Loan Ctr., Inc.

198 Cal.App.4th 230

129 Cal.Rptr.3d 874

11 Cal. Daily Op. Serv. 10,237

2011 Daily Journal D.A.R. 12,103

Clarence E. BOSCHMA et al., Plaintiffs and Appellants,

v.HOME LOAN CENTER, INC., Defendant and Respondent.

No. G043716.

Court of Appeal, Fourth District, Division 3, California.

Aug. 10, 2011.

Arbogast & Berns, David M. Arbogast, Los Angeles, and Jeffrey K. Berns, Tarzana; Spiro Moss and J. Mark Moore for Plaintiffs and Appellants.

Sheppard, Mullin, Richter & Hampton, Robert S. Beall, Jonathan P. Hersey, Isaiah Z. Weedn, Costa Mesa, and Karin Vogel, San Diego, for Defendant and Respondent.

OPINION

IKOLA, J.

The defining feature of an option adjustable rate mortgage loan (“Option ARM”) with a discounted initial interest rate (i.e., a “teaser” rate) is, for a limited number of years, the borrower may (by paying the minimum amount required to avoid default on the loan) make a monthly payment that is insufficient to pay off the interest accruing on the loan principal. Rather than amortizing the loan with each minimum monthly payment (as occurs with a standard mortgage loan), “negative amortization” occurs—a borrower who elects to make only the scheduled payment during the initial years of the Option ARM owes more to the lender than he or she did on the date the loan was made. After an initial period of several years in which negative amortization can occur, a borrower's payment schedule then recasts to require a minimum monthly payment that amortizes the loan.

In this case, plaintiffs ¹ sued defendant Home Loan Center, Inc., for: (1) fraudulent omissions; and (2) violations of Business and Professions Code section 17200 et seq. ( section 17200). Plaintiffs, individual borrowers who entered into Option ARMs with defendant, allege defendant's loan documents failed to adequately and accurately disclose the essential terms of the loans, namely that plaintiffs would suffer negative amortization if they made monthly payments according to the only payment schedule provided to them prior to the closing of the loan. The court sustained defendant's demurrer to the second amended complaint without leave to amend, reasoning that the loan documentation adequately described the nature of Option ARMs. We reverse the ensuing judgment. Plaintiffs adequately alleged fraud and section 17200 causes of action.

FACTS

In conducting our de novo review, we “must ‘give[ ] the complaint a reasonable interpretation, and treat[ ] the demurrer as admitting all material facts properly pleaded.’ [Citation.] Because only factual allegations are considered on demurrer, we must disregard any ‘contentions, deductions or conclusions of fact or law alleged....’ ” ( People ex rel. Gallegos v. Pacific Lumber Co. (2008) 158 Cal.App.4th 950, 957, 70 Cal.Rptr.3d 501.)

The Boschmas refinanced their existing home loan with defendant on or about February 1, 2006, utilizing an Option ARM. Robison agreed to an Option ARM with defendant on or about November 22, 2005; the operative complaint does not specify whether her loan was a purchase money loan or a refinancing of an existing loan.

Plaintiffs attached copies of certain loan documents to the operative complaint. We will set forth the key provisions of these documents before detailing plaintiffs' allegations. ( Barnett v. Fireman's Fund Ins. Co. (2001) 90 Cal.App.4th 500, 505, 108 Cal.Rptr.2d 657 [“we rely on and accept as true the contents of the exhibits and treat as surplusage the pleader's allegations as to the legal effect of the exhibits”].)

The Note

Plaintiffs executed nearly identical documents entitled “ADJUSTABLE RATE NOTE [ (Note) ].” The Note features a bold, capitalized disclaimer below its title and loan identification numbers: “THIS NOTE CONTAINS PROVISIONS THAT WILL CHANGE THE INTEREST RATE AND THE MONTHLY PAYMENT. THERE MAY BE A LIMIT ON THE AMOUNT THAT THE MONTHLY PAYMENT CAN INCREASE OR DECREASE. THE PRINCIPAL AMOUNT TO REPAY COULD BE GREATER THAN THE AMOUNT ORIGINALLY BORROWED, BUT NOT MORE THAN THE LIMIT STATED IN THIS NOTE.” Following this disclaimer, the Note indicates the date of execution (February 1, 2006 for the Boschmas, and November 22, [129 Cal.Rptr.3d 880]2005 for Robison), the site of execution (Irvine, California), and the address of the property that secures the loan for each party. The Note then lists 11 separate terms, which we quote in relevant part below (using the Boschmas's Note, with footnotes describing any differences in the Robison Note).

“1. BORROWER'S PROMISE TO PAY [¶] In return for a loan that I have received, I promise to pay U.S. $250,000.00 ² (this amount is called ‘principal’), plus interest, to the order of the Lender.... [¶] ... The Lender or anyone who takes this Note by transfer ... is called the ‘Note Holder.’ ”

“2. INTEREST [¶] (A) Interest Rate [¶] Interest will be charged on unpaid principal until the full amount of principal has been paid. I will pay interest at a yearly rate of 1.250%. The interest rate I pay may change. [¶] The interest rate required by this Section 2 is the rate I will pay both before and after any default.... [¶] (B) Interest Rate Change Dates [¶] The interest rate I will pay may change on the first day of April 1, 2006,[³ and on that day every month thereafter. Each date on which my interest rate could change is called an ‘Interest Rate Change Date.’ The new rate of interest will become effective on each Interest Rate Change Date. [¶] (C) Interest Rate Limit [¶] My interest rate will never be greater than 9.950%. [¶] (D) Index [¶] Beginning with the first Interest Rate Change Date, my Interest Rate will be based on an Index. The ‘Index’ is the Twelve–Month Average ... of the monthly yields on actively traded United States Treasury Securities adjusted to a constant maturity of one year.... [¶] (E) Calculation of Interest Rate Changes [¶] Before each Interest Rate Change Date, the Note Holder will calculate my new interest rate by adding THREE AND 500/1000 percentage point(s) (3.500%)⁴ to the Current Index. Subject to the limit stated in Section 2(C) above, the result of this addition will be my new interest rate until the next Interest Rate Change Date.”

“3. PAYMENTS [¶] (A) Time and Place of Payments [¶] I will pay principal and interest by making payments every month ... beginning on April 1, 2006.[[⁵ I will make these payments every month until I have paid all the principal and interest and any other charges described below that I may owe under this Note.... [¶] ... [¶] (B) Amount of My Initial Monthly Payments [¶] Each of my initial monthly payments will be in the amount of $833.13.[[⁶ This amount may change. [¶] (C) Payment Change Dates [¶] My monthly payment may change as required by Section 3(D) below beginning on the 1st day of April, 2007,⁷ and on that day every 12th month thereafter. Each of these dates is called a ‘Payment Change Date.’ My monthly payment also will change at any time Section 3(F) or 3(G) below requires me to pay a different monthly payment. [¶] I will pay the amount of my new monthly payment each month beginning on each Payment Change Date or as provided in Section 3(F) or 3(G) below.”

“(D) Calculation of Monthly Payment Changes [¶] Before each Payment Change Date, the Note Holder will calculate the amount of the monthly payment that would be sufficient to repay the unpaid principal that I am expected to owe at the Payment Change Date in full on the Maturity Date in substantially equal installments at the interest rate effective during the month preceding the Payment Change Date. The result of this calculation is called the ‘Full Payment.’ Unless Section 3(F) or 3(G) below requires me to pay a different amount, my new monthly payment will be in the amount of the Full Payment, except that my new monthly payment will be limited to an amount that will not be more than 7.5% greater or less than the amount of my last monthly payment due before the Payment Change Date.”

“(E) Additions to My Unpaid Principal [¶] My monthly payment could be less than the amount of the interest portion of the monthly payment that would be sufficient to repay the unpaid principal I owe at the monthly payment date in full on the Maturity Date in substantially equal payments. If so, each month that my monthly payment is less than the interest portion, the Note Holder will subtract the amount of my monthly payment from the amount of the interest portion and will add the difference to my unpaid principal. The Note Holder also will add interest on the amount of this difference to my unpaid principal each month. The interest rate on the interest added to principal will be the rate required by Section 2 above.”

“(F) Limit on My Unpaid Principal; Increased Monthly Payment [¶] My unpaid principal can never exceed a maximum amount equal to ... ONE HUNDRED TEN AND 000/100 PERCENT (110.000%) of the principal amount I originally borrowed. Because of my paying only limited monthly payments, the addition of unpaid interest to my unpaid principal under Section 3(E) above could cause my unpaid principal to exceed that maximum amount when interest rates increase. In that event, on the date that ... paying my monthly payment would cause me to exceed that limit, I will instead pay a new monthly payment. The new monthly payment will be in an amount that would be sufficient to repay my then unpaid principal in full on the Maturity Date in substantially equal installments at the interest rate effective during the preceding month.”

“(G) Required Full Payment [¶] On the 5th Payment Change Date and on each succeeding 5th Payment Change Date thereafter, I will begin paying the Full Payment as my monthly payment until my monthly payment changes again. I also will begin paying the Full Payment as my monthly payment on the final Payment Change Date.

“5. BORROWER'S RIGHT TO PREPAY * * See attached Prepayment Note Addendum. [¶] I have the right to make payments of principal at any time before they are due. A payment of principal only is...