In re Countrywide Financial Corp. Mortg. Marketing

601 F.Supp.2d 1201

In Re: COUNTRYWIDE FINANCIAL CORP. MORTGAGE MARKETING AND SALES PRACTICES LITIGATION Symone Leyvas, et al., Plaintiffs, v. Bank of America Corp., et al., Defendants.

Kimberly A. Jackson, on behalf of herself and all others similarly situated, Plaintiffs, v. Countrywide Financial Corp., et al., Defendants.

Heath O. White, on behalf of himself and all others similarly situated, Plaintiffs, v. Countrywide Financial Corp., et al., Defendants.

Case No. 08MD1988 DMS (LSP).

Case No. 08CV1888 DMS (LSP).

Case No. 08CV1957 DMS (LSP).

Case No. 08CV1972 DMS (LSP).

United States District Court, S.D. California.

February 5, 2009.

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ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS

[Docket Nos. 50 (08md1988), 38 (08cv1888), 25 (08cv1957), and 69 (08cv1972)]

DANA M. SABRAW, District Judge.

This matter comes before the Court on Defendants' motion to dismiss the Consolidated Class Action Complaint ("CAC"). The motion came on for hearing on January 30, 2009. Joe R. Whatley, Jr. and Donna Siegel Moffa appeared and argued on behalf of Plaintiffs and Thomas M. Hefferon appeared and argued on behalf of Defendants. After thoroughly reviewing the parties' briefs and the record on file herein, and after hearing oral argument, the Court grants the motion in part and denies the motion in part.

I. BACKGROUND

This case is part of a multi-district litigation involving states, individuals and several business entities involved in mortgage lending across the country. Plaintiffs filed separate class action complaints in other courts, and those complaints were transferred to this Court pursuant to an order from the Judicial Panel on Multidistrict Litigation. After transfer, the named Plaintiffs filed a Consolidated Class Action Complaint ("CAC"), which is the subject of the present motion to dismiss. The named Plaintiffs in this class action case are Francis G. and Rebecca G. Sizemore, Edward Marini, Kimberly and Philip D. Menichetti, Sequesta Washington, Symone and John Leyvas, June Harding Brown, Preston Givens and Paula Prezola, and Kimberly A. Jackson. Defendants are Countrywide Financial Corp. ("CFC"), Countrywide Bank, FSB ("CW Bank, FSB"), Countrywide Home Loans, Inc. ("CHL"), Countrywide KB Home Loans, LLC, Countrywide Tax Services Corp. ("CT"), LandSafe, Inc., LandSafe Appraisal Services, Inc., LandSafe Credits, Inc., LandSafe Flood Determination, Inc., and Bank of America Corp. ("BAC").

In general, Plaintiffs allege Defendants have engaged in a scheme to steer borrowers into subprime mortgages, which were then sold as investments in the secondary mortgage market. (CAC at 1-2.) Plaintiffs allege Defendants pushed borrowers into subprime loans irrespective of their ability to repay the loans or their suitability for other types of loans. (Id.) According to Plaintiffs, Defendants executed this scheme through fraudulent means, including:

• incentivizing employees and brokers to place borrowers into subprime loans, (id. at 2-3),

• training and instructing employees to place borrowers into subprime loans without explaining the terms or disclosing the risks, (id.),

• "making false representations to borrowers, as set forth in standardized sales scripts, that they were offering the best loans available to the borrowers." (id. at 4),

• using "an automated, computerized underwriting program that was designed to maximize the number of subprime loans[,]" (id. at 6),

• failing to adequately disclose future interest rate increases, (id. at 7),

• failing to disclose the risk of negative amortization, (id.),

• misrepresenting the borrowers' ability to refinance, (id. at 11-12), and

• failing to disclose the overall scheme.

The allegations as to specific Plaintiffs are as follows:

The Sizemores

"On May 19, 2006, the Sizemores received a subprime loan in the form a `pay option' adjustable rate mortgage from Countrywide Home Loans, Inc., in order to refinance the mortgage on their primary residence" in South Carolina. (Id. at 14.)

Under Countrywide's pay option ARM loan, a borrower is given three different payment options to choose from each month. The top-tier option, `amortized payment' encompasses payments of interest and a portion of the principal of the loan. The middle option is the `interest only payment,' which covers only the interest for the month and does not decrease the principal amount of the loan. The third, and lowest, payment option is what Countrywide calls the `minimum payment.' When a borrower makes the `minimum payment' on a pay option ARM loan, he or she is in fact paying less that the interest owed on the principal loan, and the unpaid interest is added to the principal amount owed. Once the principal amount reaches 115% of the original loan amount, the repayment structure resets to significantly higher monthly payments.

(Id. at 3.) Plaintiffs allege that "at the time of the loan," Countrywide failed to disclose to the Sizemores the effect of making only the "minimum payments," that their monthly payments would soon increase, and that they would be charged a prepayment penalty if they refinanced within three years. (Id. at 14.) On the contrary, Plaintiffs allege that the Countrywide Loan Officer, Cortney Lanktree, told the Sizemores their monthly payment would remain constant for three years, they would not suffer negative amortization if they paid the "monthly minimum," their loan was spread out over forty years, and there would not be a prepayment penalty if they refinanced within the first three years. (Id.) Plaintiffs allege the Sizemores requested that the information they received about the prepayment penalty be put in writing, which Ms. Lanktree did in a letter dated April 25, 2006. (Id. at 15.)

On June 5, 2007, Countrywide sent a letter to the Sizemores alerting them that the required monthly payment on their mortgage would soon increase significantly based on the negative amortization of their loan. (Id.) The following month, the Sizemores sought to refinance their loan, but they were told that Countrywide would not honor Ms. Lanktree's letter. (Id.) Plaintiffs allege the Sizemores would not have refinanced with Countrywide had they been informed "that their principal would increase as a result of making the `minimum payment' on their loan[.]" (Id. at 16.)

Edward Marini

Edward Marini is a disabled Vietnam veteran on a fixed income. (Id.) Plaintiffs allege he was solicited by Countrywide via telephone to refinance his Countrywide home loan in the first part of 2005. (Id.) Plaintiffs allege a Countrywide customer service representative told Marini that the interest rate on his loan would be fixed for five years "with an increase of one hundred dollars ($100) per month[.]" (Id.) Plaintiffs further allege "Countrywide representatives continuously reiterated" this representation to Marini. (Id.)

Marini thereafter refinanced his mortgage with a pay option ARM loan. (Id. at 17.) "[A]t the time of the loan," Countrywide did not disclose to Marini that his monthly payments would soon increase, nor did they disclose that negative amortization would occur if he made only the "minimum payment." (Id.)

As with the Sizemores, on August 6, 2007, Countrywide sent a letter to Marini alerting him that the minimum payment on his loan would soon be more than double his current payment based on the negative amortization of his loan. (Id.) Plaintiffs allege Marini would not have entered into the loan with Countrywide had he been informed that the "minimum payments" would result in increased principal. (Id.) Plaintiffs allege Marini will need to file for bankruptcy, (id.), and indeed, he did so before the CAC was filed. (See Defs.' Request for Judicial Notice in Supp. of Mot., Ex. D.)

The Menichettis

The Menichettis obtained a pay option ARM loan from Countrywide Bank, N.A. ("CW Bank, N.A. on August 18, 2006.") (CAC at 18.) The Menichettis obtained the loan through Don Cutler, a broker at Mid Atlantic Capital ("Mid Atlantic"). (Id.) Mr. Cutler first contacted the Menichettis by letter about refinancing their mortgage. (Id.) Plaintiffs allege that neither Countrywide nor Mid Atlantic disclosed to the Menichettis that their monthly payments would increase soon after taking the loan or that their principal would increase if they made the "minimum payment" each month. (Id.) On the contrary, Plaintiffs allege Mr. Cutler told the Menichettis he was providing a "good mortgage option," they would now have a "low monthly payment," and it was "the best loan he could think of." (Id.)

After obtaining the loan, the Menichettis noticed that the principal balance began increasing. (Id. at 18-19.) They sought assistance from Countrywide, but have yet to receive any. (Id. at 19.) Plaintiffs allege the Menichettis would not have entered into the loan with Countrywide had they known that paying the "minimum payment" would result in an increase in their principal balance. (Id.)

Sequesta Washington

Washington obtained a subprime loan from Full Spectrum Lending, Inc., a former subsidiary of CFC, on November 20, 2004. (Id. at 20.) Plaintiffs allege that "at the time of the loan," Countrywide failed to disclose to Washington that her interest rate would only be fixed for three years. (Id.) Plaintiffs also allege that Washington spoke to a Countrywide loan officer, Fred Aghili, about her ability to make the monthly payments, but Mr. Aghili told Washington she could refinance at any time. (Id.)

Washington began experiencing difficulty in making her monthly payments. (Id.) She tried to refinance on two separate occasions, but was told that she could not for different reasons. (Id.) Plaintiffs allege Washington would not have entered into the loan had she known that her interest rate would adjust in three years, or that she could not refinance at any time. (Id.)

The Leyvases

In July 2007,...