ROBERT L. HINKLE, District Judge.
Each named plaintiff in this purported class action took out a loan secured by a residential mortgage. The mortgage note allowed the plaintiff, for up to ten years, to make monthly payments too small to cover the accruing interest, thus resulting in "negative amortization." But the plaintiff could also choose to make higher payments from the outset that were sufficient to cover the interest and amortize the principal. The decision whether to do so rested with the plaintiff. A loan of this kind is sometimes referred to as a "payment option" loan.
The plaintiffs have sued the mortgagee and the company that serviced the loans. The plaintiffs assert Florida state-law claims for breach of contract, for breach of the implied covenant of good faith and fair dealing, and for deceptive or unfair trade practices. The nub of the claims is that the relevant documents—the note and attendant disclosures—failed to adequately disclose that if a plaintiff made the minimum required payment at the outset, the payment would not cover the interest and so the principal balance would increase. But the documents were chock full of disclosures about this possibility. The documents fully disclosed precisely how the note worked in terms that were readily understandable and that met the requirements of the federal Truth in Lending Act.
Because the first amended complaint fails to allege facts showing a breach of contract or a failure to fully and properly disclose, I grant the mortgagee's motion to dismiss. I grant the servicing company's motion for the same reason and because the first amended complaint fails to allege that it breached a contract or had a role in the challenged disclosures.
The named plaintiffs are Mary Taylor and Farrell L. Stewart. The defendants are the mortgagee, Homecomings Financial, LLC, and the servicing company, Aurora Loan Services, LLC.
Three relevant documents attended each plaintiff's transaction. For convenience, this order refers only to Ms. Taylor's documents; Mr. Stewart's were substantively identical.
The note, ECF No. 8-2, was the actual contract setting out the plaintiff's obligation to repay the funds the plaintiff borrowed. The federal truth-in-lending disclosure statement, ECF No. 8-3, set out the disclosures required by federal law, including such things as the annual percentage rate. The program disclosure explained the operation of the payment-option loan, tempered by the statement that it was "intended for reference purposes only" and that only the actual loan documents "establish your rights and obligations under the loan plan." ECF No. 8-4 at 4.
Ms. Taylor's note included these statements:
ECF No. 8-2 at 3-4.
The truth-in-lending disclosure statement accurately set out the annual percentage rate, finance charge, amount financed, total of payments, and payment schedule, all as required by the Truth in Lending Act and its implementing regulations. See ECF No. 8-3.
The program disclosure included these statements:
ECF No. 8-4 at 2-4 (emphasis in original). A footnote explained the hypothetical $36.96 initial payment:
Id. at 4. The program disclosure continued:
Id. at 4 (emphasis in original).
The Supreme Court recently summarized the standards that apply to most complaints:
Erickson v. Pardus, 551 U.S. 89, 93, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007). The court must accept the complaint's allegations as true "even if [the allegations are] doubtful in fact." Twombly, 550 U.S. at 555, 127 S.Ct. 1955.
Under Rule 8(a)(2), a complaint thus "does not need detailed factual allegations." Id. Nor must a complaint allege with precision all the elements of a cause of action. See Swierkiewicz, 534 U.S. at 514-15, 122 S.Ct. 992 (rejecting the assertion that a Title VII complaint could be dismissed for failure to plead all the elements of a prima facie case).
But neither is a conclusory recitation of the elements of a cause of action alone sufficient. A complaint must include more than "labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555, 127 S.Ct. 1955. A complaint must include "allegations plausibly suggesting (not merely consistent with)" the plaintiff's entitlement to relief. Id. at 545, 127 S.Ct. 1955. The complaint must set forth facts—not mere labels or conclusions— that "render plaintiffs' entitlement to relief plausible." Id. at 569 n. 14, 127 S.Ct. 1955.
A district court thus should grant a motion to dismiss unless "the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). This is so because
Id. at 1949-50 (emphasis added).
When a complaint alleges fraud or mistake, the pleading standard is more exacting:
The plaintiffs assert that the defendants breached the contract by failing to apply at least a portion of each monthly payment to principal. The claim fails because the contract did not require a portion of each payment to be applied to principal and because it would make no difference anyway.
The contract—that is, the note—repeatedly and unmistakably says that a payment may not be sufficient to cover interest and that the deficiency will be added to the note's principal. Thus the note's section 3(B) says that if a payment is not sufficient to cover the interest due, "the difference will be added to my Principal amount." Section 3(E) explains the calculation, saying that if a
ECF No. 8-2 at 4. The math could perhaps have been explained more clearly, but this was easily clear enough to establish the terms of the contract.
In asserting the contrary, the plaintiffs rely on this statement in the note's section 3(D):
Id. at 4. The point of the sentence is clear and unobjectionable: the note sets out a "minimum payment," which is the minimum amount the borrower must pay on the note, but any required escrow payment—such as for taxes or insurance—is extra. The sentence does not say that a minimum payment will always be enough to pay the interest, or that a portion of a minimum payment will always be applied to principal, even if the payment is insufficient to cover the interest. The sentence does not countermand the other plain provisions of the note.
And it would not matter anyway. If, for example, a loan had a principal balance of $10,000 with monthly interest of $50, and if a borrower made a minimum payment of $40, then applying the payment to interest—as required under the terms of Ms. Taylor's note—would result in a new balance of $10,010, calculated as $10,000 + ($50-$40). If, on the other hand, the
To be sure, whether a payment was applied to interest or principal would make a difference if further interest accrued only on principal, not on interest. But the note clearly states that interest will accrue not only on principal but also on the amount of any interest that is not covered by a monthly payment. There is not the slightest contrary suggestion in the note or in any attendant disclosure.
In short, the plaintiffs have failed to state a claim for breach of contract.
Under Florida law, an implied covenant of good faith and fair dealing is a part of every contract. But the covenant does not override a contract's express terms. See, e.g., Ernie Haire Ford, Inc. v. Ford Motor Co., 260 F.3d 1285, 1291 (11th Cir.2001); Burger King Corp. v. Weaver, 169 F.3d 1310, 1316-17 (11th Cir.1999); Johnson Enters. of Jacksonville, Inc. v. FPL Grp., Inc., 162 F.3d 1290, 1314 (11th Cir.1998) ("The good faith requirement does not exist `in the air.' Rather, it attaches only to the performance of a specific contractual obligation." (quoting Hosp. Corp. of Am. v. Fla. Med. Ctr., Inc., 710 So.2d 573, 575 (Fla. 4th DCA 1998))). The conclusion that, at least based on the first amended complaint's allegations, the defendants have followed—not breached—the plaintiffs's contracts necessarily indicates that the defendants also have not violated the implied covenant of good faith and fair dealing.
The Florida Deceptive and Unfair Trade Practices Act ("FDUTPA") creates a private right of action in favor of a person who is injured by a violation of the act. See Fla. Stat. § 501.211. A violation "may be based upon" any statute or rule that proscribes "unfair methods of competition, or unfair, deceptive, or unconscionable acts or practices," any "standard[] of unfairness and deception set forth and interpreted by the Federal Trade Commission or the federal courts," or any rule adopted under the Federal Trade Commission Act. § 501.203(3). At least in some circumstances, a FDUTPA violation thus may be based upon the federal Truth in Lending Act, a rule adopted under that act by the Board of Governors of the Federal Reserve System, or a published interpretation of that act by the Federal Reserve System's Division of Consumer and Community Affairs. The plaintiffs invoke these authorities here.
The Truth in Lending Act and its implementing regulations require detailed and precise disclosures on such things as a loan's annual percentage rate, total finance charge, amount financed, and total of payments. Setting these out is easy enough for a loan with a fixed term, fixed interest rate, and fixed monthly payment. For a loan with an adjustable interest rate and various payment options, it is not as easy. As an initial matter, one could design a system that required an almost infinite variety of disclosures for loans of this kind. But an important goal of the Truth in Lending Act is to allow a consumer to shop intelligently for a loan—to compare one proposed loan to another based on disclosures cast in a consistent manner. A lender must calculate the annual percentage
Homecomings provided each plaintiff a Truth in Lending disclosure statement setting out the required amounts. Homecomings says the statements complied to the letter with the applicable requirements. The plaintiffs have challenged none of the calculations and have alleged no facts suggesting that the disclosure statements were inaccurate in any respect. As a matter of Florida law—if not also federal law—Homecomings cannot be held liable for providing a disclosure statement with calculations that conform with federal law. See Fla. Stat. § 501.212(1) (stating that FDUTPA does not apply to an "act or practice required or specifically permitted by federal or state law").
Still, it is not always enough for a lender to set out the required amounts. A lender must accurately disclose the nature of a proposed loan. Thus, for example, a lender must accurately inform the borrower if a payment-option loan will or at least may result in negative amortization. A Division of Consumer and Community Affairs staff interpretation confirms the requirement:
12 C.F.R. pt. 226 supp. I, cmt. 19(b)(2)(vii).2.
The plaintiffs say Homecomings violated this standard by indicating in the note and program disclosure that negative amortization was possible but failing to state explicitly that if a plaintiff initially made only the minimum required payment, negative amortization was a certainty.
The truth is this. At the outset of the loan, a plaintiff had the option to make a below-interest minimum payment. The plaintiff also had an option to make a payment that covered the interest or both covered the interest and paid down the principal. It was likely—both sides surely knew it—that the plaintiff would take the below-interest option, at least for a time. And eventually, starting in the eleventh year if not sooner, the plaintiff would be required to pay the full interest and some of the principal.
Given these facts, it was likely but not certain that some payments would result in negative amortization. It was certain that other payments—if made as required—would cover the interest and thus would not result in negative amortization. A statement that negative amortization was certain would not have been accurate. Instead, Homecomings' statement in section 3(E) of the note was scrupulously accurate: a monthly payment "could be
The note included another statement, though, that was not as forthcoming. In section 3(B), the note said:
ECF No. 8-2 at 3 (emphasis added). The statement is literally true, just as it is literally true to say that if the Sun rises in the east, it may set in the west. But by using "if" to refer to a condition that is certain, and "may" to refer to a consequence that is equally certain, the statement, viewed in isolation, could be deemed misleading.
The program disclosure document, like the note, included statements accurately setting out the possibility of negative amortization, but it also included this less-forthcoming statement: "Your initial Minimum Payment may not be sufficient to cover the interest due." ECF No. 8-4 at 2 (emphasis added). Like the analogous statement in the note, this statement, viewed in isolation, could be deemed misleading.
But the statements cannot properly be viewed only in isolation. They were, instead, parts of a note and program disclosure that repeatedly and accurately emphasized the possibility and import of negative amortization. Nobody could have read these documents without understanding full well the essence of the transaction: the plaintiff would have the option of making below-interest payments at the outset, this would increase the principal by as much as 15%, the interest rate and required payment would change after five years, and eventually the plaintiff would have to pay the full principal with interest. Lower payments now mean higher payments later. And interest keeps running. It is not a difficult concept.
To be sure, the disclosures would have been better had they included a statement like this: "The initial minimum payment is less than the interest, and if you make the initial minimum payment, the principal balance will increase." This is closer to the example of an appropriate disclosure included in the applicable staff interpretation, which says that if a consumer is given an option to make a payment that may result in negative amortization, "the creditor must fully disclose the rules relating to the option, including the effects of exercising the option (such as negative amortization will occur and the principal loan balance will increase)." 12 C.F.R. pt. 226 supp. I, cmt. 19(b)(2)(vii).2. The plaintiffs focus on this disclosure as drafted by the staff—"negative amortization will occur and the principal loan balance will increase"—as if the staff interpretation requires those very words to be included in a disclosure. But the staff's draft is just an example of an acceptable disclosure. Thus the staff interpretation says the creditor "must" disclose the rules governing, and the effect of, a below-interest payment, and Homecomings did. But the staff interpretation does not say that the creditor "must" make a disclosure in the form the staff drafted. Instead, the staff interpretation uses "[s]uch as" to introduce its draft, plainly indicating that the draft is
On balance, the defendants' actions as alleged in the first amended complaint were not deceptive or unfair. The first amended complaint fails to state a claim under FDUTPA.
This conclusion rests on a proper analysis of FDUTPA and the relevant documents—the note, the TILA disclosure statement, and the program disclosure— all as set out above. The limited case law in the area affects the analysis only a little. There are district-court decisions on both sides of the question whether a borrower has stated a claim based on a similar set of disclosures for a similar kind of loan. But the parties have cited no such case, and I am aware of none, arising under FDUTPA. Nor have they cited a Supreme Court or Eleventh Circuit decision addressing the required disclosures for a loan of this kind.
The district-court decisions that reject challenges to similar disclosures provide some support for this order. See Appling v. Wachovia Mortg., FSB, No. C 10-01900 JF (PVT), 2010 WL 2354138, at *7 (N.D.Cal. June 9, 2010) (viewing a mortgagee's disclosures as a whole and concluding that they adequately disclosed the certainty of negative amortization if the borrower exercised the option to make minimum, below-interest payments); Carroll v. Homecomings Fin. LLC, CV 07-3775-AHS (FMOx), slip op. at 3 (C.D.Cal. Mar. 23, 2009) (tentatively upholding a statement that negative amortization was a possibility, even though it was a certainty, because the disclosure was technically accurate). Other district courts, though, have upheld challenges to similar disclosures. See, e.g., Nkengfack v. Homecomings Fin., LLC, Civil No. RDB 08-2746, 2009 WL 1663533, at *2-3 (D.Md. June 15, 2009) (collecting authorities); Mincey v. World Sav. Bank, FSB, 614 F.Supp.2d 610, 635-38 (D.S.C.2008). The claims in these cases did not arise under FDUTPA, and to the extent they could nonetheless be read to suggest that the result here should be different, I simply disagree.
Two final points deserve mention. First, the plaintiffs make vague and conclusory arguments that the defendants misrepresented the nature of the loans more broadly and that the plaintiffs were misled. But the plaintiffs point to nothing Homecomings said or that they relied upon beyond the actual documents addressed in this order. There are no other allegations of deceptive or unfair practices that meet the pleading standards of Rule 8(a)(2), let alone the particularity requirement of Rule 9(b).
Second, loans of this kind raise issues more substantial than those addressed in this order. One could argue both sides of the question whether a consumer transaction like this should be legal at all. One could argue both sides of the question whether the required disclosures should include a warning that real-estate values may plummet—often the biggest practical risk in a negative-amortization transaction—or should include calculations based on different assumptions about interest rates or minimum payments. One could argue both sides of the question whether a lender initiating a loan of this kind should have more skin in the game. But these arguments belong in Congress. As things now stand, a transaction of this kind is legal, so long as the lender makes adequate disclosures, as Homecomings did.
The FDUTPA claim must be dismissed.
The claims against Aurora fail on another ground as well. Whatever might be
For these reasons,
IT IS ORDERED:
1. The motions to dismiss, ECF Nos. 21 & 22, are GRANTED. The first amended complaint is dismissed. I do not direct the entry of judgment under Federal Rule of Civil Procedure 54(b).
2. The plaintiffs are granted leave to file a second amended complaint within 21 days but need not do so to preserve their claim that the first amended complaint adequately states a claim on which relief can be granted. If the plaintiffs do not file a second amended complaint, a judgment will be entered dismissing the case with prejudice.
3. Aurora's request for judicial notice, ECF No. 23, is denied without prejudice as moot.
