HAYWOOD S. GILLIAM, JR., District Judge.
WHEREAS, the Complaint filed by Plaintiff Vana Fowler on March 9, 2017 is the operative complaint;
WHEREAS, the Complaint originally alleged causes of action for violation of California Business and Professions Code § 17200 et seq. and a California class;
WHEREAS, Wells Fargo moved to dismiss the Complaint;
WHEREAS, the Court granted in part and denied in part Wells Fargo's motion;
WHEREAS, counsel for Plaintiff also represent Michael Peters with respect to claims against Wells Fargo on behalf of a putative nationwide class (ex-California) related to the collection of post-payment interest, which are currently pending in the Southern District of Texas (Michael Peters, et al. v. Wells Fargo Bank, N.A., Civil Action No. 4:18-cv-00136);
WHEREAS, the Parties engaged in a day-long mediation on January 15, 2018, before the Hon. Daniel Weinstein (Ret.) of JAMS;
WHEREAS, the Parties reached a nationwide settlement which they are presenting concurrently with the submission of this Joint Stipulation to Conditionally Amend the Complaint for Settlement Purposes ("Joint Stipulation");
NOW THEREFORE, the Parties have agreed to stipulate to the filing of an amended complaint pursuant to Federal Rule 15(a)(2), subject to the Court's approval, as follows:
1. Upon entry of the Order granting this Joint Stipulation, Plaintiff be permitted to amend her Complaint to conform to the terms of the proposed settlement as follows: (1) add Michael Peters as a plaintiff pursuant to Federal Rules 15 and 24; (2) allege a cause of action for breach of contract; and (3) amend the class definition to allege a nationwide class.
2. Upon the entry of the Order granting this Joint Stipulation, the First Amended Complaint attached as Exhibit A shall be deemed filed and served. Defendant's previously filed Answer to Plaintiff's Complaint shall be deemed as Defendant's Answer to Plaintiff's First Amended Complaint.
3. This agreement shall remain in effect only if the settlement becomes final, which means that neither party has voided the settlement, the settlement is approved by the Court, and the judgment becomes final, in that all dates for appeal have passed and no successful appeal challenging the judgment has occurred. If, for some reason, the settlement does not become final, then this agreement and this amendment to the complaint shall be deemed null and void, the operative complaint in this action shall be the Complaint, and the Parties shall be returned to their status as of the date of this filing without prejudice to any claim, right, or defense.
IT IS SO STIPULATED.
1. Defendant Wells Fargo Bank, N.A. has a systematic practice of collecting "post-payment" interest on loans insured by the Federal Housing Administration without first complying with the uniform provisions of the promissory notes and the regulations governing these loans. As a result, Wells Fargo has collected tens of millions of dollars in post-payment interest from Californians in breach of contract, and through this class action, Plaintiffs seeks to recover damages for those Class members injured by Wells Fargo.
2. Post-payment interest refers to interest that a lender collects
3. A promissory note governs the contractual relationship between borrowers and lenders, and lenders issuing FHA-insured loans must include certain uniform provisions in the notes for these loans. Among other things, the uniform provisions provide that the lender may collect post-payment interest for the remainder of the month in which full payment is made, but only "
4. HUD regulations prohibit lenders from collecting post-payment interest unless two strict conditions are met: (a) the borrower makes payment of the full unpaid principal on a day "
5. HUD requires use of its approved form because the form explains to borrowers, at the appropriate time, that the lender is seeking to collect post-payment interest, the terms under which the lender can collect post-payment interest, and how they can avoid such charges. See HUD Housing Handbook, Administration of Insured Home Mortgages, 4330.1 REV-5 Appendix 8 (C).
6. Although the uniform provisions of the note, HUD handbooks, and HUD regulations prohibit lenders from collecting post-payment interest unless they provide borrowers with a HUD-approved form, Wells Fargo does not use the approved form attached to HUD Handbook 4330.1 or the "Payoff Procedure Disclosure Form" hyperlinked in HUD Handbook 4000.1. Instead, Wells Fargo uses its own unauthorized form, which is not approved by HUD and does not fairly disclose the terms under which Wells Fargo can collect post-payment interest or properly explain how borrowers can avoid such charges.
7. Because Wells Fargo does not use a HUD-approved form as required by both the uniform provisions of the note, the HUD Handbooks and HUD regulations, Wells Fargo has no right to collect post-payment interest from borrowers. Yet, Wells Fargo has collected tens of millions of dollars in post-payment interest from Plaintiffs and the nationwide class of borrowers of FHA-insured loans to which it was not entitled. Through this class action, Plaintiffs seek to recover the overcharged interest for themselves and Class members.
8. Plaintiff Vana Fowler is a citizen of California, residing in Victorville, California. In November 2013, Fowler paid off an FHA-insured loan held by Defendant Wells Fargo Bank, N.A.
9. Plaintiff Michael Peters is a citizen of Texas, residing in Montgomery, Texas. In February 2017, Plaintiff Peters paid off an FHA-insured loan held by Defendant Wells Fargo Bank, N.A.
10. Defendant Wells Fargo Bank, N.A. is a national banking association. Wells Fargo held FHA-insured loans for Plaintiffs and other Class members. These loans have been paid off in full.
11. Wells Fargo's Articles of Association state that its main office shall be in Sioux Falls, South Dakota. Thus, Wells Fargo is a citizen of South Dakota. See 28 U.S.C. § 1348.
12. This Court has subject matter jurisdiction over this class action. Plaintiffs are citizens of States different from Wells Fargo, and so are many other Class members. See 28 U.S.C. § 1332 (d)(2). And the claims of the Class in the aggregate exceed the minimally required amount in controversy. See 28 U.S.C. § 1332 (d)(6). In fact, the amount in controversy involves tens of millions of dollars.
13. This Court has personal jurisdiction over Wells Fargo. Among other things, Wells Fargo is registered to and does conduct business in California, holds mortgages on real property in California, has breached contracts with persons located in California, has caused injuries in California, and generally engages in substantial activity in California.
14. This Court is also a proper venue for this action. Wells Fargo is subject to personal jurisdiction in the Northern District of California, which "[f]or purposes of venue," means that Wells Fargo resides in this judicial district. 28 U.S.C. § 1391 (b)(1), (c).
15. The Department of Housing and Urban Development is a department within the executive branch of the United States government. HUD was established in 1965 by the Department of Housing and Urban Development Act. See 42 U.S.C. § 3532. The Federal Housing Administration was established in 1934 by the National Housing Act of 1934. See 12 U.S.C. § 1701. When HUD was created, Congress re-organized the FHA as an agency within HUD.
16. Among other things, the FHA provides mortgage insurance to FHA-approved lenders for loans on single-family homes. See U.S. Dep't of Housing and Urban Devt.,
17. Mortgage insurance protects lenders against losses that are caused by borrower defaults. The lenders bear less risk on FHA-insured loans because the FHA will pay lenders in the event of a borrower default. Id. In exchange for FHA mortgage insurance, borrowers pay an upfront mortgage insurance premium and also make monthly premium payments.
18. To be eligible to receive FHA mortgage insurance, lenders must be pre-approved by the FHA. Lenders must also comply with FHA regulations, including but not limited to the regulations contained in Title 24, Subtitle B, Chapter II, Subpart B, Part 203 of the Code of Federal Regulations. Among other things, FHA regulations require that, for any FHA-insured loan, the lender must include certain uniform provisions in every promissory note. As a result, each of the approximately 4.8 million FHA-insured loans is documented by a promissory note containing certain uniform provisions.
19. One uniform provision lenders must include in the promissory note for every FHA-insured loan addresses the borrower's promise to pay interest for unpaid principal:
Multistate — FHA Fixed Rate Note, USFHA.NTE at 1 (emphasis added).
20. Under this provision, the borrower agrees to pay interest only on the
21. In fact, when lenders issue loans backed by Fannie Mae, Freddie Mac, and the Veterans Administration, interest charges stop on the day the borrower pays the full unpaid principal of the loan, and the lender cannot collect any post-payment interest.
22. However, for nearly thirty years, the FHA maintained a policy different from the other government agencies. For mortgages insured by the FHA on or after August 2, 1985 and through January 20, 2015, the FHA allows lenders, subject to strict limitations, to collect interest even after the borrower has paid the full amount of the unpaid principal.
23. This type of interest is often referred to as "post-payment" interest. Post-payment interest is interest that a lender collects even after the borrower has paid the full unpaid principal. It is also considered a "penalty" because, at that point, the borrower owes the lender
24. Although HUD permits lenders to collect post-payment interest, it has imposed strict limitations on the lender's ability to do so. HUD prohibits lenders from collecting post-payment interest unless the lender complies with HUD regulations. And HUD regulations require the lender to provide the borrower with a disclosure form approved by HUD.
25. The limitations on post-payment interest are reflected in a uniform provision of the note, which again must be included in the note for every FHA-insured loan:
5. BORROWER'S RIGHT TO PREPAY
Multistate — FHA Fixed Rate Note, USFHA.NTE (emphasis altered) at 2.
26. Under this provision, the borrower has the right to prepay the full unpaid principal without charge or penalty on the
27. The relevant FHA regulation is titled "Handling Prepayments" and provides that:
(e) If the [lender]
24 C.F.R. § 203.558 (2014) (emphasis added).
28. Under this regulation, if payment of the full unpaid principal is made on a day other than the first of the month, and the lender provides the borrower the FHA-approved form, then, and only then, can the lender collect post-payment interest for the remainder of the month in which payment of the full unpaid principal was made.
29. For the convenience of lenders, for mortgages insured on or after August 2, 1985 and through January 20, 2015, HUD provided an approved form as Appendix 8 (C) to the HUD Housing Handbook:
MORTGAGEE NOTICE TO MORTGAGOR
(In response to prepayment inquiry, request for payoff or tender of prepayment in full)
The ________(mortgagee name)_________ will:
HUD Housing Handbook, 4330.1 REV-5 Appendix 8 (C) at 1-2.
30. As HUD explains, "[t]he
31. HUD also confirms that the lender "
32. In May 2016, HUD Handbook 4000.1 went into effect, and reiterates the requirement that lenders must provide borrowers with an approved disclosure as a condition to charging post-payment interest.
33. For example, Handbook 4000.1 states that, "[w]hen notified of the Borrower's intent to prepay a Mortgage, the Mortgagee
34. The Payoff Procedure Disclosure Form is found on HUD's forms webpage which is hyperlinked in the handbook.
35. Likewise, a Frequently Asked Questions page linked from and accessible through the HUD website contains the question "Is there a current Payoff Procedure Disclosure for FHA Loans?"
36. The answer to the FAQ is: "Yes, in response to a prepayment inquiry, request for payoff, or tender of prepayment in full,
37. In sum, pursuant to the uniform provisions of the note, HUD Handbooks, and HUD regulations, lenders cannot collect post-payment interest on FHA-insured loans unless (a) the borrower pays the full unpaid principal on a day
38. From August 2, 1985 through January 20, 2015, lenders including Wells Fargo have collected billions of dollars in post-payment interest.
39. The National Association of Realtors estimates that "more than 40 percent of FHA borrowers close during the first 10 days of the month, exposing them to at least 20 days of interest payments." Kenneth R. Harney, Interest Costs Don't End With Payoff Of FHA Loan, Chicago Tribune, Apr. 11, 2004,
40. "HUD doesn't get the interest, lenders do. In effect,
41. "This practice . . . has cost consumers staggering amounts, with estimates ranging into the
42. "[
43. Meanwhile, "
44. All of the relevant government agencies now agree that collecting post-payment interest is an unfair prepayment penalty and is against public policy.
45. On August 26, 2009, the Board of Governors of the Federal Reserve System proposed a rule "to amend Regulation Z, which implements the Truth in Lending Act (TILA)," which regulates prepayment penalties. 74 Fed. Reg. 43232, 43232 (Aug. 26, 2009). The Board stated that "[o]ne such example [of a prepayment penalty] is `interest charges for any period after prepayment in full is made.'
46. On January 30, 2013, the Consumer Financial Protection Bureau issued a final version of its rule titled "Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act (Regulation Z)."
47. This definition includes "charges resulting from FHA's monthly interest accrual amortization method." 79 Fed. Reg. 50835, 50835 (Aug. 26, 2014). As CFPB explains:
78 Fed. Reg. 6408, 6445 (Jan. 30, 2013) (emphasis added).
48. Based on Regulation Z's definition, charges for post-payment interest are now subject to the Truth in Lending Act. See 79 Fed. Reg. 50835, 50835 (Aug. 26, 2014); 75 Fed. Reg. 58539, 58586 (Sep. 24, 2010) ("[T]he Board believes that the charging of interest for the remainder of the month in which prepayment in full is made should be treated as a prepayment penalty for TILA purposes, even when done pursuant to the monthly interest accrual amortization method.").
49. In response to those changes by FRB and CFPB, on March 13, 2014, "HUD published a proposed rule in the Federal Register, at 79 FR 14200, to eliminate post-payment interest charges to borrowers resulting from FHA's monthly interest accrual amortization method for calculating interest." 79 Fed. Reg. 50835, 50835. And, on August 26, 2014, HUD issued a final version of its rule titled "Federal Housing Administration (FHA): Handling Prepayments: Eliminating Post-Payment Interest Charges." Id.
50. Under the new regulation, "[w]ith respect to FHA-insured mortgages closed on or after January 21, 2015, notwithstanding the terms of the mortgage, the [lender] shall accept a prepayment at any time and in any amount." 24 C.F.R. § 203.558 (a). "Monthly interest on the debt must be calculated on the actual unpaid principal balance of the loan as of the date the prepayment is received, and not as of the next installment due date." Id.
51. Although CFPB, FRB, and HUD have now all prohibited post-payment interest charges for FHA-insured mortgages closed on or after January 21, 2015, they
52. Wells Fargo was the holder of Plaintiff Fowler's loan secured by her home in Victorville, California. Plaintiff Fowler's loan was insured by the FHA, and so Wells Fargo is required to comply with the HUD Handbook and HUD regulations with respect to her loan.
53. Pursuant to HUD regulations, Plaintiff Fowler's promissory note contains certain uniform provisions found in the note for every FHA-insured loan. These uniform provisions include, among others, section 2 titled "Borrower's Promise to Pay; Interest" and section 5 titled "Borrower's Right to Prepay." See Multistate — FHA Fixed Rate Note, USFHA.NTE, at 1-2.
54. In 2013, Plaintiff Fowler refinanced her home. So that she could pay off her loan with Wells Fargo, Plaintiff Fowler requested that Wells Fargo provide her with a payoff statement. Wells Fargo provided a payoff statement dated October 18, 2013.
55. The form includes the statements "TOTAL PRINCIPAL, INTEREST AND OTHER AMOUNTS DUE UNDER NOTE/SECURITY INSTRUMENT"; "Unpaid Principal Balance $ "; "Interest as of "; and "TOTAL AMOUNT DUE through $ ." Id. at 2.
56. The statement contains the following specific numbers for Fowler's loan: "Unpaid Principal Balance $154,907.90"; "
57. Plaintiff Fowler's interest payments were $532.50 per month. Thus, by representing that Plaintiff Fowler owed $1,065.00 in interest, Wells Fargo charged and sought to collect interest for
58. Wells Fargo has an admitted policy of charging post-payment interest on all FHA-insured loans such as Plaintiff Fowler's loan.
59. On or about November 25, 2013, Plaintiff Fowler paid Wells Fargo $156,147.18, which includes the interest Wells Fargo represented it was owed. And because Wells Fargo required Plaintiff Fowler to pay interest for the entire month of November 2013 — even though Plaintiff Fowler paid the full unpaid principal by November 25, 2013 — Wells Fargo collected post-payment interest.
60. Likewise, in February 2017, Plaintiff Peters refinanced his home. So that he could pay off his loan with Wells Fargo, Plaintiff Peters requested that Wells Fargo provide him with a payoff statement. Wells Fargo provided a payoff statement dated January 30, 2017. The statement is in the same provided to Plaintiff Fowler and other class members.
61. The statement contains the following specific numbers for Plaintiff Peters' loan: "Unpaid Principal Balance $123,760.18"; "
62. Plaintiff Peters' interest payments were $515.67 per month. Thus, by representing that Plaintiff Peters owed $1,031.34 in interest, Wells Fargo charged and sought to collect interest for the entire month of February 2017, even though the loan was paid off by February 21, 2017. Id.
63. On or about February 21, 2017, Plaintiff Peters paid Wells Fargo $124,970.85, which includes the interest Wells Fargo represented it was owed. And because Wells Fargo required Plaintiff Peters to pay interest for the entire month of February 2017 — even though Plaintiff Peters paid the full unpaid principal by February 21, 2017 — Wells Fargo collected post-payment interest.
64. However, Wells Fargo did not first provide Plaintiff Peters with the disclosure in Appendix 8(c), the Payoff Disclosure, or any other HUD-approved form. For one, the form used by Wells Fargo is not a HUD-approved form, nor does it include all of the essential elements of the Payoff Disclosure, and FHA or HUD approval is an
65. HUD's approved forms included with its handbooks are designed to be consumer-friendly.
66. Appendix 8(c) to HUD Handbook 4330.1 rev-1 is nearly a page long, has a capitalized title (MORTGAGE NOTICE TO MORTGAGOR (In response to prepayment inquiry, request for payoff or tender of prepayment in full), two easy-to-read, distinct paragraphs labeled (a) and (b), with options for how interest will be charged, along with boxes for the lender to check the applicable option, and a place for the lender to sign at the bottom, emphasizing the significance of the document to borrowers.
67. Similarly the disclosure form appended to HUD Handbook 4000.1 is nearly a full page long, has a capitalized title (PAYOFF PROCEDURE DISCLOSURE), two easy-to-read distinct paragraphs with boxes for the lender to check the applicable option, and a place for the lender to sign at the bottom.
68. Wells Fargo's unapproved form is nothing like Appendix 8(c) or the Payoff Procedure Disclosure Form.
69. Wells Fargo's unapproved form does not have a title relating to post-payment interest, separate paragraphs, check-boxes, or anywhere for the lender to sign; instead, Wells Fargo's form squeezes two sentences about post-payment interest into a single confusing paragraph.
70. Moreover, the language that Wells Fargo uses is different from HUD's approved disclosures and is both misleading and confusing. The relevant language consists of two sentences. The first sentence tells Plaintiffs that
71. The second sentence further reinforces the misleading and confusing nature of the first sentence. It tells borrowers that, "[t]o avoid paying an
72. The effect of Wells Fargo's illegal collection of post-payment interest is that Plaintiffs and Class members were charged interest twice — by Wells Fargo and their new lender — for the period between the date of closing and the end of the month.
73. Plaintiffs assert claims on behalf of themselves and a class of similarly-situated persons pursuant to Federal Rule 23.
74. Plaintiffs propose the following class:
75. Plaintiffs reserve the right to revise this class definition.
76. Plaintiffs propose certification of all issues, while reserving the right to alternatively seek certification as to any specific claim or issue.
77. Plaintiffs would serve as the class representatives.
78. Plaintiffs satisfy the requirements of Federal Rule 23:
79. Plaintiffs incorporate by reference the allegations contained in all preceding paragraphs of this Complaint.
80. Plaintiffs had a contract with Wells Fargo. The terms of the contract are set forth in the promissory note between Plaintiff and Wells Fargo. The note is a form contract containing certain provisions that are identical to provisions found in the promissory notes for every FHA-insured loan.
81. In Section 2 of the note, titled "BORROWER'S PROMISE TO PAY; INTEREST," Wells Fargo agreed that "[i]nterest will be charged on unpaid principal" and only "until the full amount of the principal has been paid." Multistate — FHA Fixed Rate Note, USFHA.NTE, at 1.
82. In section 5 of the note, titled "BORROWER'S RIGHT TO PREPAY," Wells Fargo agreed that it would charge "interest on the amount prepaid for the remainder of the month" only "to the extent . . . permitted by regulations of the Secretary." Id. at 2.
83. And the relevant FHA regulation, titled "Handling Prepayments," provides that, "[e]xcept as set out [in this regulation], monthly interest on debt must be calculated on the actual unpaid principal balance of the loan." 24 C.F.R. § 203.558 (2014). "If the prepayment is offered on other than an installment due date [the first of the month], the [lender] . . . may require payment of interest to that date, but only if [the lender] so advises the [borrower], in a form approved by the Commissioner, in response to the [borrower's] inquiry, request for payoff figures, or tender of prepayment." Id.
84. In addition to the express terms of the promissory note between Plaintiffs and Wells Fargo, the law also implies a duty of good faith and fair dealing in every contract, and Wells Fargo is subject to this duty as well.
85. Wells Fargo breached the contract, including the duty of good faith and fair dealing, by collecting post-closing interest payments from Plaintiffs without first providing them with FHA-approved notice in response to their inquiry, request for payoff figures, or tender of prepayment.
86. Plaintiffs were damaged by Wells Fargo's breach, and seek damages for Wells Fargo's improper collection of post-closing interest payments. Plaintiffs seek damages for interest collected for the period beyond the date Wells Fargo received full repayment of the unpaid principal.
Plaintiffs ask this Court to:
