Among the implications of litigation related to pay-option ARMs as of press time were potential liabilities that could affect how disclosure documents are drawn up, not only at the originator level but also for investors who buy loans through the correspondent channel.
“I think it will absolutely affect how loan documents are drafted,” said Roland Reynolds, an attorney at Palmer, Lombardi & Donohue LLP, who represents one of the originators in at least one of the cases that is among the farthest along.
In the federal court case in California he is representing an originator in (Ralston v. Mortgage Investors Group Inc., et al), among the plaintiff's arguments is that, by virtue of having creating this form used by originator, the investor takes on the same liability for nondisclosure or faulty disclosure in the loan documents.
“It's a little bit transforming if you buy the theory that the person who makes the form is liable for how those forms are used by the originator,” he said. “It extends liability in a way liability hasn't been extended before.”
The legal theory behind holding the investor liable involves “aiding and abetting” theory and “conspiracy theory” in some places, Reynolds said.
Generally, the results of efforts to obtain class certification for POA suits has been mixed to date, with some cases proceeding and others having class certification denied, he said. Some like the aforementioned one are federal but others are state cases, generally in California. (“A lot of other states certainly look to the law being developed in California,” he noted.)
At least one case with the same judge who is now overseeing the case Reynolds is involved in settled, but with a significant settlement, Reynolds said. (Although that judge is leaving to take a nonjudicial job in Washington, the case Reynolds is involved in is one of 11 cases that judge wanted to continue to serve as judge on during the transition period, Reynolds said.)
Reynolds argues that a factor in whether the POA cases out there get class certification could be the Supreme Court's June denial of class certification for the discrimination suit Dukes, et al v. Wal-Mart Stores Inc., which stressed that there must be “commonality” among the members of the class.
Another case that could be influential as POA litigation moves through the courts is Boschma v. Home Loan Center, a California court of appeals case that stated a claim that originators needed to disclose more than was in the loan documents, he said.
The trial court had originally taken the position that the originator had disclosed how the loan adjusts and fees and costs in the loan documents.
But this summer the appeals court reversed the trial court's decision on the case, sending it back to trial court for discovery as putative class action, said Reynolds.
The appeals court judge agreed with the plaintiff's argument that even if all loan terms are in the contract, the contract itself can still be misleading. Or, roughly put, “it's not just what you said but how you said it.”
