Pierce v. NovaStar-Class Action Defense Cases: Washington Federal Court Certifies Truth-In-Lending/Real Estate Settlement Procedures Act Class Action Against NovaStar Mortgage Based On Failure To Disclose Yield Spread Premiums (YSPs)

Feb 22, 2007 | By: Michael J. Hassen

Whether Lender Violated TILA, RESPA or State’s Consumer Loan Act Irrelevant to Determination of Class Certification Motion because Plaintiffs Adequately Alleged such Violations Washington Federal Court Holds

Plaintiffs filed a class action against their lender NovaStar Mortgage for violations of Washington’s Consumer Protection Act (CPA) alleging that it failed to disclose it paid mortgage brokers a yield spread premium (YSP) in connection with their loans; the class action complaint was premised on NovaStar’s purported failure to provide written disclosures required by the federal Real Estate Settlement Procedures Act (RESPA), the federal Truth in Lending Act (TILA), Washington’s Consumer Loan Act (CLA), and the plaintiffs’ deeds. Pierce v. NovaStar Mortgage, Inc., 238 F.R.D. 624, 625 (W.D. Wash. 2006). In response to plaintiffs’ first motion to certify the lawsuit as a class action, the district court agreed with defense attorneys that plaintiffs had failed to demonstrate numerosity or typicality as required by Rule 23(a) and also failed to establish the predominance and superiority elements required by Rule 23(b); it therefore denied the motion, but did so without prejudice. Id. On plaintiffs’ renewed motion for class certification, the court rejected defense objections and granted the motion.

By way of background, to establish a violation of the CPA one must prove “(1) an unfair or deceptive act or practice; (2) occurring in trade or commerce; (3) that impacts the public interest; (4) and causes injury to the plaintiff in his or her business or property; and (5) such injury is causally linked to the unfair or deceptive act.” Pierce, at 626 (citation omitted). A plaintiff may satisfy the first two elements by proving that the act in question is a per se unfair trade practice: “A per se unfair trade practice exists when, by statute, the Legislature declares an unfair or *627 deceptive act in trade or commerce and the statute has been violated.” Id., at 626-27 (citations omitted). Under Washington law, “[a] violation of the CLA . . . is explicitly deemed a violation of the first and second elements of the CPA,” id., at 627 (citation omitted). In denying the first motion for class certification, the district court believed that “verbal disclosures and independent knowledge of the YSP were relevant to determining whether NovaStar violated the CPA.” Id., at 626. Plaintiffs’ lawyers disagreed, arguing in the renewed motion that “verbal disclosures are irrelevant to class certification because they seek to establish a per se violation of the Consumer Protection Act by proving that NovaStar violation the Consumer Loan Act.” Id.

The district court summarized the issue before it at page 627 as follows: “Because the CLA is the plaintiffs’ basis for establishing a violation of the CPA, class certification hinges upon whether the plaintiffs sufficiently allege a violation of the CLA (and therefore a per se violation of the CPA) and whether verbal disclosures are legally relevant to the third, fourth, or fifth elements of a CPA claim.” In analyzing the motion, the court first rejected defense arguments that the CLA applies only to “high interest” loans and that plaintiffs’ loans fell within a statutory exemption to the CLA. Pierce, at 627-28. The district court then concluded that the written disclosure requirements in the CLA apply to YSPs, though the court’s reasoning in this regard is difficult to follow. The federal court acknowledged that the statute requires written disclosure only of “fees and costs that the borrower is required to pay in connection with obtaining a loan from the licensee,” id., at 628 (italics added by court) (citation omitted), that the parties agree YSPs are “paid by lenders, such as NovaStar, and not by borrowers themselves,” id. (citations omitted), and that “plaintiffs have not cited a provision of the CLA requiring disclosure of payments made by the lender in connection with loan transactions,” id. Nonetheless, the district court concluded that plaintiffs had adequately alleged a violation of the CLA because “[w]hether NovaStar’s conduct actually violated the CLA is an issue not yet before the Court.” Id. Similarly, the court concluded that it need not determine whether NovaStar in fact violated TILA or RESPA because plaintiffs adequately alleged it had violated these statutes. Id., at 628-29.

At bottom, the court concluded that “plaintiffs have sufficiently alleged that NovaStar committed a per se violation of the CPA by failing to comply with written disclosure requirements under the CLA, TILA, and RESPA.” Pierce, at 629. The district court therefore certified the matter as a class action, holding at page 631:

The Court hereby certifies an opt-out class that includes every borrower satisfying the following requirements: [¶] (1) the borrower entered into a federally-regulated mortgage loan that was subject to the requirements of [RESPA] and secured by property within the State of Washington, at any time from July 30, 1999, to the present; [¶] (2) in connection with the transaction, NovaStar paid a [YSP] to the borrower’s mortgage broker; [¶] (3) in connection with the transaction, neither NovaStar nor the broker disclosed to the borrower the YSP on a good faith estimate dated within three days of the date on which NovaStar received the loan application; and [¶] (4) in connection with the transaction, the borrower paid the mortgage broker compensation in addition to the YSP that NovaStar paid to the broker.

NOTE: We do not summarize here the district court’s analysis of NovaStar’s challenges to the CPA’s elements of causation and injury, see Pierce, at 629-30, or its step-by-step consideration of the requirements of Rule 23(a) and Rule 23(b), id., at 630-31. Suffice it to say that because the court now believed that verbal disclosures were irrelevant to the class certification motion, it had little difficulty in concluding that the requirements of Rule 23(a) and (b) had been met. Also, we note that the reported decision includes the district court order considering and denying NovaStar’s motion for reconsideration. See id., at 631-33.

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