Matthews v. New Century Mortgage Corp.
2002 WL 206293, 185 F.Supp.2d 874, 2002 U.S. Dist. LEXIS 2144 (2002)
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Rule of Law:
A plaintiff can sustain claims of 'reverse redlining' under the Fair Housing Act (FHA) § 3605 and discrimination under the Equal Credit Opportunity Act (ECOA), as well as state law claims for fraud, civil conspiracy, and unconscionability, by alleging that a lender knowingly participated in a scheme to target protected classes with grossly unfavorable loan terms, and the statute of limitations for such claims may be equitably tolled due to fraudulent concealment.
Facts:
- Between October 1997 and summer 1999, employees of companies like Century 21, Century Mortgage, and Equibanc Mortgage Corp. contacted elderly, single women (including Ruth Morgan, Hazel Jean Matthews, Marie I. Summerall, and Ella Mae Arnold) about home improvement loans.
- These women were often promised home improvement loans with favorable terms, but during the loan application and closing processes, they were not given copies of documents, were not informed of their right to cancel, and felt pressured to sign papers due to ongoing home repairs.
- Loan applications submitted to New Century Mortgage Corp. frequently contained falsified information, such as inflated monthly incomes and fabricated occupations (e.g., 'quilt-maker,' 'Crafts and Stuff' owner), which were significantly higher than the borrowers' actual incomes and real employment.
- New Century, as the lender, approved these loans for amounts substantially higher than initially sought for home improvements (e.g., $49,000 for Ms. Morgan instead of $17,325), often with variable interest rates and terms that led to increased monthly payments and threats of foreclosure.
- The plaintiffs allege that New Century, along with the mortgage brokers, engaged in a common, ongoing course of conduct to target single, elderly women and induce them into these 'stated income loans' (high-risk loans with high interest rates) for profit, despite knowing the borrowers could not repay them.
Procedural Posture:
- On September 14, 2000, the Plaintiffs filed a complaint with the U.S. District Court for the Northern District of Ohio.
- On October 18, 2000, the Plaintiffs filed an Amended Complaint, naming New Century Mortgage Corp. as a Defendant for the first time.
- On May 18, 2001, the Plaintiffs filed a Second Amended Complaint.
- By agreement of the parties, Defendants Central Mortgage and K & R Equity were dismissed from the case.
- Defendant New Century Mortgage Corp. filed a Motion to Dismiss all of the Plaintiffs’ claims against it pursuant to Fed.R.Civ.P. 12(b)(6).
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Issue:
Does a complaint alleging a pattern of predatory lending targeting elderly, single women through fraudulent loan applications and unfavorable terms state a claim for reverse redlining under the Fair Housing Act (FHA) § 3605, discrimination under the Equal Credit Opportunity Act (ECOA), Truth-in-Lending Act (TILA) violations, civil conspiracy, common law fraud, the Ohio Pattern of Corrupt Activities Act (PCA), and unconscionability, and are these claims, particularly those under FHA, ECOA, and TILA, time-barred by applicable statutes of limitations?
Opinions:
Majority - CHATIGNY, District Judge
Yes, the plaintiffs' complaint states cognizable claims for reverse redlining under FHA § 3605, discrimination under ECOA, TILA violations, civil conspiracy, common law fraud, Ohio PCA, and unconscionability, and these claims are not time-barred due to equitable tolling. However, a claim under FHA § 3604(b) is not stated. The court found that the FHA and ECOA claims, both subject to a two-year statute of limitations, and the TILA claims, subject to a one-year statute, were not time-barred because the plaintiffs sufficiently alleged fraudulent concealment by New Century. The court applied equitable tolling, reasoning that the statutes of limitations did not begin to run until the plaintiffs discovered, or had a reasonable opportunity to discover, the alleged fraud, which was within the statutory periods. Ms. Morgan's TILA claim was further tolled by her filing a third-party complaint in a state foreclosure action, providing New Century with notice. Regarding the FHA claims, the court granted dismissal for claims under 42 U.S.C. § 3604(b), stating that this section applies to the sale or rental of a dwelling and does not extend to transactions involving financial assistance for improving or maintaining a previously acquired dwelling. However, the court denied dismissal for claims under 42 U.S.C. § 3605, recognizing the viability of 'reverse redlining' claims. The plaintiffs sufficiently alleged they were members of a protected class, qualified for loans, and received loans on grossly unfavorable terms. Furthermore, the court held that direct evidence of intentional targeting of protected classes negates the need to show that other similarly situated individuals received more favorable terms. For the ECOA claims, the court found the plaintiffs adequately alleged discrimination in the terms of their credit transactions based on sex, marital status, or age, which is sufficient under the statute’s broad language covering 'any aspect of a credit transaction.' TILA claims regarding the right to rescind were also sustained, as plaintiffs alleged they were not given proper notice or copies of loan documents informing them of this right. Finally, the court denied dismissal for claims of civil conspiracy, common law fraud, Ohio PCA, and unconscionability. It found that the plaintiffs adequately alleged a malicious combination between New Century and the mortgage brokers to commit fraud, making New Century potentially liable for the fraudulent acts of its co-conspirators. The specific details of misrepresentations and the alleged scheme were deemed sufficient for fraud claims. The allegations of unfair contract terms (substantive unconscionability) and unequal bargaining power/lack of disclosure (procedural unconscionability) were also sufficient, with New Century potentially liable through the alleged conspiracy. The Ohio PCA claim was sustained as plaintiffs alleged predicate offenses (mail/wire fraud), a pattern of corrupt activity, and participation in an enterprise.
Analysis:
This case significantly clarifies the legal landscape surrounding predatory lending, particularly for vulnerable populations. It establishes a strong precedent for 'reverse redlining' claims under FHA § 3605 and ECOA, emphasizing that extending credit on discriminatory, unfavorable terms to protected classes is unlawful. The extensive application of equitable tolling is critical, as it ensures that victims of fraudulent concealment in lending schemes are not barred by statutes of limitations before they reasonably discover the fraud. Moreover, the court's robust interpretation of civil conspiracy allows plaintiffs to hold lenders accountable for the actions of their co-conspirators (e.g., mortgage brokers) who directly engage in fraudulent and unconscionable practices, offering a powerful mechanism to combat systemic predatory schemes.
