A bankruptcy judge recently ruled against National City Bank even though the borrowers committed mortgage fraud.
The case involved a $250,000 junior lien to Cecelia and Norman Hill on an Oakland, Calif., property, according to a case summary written by Bruce E. Alexander of Weiner Brodsky Sidman Kider PC — a Washington, D.C.-based law firm that provides mortgage banking litigation analysis.
The loan was a stated-income loan used to refinance a previous $200,000 loan — which was also stated-income, according to Alexander, who has over 26 years of litigation experience and has previously served as in-house counsel at a national bank, a consumer lender and a national residential origination and servicing firm.
The income stated by the Hills on the $250,000 refinance varied widely from what they claimed as income when obtaining the $200,000 mortgage.
The first mortgage lender foreclosed on the property, and no bids in excess of the first mortgage balance were made — causing National City to lose its security.
At around the same time, the borrowers filed a chapter 7 bankruptcy.
National City brought a proceeding to have its loan excepted from the bankruptcy discharge on the basis that the Hills committed mortgage fraud.
While the bankruptcy judge found that the borrowers were fraudulent because they had grossly overstated their income, he also found that the bank had failed to prove it reasonably relied on the fraudulent statement of income, the summary said. He noted that National City should have noticed a red flag because the amount of stated income for one of the borrowers almost tripled from the first transaction to the second transaction.
The judge additionally cited National City’s failure to submit any evidence showing it had done any independent evaluation of the accuracy of the borrowers’ stated income even though the Cleveland-based company’s own guidelines required such an evaluation.
“Some may find this result surprising, but anyone familiar with the common law of fraud knows that the law is not very solicitous of defrauded fools,” Alexander wrote. “Reasonable reliance on the fraudulent statement or representation is a nearly universal requirement for civil liability.”
Even thought the judge found the Hill’s statements of income on their loan applications to be fraudulent, possible criminal sanctions were not addressed by the bankruptcy court.
National City Bank v. Hill
No. 07-41137, AP 07-4106 (N.D. Cal., filed May 23, 2008)
