SAN FRANCISCO (CN) - Wells Fargo Bank and J.P. Morgan Chase charge homebuyers who go into default inflated fees and interest rates, customers say in a federal RICO class action.
Lead plaintiff Latara Bias claims the defendants, including Chase Home Finance, service almost 20 million mortgage loans, approximately 25 percent of the home loans made in the United States.
The class claims the defendants use an automated mortgage loan management system, and subsidiaries, to "fraudulently conceal their unlawful assessment of improperly marked-up or unnecessary fees for default-related services, cheating borrowers who have least afford it."
The plaintiffs concede that when mortgage borrowers go into default, it is natural for lenders to act to protect their interest in the property.
"However, lenders are not permitted to mark up the fees for such services to earn a profit," the complaint states. "Nor are lenders permitted to assess borrowers' accounts for defaulted-related service fees that are unreasonably and unnecessary. Nevertheless ... using false pretenses to conceal the truth from borrowers, that is precisely what defendants do.
"In effect, to generate hearty profits, defendants have substituted inflated interest rates with inflated fees. Defendants formed enterprises - associations of subsidiaries and affiliated companies - and designed schemes to disguise hidden mark-ups, and unnecessary fees so that they could earn additional, undisclosed profits. Through these unlawful enterprises, defendants mark up the fees charged by vendors, often by 100 percent or more, and then, without disclosing the mark-up, assess borrowers' accounts for the hidden profits. In connection with their schemes, defendants also have a practice of routinely assessing fees for default-related services, even when they are unnecessary and inappropriate. Employing this strategy, defendants are able to quietly profit from default-related service fees at the expense of struggling consumers. Indeed, in the fourth quarter of 2011 alone, defendant Wells Fargo & Co. saw a 20 percent increase in profits."
The class claims these tricks evolved and expanded dramatically in recent years.
Traditionally, they say, borrowers reasonably believed that the lender from whom they obtained their mortgage would hold it until it was paid off. But that's no longer the case, because of the securitization and sale of mortgage-backed securities.
"In today's market, loans and the rights to service them are bought and sold at will, multiple times over," the plaintiffs say. "Because banks like defendants who service loans do not profit directly from interest payments made by borrowers, rather than ensuring that borrowers stay current on their loans, defendants are more concerned with generating revenue from fees assessed against the mortgage accounts they service. According to one member of the Board of Governors of the Federal Reserve System, 'a foreclosure almost always costs the investor [who owns the loan] money, but [it] may actually earn money for the servicer in the form of fees.' [Brackets in complaint.]
"Banks like defendants see opportunity where investors see failure because borrowers are captives to companies who service their loans. Accordingly, when borrowers go into default and defendants unilaterally decide to perform default-related services, borrowers have no option but to accept defendants' choice of providers.
"Taking advantage of these circumstances, the Wells Fargo defendants and Chase defendants each formed enterprises with their respective subsidiaries and affiliates and then, developed a uniform practice of unlawfully marking up default-related service charges assessed against borrowers' accounts so that defendants can earn undisclosed profits in connection with these services. Defendants' marked-up fees violate borrowers' mortgage agreements because the fees exceed the actual cost of the services, and therefore, they are not, as the mortgage agreements require, 'reasonable' or 'appropriate' to protect the not holder's interest in the property.
"Defendants are aware that it is improper to mark up the fees assessed on borrowers' accounts for default-related services. Therefore, defendants fraudulently conceal these fees on borrowers' accounts, omitting any information about defendants' additional profits, by identifying them on mortgage statements only as 'other charges,' 'other fees,' 'miscellaneous fees,' or 'corporate advances.'"
The class seeks declaratory and injunctive relief, restitution and disgorgement, and compensatory and treble damages for unfair competition, unjust enrichment and RICO conspiracy.
They are represented by Mark Pifko with Baron & Budd, in Los Angeles.