(CN) - A federal judge rejected class certification for more than 500,000 borrowers who say predatory lending schemes made them fall victim to "toxic" adjustable-rate or subprime-mortgage loans offered by Countrywide and Bank of America.
In their consolidated class action, which alleges RICO violations, unfair competition and other claims, homeowners say that Countrywide and other lenders engaged in a scheme to steer borrowers into "inherently toxic and unaffordable" loans that were then bundled and sold as investments on the secondary market as "mortgage-backed securities."
These "pay option" negative amortization loans "unconscionably increased the debt burden and costs associated with the mortgage," according to the complaint, because they offered either interest-only payments or minimum-monthly payments that were less than the amount of interest owed.
The plaintiffs also claim that the subprime loans were also "inherently unaffordable," exceeding 31 percent for the front-end debt-to-income ratio, a term that describes the ratio for housing payment, including principal, interest, taxes and insurance compared to gross monthly income. And the loans exceeded 45 percent for the back-end debt-to-income ratio, which covers total outstanding, recurring obligations including mortgage payments, credit cards, child support or alimony, and car payments compared to gross monthly income.
Countrywide sold these loans in mass quantities by loosening underwriting standards and convincing borrowers that qualifying for loans meant they could afford them, according to the complaint.
Employees and brokers executed the scheme since they had an incentive to put more customers into subprime loans; they used standardized sales scripts that assured borrowers that they were receiving the "best" loans available; and they failed to disclose risks, future rate increases and underwriting standards, the plaintiffs claimed.
While all 500,000-plus class members fell victim to the underlying "scheme," U.S. District Court Judge Dana Sabraw in San Diego found that the dissimilarities in the victims' cases are so widespread that class resolution is not workable.
Regarding the RICO claim, Sabraw noted that Countrywide made loans through four divisions, two of which worked through 30,000 independent brokers who had no contact with the bank. These brokers issued almost half of the class loans and used no Countrywide-provided script. Loan officers in a third division used scripts, while a fourth division did not. For this and other reasons, the RICO and unfair-competition claims fail due to lack of a "common course of conduct."
Countrywide and Bank of America, which acquired the company in 2008, already agreed to a $624 million settlement in another class action filed by a group of pension funds that had said Countrywide misled investors about their reliance on subprime and option-adjustable-rate mortgages. The complaint also claimed the bank had falsely assured investors about surviving the housing downturn during the heart of the crash.
In January of this year, Bank of America took another hit when it paid Fannie Mae and Freddie Mac $2.8 billion to settle claims over Countrywide's questionable loans.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.