CASE STUDY 3
Freedom Mortg. Corp. v. Major, 2014 N.J. Super. Unpub. LEXIS 1914
Superior Court of New Jersey, Chancery Division, Bergen County
July 31, 2014, Decided
DOCKET No. BER-F-32463-13
Applying the "net-benefit test" to this transaction—the reduction of the interest rate from 5 5/8% to 5% resulting in a savings of interest that would take more than 5 years to amortize and reduction of the monthly payment from $1963.22 to $1900.38 demonstrates that the financial benefit to Freedom in fees for arranging this refinance far exceeded the nominal benefit of savings to the defendant.
In deciding whether there was a violation of the Consumer Fraud Act, the price charged the consumer is one element to be considered. Kugler, 58 N.J. at 530 (holding that the price for a "book package was unconscionable in relation to defendant's cost and the value to the consumers" and finding there to be a fraud within the contemplation of the CFA). The price paid by the consumer takes on even more serious characteristics [*9] of imposition "[i]f the price is grossly excessive in relation to the seller's costs, and if in addition the goods sold have little to no value to the consumer for the purpose for which he was persuaded to buy them and which the seller pretended they would serve." Id.
In D'Ercole Sales, Inc. v. Fruehauf Corp., the Appellate Division stated that "[a]n insight into the nature of the consumer transaction contemplated by the New Jersey Consumer Fraud Act . . . can be gleaned from an analysis of the Uniform Consumer Sales Practice Act, (UCSPA)." 206 N.J. Super. 11, 29, 501 A.2d 990 (App. Div. 1985). There, the Appellate Division examined the USCPA and the criteria it set forth to assist the court in determining unconscionability under the CFA. Id. at 29. These criteria, set forth in the USCPA, included "'circumstances such as the following which the supplier knew or had reason to know:
(3) that when the consumer transaction was entered into the consumer was unable to receive a substantial benefit from the subject of the transaction;
(5) that the transaction he induced the consumer to enter into was excessively one-sided in favor of the supplier;" Id. at 29-30 (citing UCSPA, 7A U.L.A. 231 et seq).
Here, the plaintiff lender was able to take advantage of the then lax requirements [*10] of the FHA that permitted use of prior documents that accompanied (or didn't accompany) an existing FHA-insured loan. This the lender undertook regardless of the then age of the borrower (70) in the context of her employment and future income prospects. Had the lender simply checked the annual income of the borrower from its telephone interview notes, it would have seen the obvious — that her annual income did not support the monthly mortgage payment itself. Apparently, not only did the plaintiff proceed to process the loan using the underwriting data of the existing loan, it never examined those documents. It never made diligent inquiry into her then ability to make the loan payments going forward. As demonstrated here, defendant defaulted within a few months. Such default so soon after the making of the loan suggests her then financial frailty.
These facts then leads to the conclusion that the loan was granted in order to engender fees for the lender and not for the benefit of the borrower. The reduction in her interest rate would take five plus years to amortize via reduced interest payments set off against the additional fees she incurred and that increased her principal balance. [*11] The transaction has been demonstrated to be effectively one-sided, for the benefit of the lender. The token reduction in the monthly payment for the borrower while substantially increasing her debt shows only token benefit to her.