In 2013, the Massachusetts Supreme Judicial Court overturned a Superior Court decision and changed the way Massachusetts courts analyze liability of successor lenders and assignees on consumer home loans. In Drakopoulos v. U.S. Bank, Nat’l Ass’n, 465 Mass. 775 (2013), residential borrowers defaulted on a mortgage that required monthly payments that exceeded their monthly income by $600.00. The borrowers had been unaware that their income was inflated on their loan application (for a 10.315% stated-income loan), and they weren’t required to demonstrate how they could make payments that were 150% of their monthly income. Following the default, the loan and mortgage were assigned to another lender for collection. The second lender then foreclosed on the mortgage.
The borrowers raised the original lender’s predatory lending practices as a defense to the foreclosure action, claiming violations of the Consumer Protection Act, the Predatory Home Loan Practices Act, and the Borrower’s Interest Act. The Superior Court granted summary judgment on behalf of the foreclosing lender, ruling that the original lender’s conduct could not be attributed to the successor lender. On appeal, however, the Supreme Judicial Court found that if the acts of the original lender were unconscionable, then the original mortgage was unenforceable. Applying common law principles of assignee liability to the contractual defense of unconscionability, the SJC concluded that if a mortgage is unenforceable for this reason, then the mortgage does not become enforceable by assigning it to a third party.
This consumer-friendly decision reaffirms the fact that lenders may not shield themselves from liability simply because they are not the original party to a contract. Successor lenders have an incentive to insure that the laws have been followed when the original transaction took place, or else they could be left unable to enforce mortgages that they received by assignment if the original lender engaged in unconscionable behavior.
Contributed by Laura Martin