On appeal from the Superior Court of New Jersey, Chancery Division, Essex County, Docket No. F-8466-98.
Judges Havey, Cuff and Lisa.
The opinion of the court was delivered by: Havey, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
As amended September 13, 2001
This is a foreclosure action. Defendants Beatrice and Curtis Troup, African-Americans, obtained a mortgage loan from third-party defendant East Coast Mortgage Corp. (ECM) to pay for repairs on their Newark home made by third-party defendants Gary Wishnia, General Builders Supply, Inc. and Property Redevelopment Center, Inc. (collectively Wishnia). The mortgage and note were assigned by ECM to Associates Home Equity Services, Inc. (Associates). When the Troups defaulted, Associates instituted this foreclosure proceeding. The Troups filed a counterclaim against Associates and a third-party complaint against Wishnia and ECM, claiming violations of the Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -106, the Law Against Discrimination (LAD), N.J.S.A. 10:5-1 to -49, the Fair Housing Act (FHA), 42 U.S.C.A. §§ 3601 to -3631, the Civil Rights Act, 42 U.S.C.A. § 1981, and the Truth-In-Lending Act (TILA), 15 U.S.C.A. § 1635. The trial court granted summary judgment dismissing all of the Troups' claims against Associates and ECM, and entered a judgment of foreclosure in favor of Associates. The court found that the terms of ECM's construction loan were not unconscionable and that the Troups' affirmative claims under the applicable state and federal laws were barred by the governing statute of limitations. We granted the Troups' motion for leave to appeal.
We affirm in part and reverse in part. We conclude that it was premature to dismiss the Troups' claim that Associates engaged in predatory lending activities. The Troups are entitled to discovery on this claim. Further, although the Troups' affirmative claims against Associates under the governing statutes are time-barred, they may be considered in support of the affirmative defense of equitable recoupment. See R. 4:5-4 (if a party mistakenly designates an affirmative defense as a counterclaim, the court may in the interest of justice, treat the pleading "as if there had been a proper designation"). We further conclude that genuine issues of material fact exist respecting whether the "Holder Rule," 16 C.F.R. § 433, applies in this case, subjecting ECM to liability for the wrongdoings of Wishnia, the home repair contractor. Fact issues also exists as to whether defendants engaged in unconscionable business practices under the CFA.
Considering the evidentiary material in a light most favorable to the Troups, see Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520 (1995), these are the facts. Beatrice Troup, a seventy-four year old African-American, has lived at 62 Vanderpool Street in Newark for approximately forty years. Following a telephone solicitation by Gary Wishnia, an agent for General Builders Supply, Inc., Beatrice and her son Curtis executed a contract for exterior home repairs with General on September 1, 1995. The contract price was $38,500, payable "$479.75 for 240 months." Beatrice claims that Wishnia told her "not to worry, he would get me financing." An amended contract was executed on November 16, 1995, for additional interior home repairs, increasing the contract price to $49,990. The agreement provided that "[payments] are to be made beginning January 1, 1996 payable to Property Redevelopment Center, Inc. until permanent financing is obtained."*fn1
On September 14, 1995, the Troups were interviewed by Jeffrey Ahrens, ECM's representative, regarding their application for a loan. A credit search was conducted. According to Beatrice, the Troups had no personal dealings with ECM. She and her son Curtis dealt directly with Wishnia who arranged a limousine to transport the Troups to ECM's office to close the loan. Also, Wishnia did the "leg work" in processing the loan and obtained all income documentation required by ECM.
The Troups' loan application, dated September 14, 1995, but not signed by them until the closing date of April 27, 1996, provided for a $46,500 loan at an annual interest rate of 11.65 percent, adjustable after six months. The Truth-In-Lending disclosure form signed by the Troups at closing stated that the loan was a "balloon" type, payable in fifteen years, with the last payment being $41,603.58. The Troups were also charged four points, or four percent of the total loan amount. At the closing, Beatrice was required to execute a deed conveying the property to herself and her son.
At some point after April 27, 1996, ECM assigned the mortgage and note to Associates. On May 11, 1998, Associates filed a foreclosure complaint alleging that the Troups had failed to make the required payments under the mortgage and note. The Troups filed an answer, counterclaim and third-party complaint consisting of fifteen counts against the Wishnia defendants, ECM and Associates. Pertinent here are the counts charging Wishnia with "unconscionably poor" workmanship, and that Wishnia had conspired with ECM to place the mortgage financing with ECM and "to reap profits by subjecting the Troups to unconscionable, illegal and fraudulent home repair and financing transactions." The Troups charged defendants with unconscionable and deceptive conduct in violation of the CFA. They further allege that ECM violated the TILA, 15 U.S.C.A. § 1635a, by failing to provide them with a "clear and conspicuous notice" of the expiration date of their right to rescind, failing to make proper disclosures, and materially understating the finance charges. Finally, the Troups asserted that Associates "participated in, authorized and/or ratified and/or had constructive knowledge of" the deceptive unconscionable acts of ECM and engaged in predatory lending practice in violation of the FHA, §§ 3601 to -3631, the CRA, 42 U.S.C.A. § 1981, and the LAD, N.J.S.A. 10:5-1 to -49.
In dismissing all of the Troups' claims against ECM and Associates, and entering a judgment of foreclosure in Associates' favor, the trial court found that the terms of the mortgage loan given to the Troups were not "unconscionable when looked at in its entirety," given the fact that, although a 6.6 percent rate was available to "prime borrowers," the Troups "did not appear to be AAA rating." The claims against ECM based on Wishnia's deceptive and unconscionable conduct and workmanship were dismissed because, according to the court, ECM could not be held accountable for Wishnia's conduct. The court also determined that all of the Troups' claims against ECM and Associates were barred by the governing statutes of limitations under the LAD, the FHA and the CFA. Finally, the court dismissed the Troups' demand for rescission under the TILA, concluding that "there was conspicuous notice given" of the right to rescind.
The Troups and amicus contend that the trial court erred in dismissing the Troups' claim of predatory/discriminatory lending practices against Associates, claiming that genuine fact issues exist precluding summary judgment. Amicus contends that at the very least the dismissal of the claim was premature because the Troups did not have the opportunity to develop it by way of meaningful discovery. We agree with amicus.*fn2
The Troups and amicus claim that Associates engaged in a predatory lending practice by actively discriminating against them in consort with ECM by treating the Troups, African- Americans, less favorably than white borrowers in violation of the FHA, the Civil Rights Act, and the LAD. Amicus adds that Associates may also be held accountable for ECM's discriminatory practice on the theory that Associates "controlled" ECM's conduct.*fn3 The Troups do not seek money damages against Associates for any violation of these statutes. Rather, they argue that Associates' discriminatory conduct supports the affirmative defense of equitable recoupment in these foreclosure proceedings. The trial court did not address this issue.
Predatory lending has been described as:
a mismatch between the needs and capacity of the borrower . . . . In essence, the loan does not fit the borrower, either because the borrower's underlying needs for the loan are not being met or the terms of the loan are so disadvantageous to that particular borrower that there is little likelihood that the borrower has the capability to repay the loan. [Daniel S. Ehrenberg, If the Loan Don't Fit, Don't Take It: Applying the Suitability Doctrine to the Mortgage Industry to Eliminate Predatory Lending, 10 J. Affordable Housing & Community Dev. L. 117, 119-20 (Winter 2001).]
Plaintiffs' expert, Calvin Bradford, summarized the concept of predatory lending as follows:
In using the term "predatory lending" I refer to lenders who target certain populations for onerous credit terms. The population generally targeted includes, among others, the elderly, minorities, and residents of neighborhoods that do not have ready access to mainstream credit. Credit terms not warranted by the objective facts regarding the creditworthiness of these individuals are imposed upon them because for various reasons the lenders feel they can take advantage of a borrower. Typically predatory lenders take advantage of borrowers due to their lack of sophistication in the lending market, due to their lack of perceived options for the loan based on discrimination or some other factor, or due to deceptive practices engaged in by the lender that mislead or fail to inform the borrower of the real terms and conditions of the loan. The record in this case indicates that this is consistent with what occurred in the Troup transaction.
Specifically, the Troups and amicus charge "reverse redlining" in this case. "Redlining is 'the practice of denying the extension of credit to specific geographic areas due to the income, race or ethnicity of its residents.'" Hargraves v. Capital City Mortgage Corp., 140 F.Supp.2d 7, 20 (D. D.C. 2000) (quoting United Companies Lending Corp. v. Sargeant, 20 F.Supp.2d 192, 203 n.5 (D. Mass. 1998)). The term "redlining" is derived from the actual practice of drawing a red line around designated areas in which credit is to be denied. Sargeant, supra, 20 F.Supp.2d at 203 n.5. "Reverse redlining is the practice of extending credit on unfair terms to those same communities." Ibid.; see also Hargraves, supra, 140 F.Supp.2d at 20; Honorable v. Easy Life Real Estate Sys., 100 F.Supp.2d 885, 892 (N.D. Ill. 2000). Congress has reported that "reverse redlining . . . [is] the targeting of residents of those same communities for credit on unfair terms. Considerable testimony before the committee indicates that the communities lacking access to traditional lending institutions are being victimized in this fashion by second mortgage lenders, home improvement contractors, and finance companies . . . ." S. Rep. No. 103-169, 1994 U.S.C.C.A.N. at 1910. Reverse redlining has been held to violate the FHA and the Civil Rights Act. Honorable, supra, 100 F.Supp.2d at 892. We do not hesitate to conclude that the practice violates the LAD as well. See N.J.S.A. 10:5-12i(1) (it is unlawful for a mortgage company to "discriminate against any person . . . because of race, . . . in the granting, . . . or in the fixing of the rates, terms, conditions or provisions" of a mortgage loan).
A plaintiff may establish a colorable claim of reverse redlining by demonstrating that "defendants' lending practices and loan terms were 'unfair' and 'predatory,' and that the defendants either intentionally targeted on the basis of race, or that there is a disparate impact on the basis of race." Hargraves, supra, 140 F.Supp.2d at 20. See also United States v. Mitchell, 580 F.2d 789, 791 (5th Cir. 1978) (the FHA prohibits "not only direct discrimination but practices with racially discouraging effects"); and see Jackson v. Oklaloosa County, 21 F.3d 1531, 1543 (11th Cir. 1994) (FHA violation can be demonstrated by a showing of either direct discrimination or discriminatory effects).
In this case the Troups' predatory lending claim was dismissed without permitting them to conduct meaningful discovery on the issue. The Troups laid the foundation for a reverse redlining case by establishing that they are African Americans living in a predominately African-American neighborhood in Newark. Their expert stated that the 11.65 percent interest rate and other terms of the loan were unjustified from an objective viewpoint, given the Troups' credit history and favorable debt- to-income ratio. Moreover, an Associates' representative testified during deposition that Associates paid a premium of $2,325 to ECM for securing the Troups' loan. He explained that "[w]e ...