The opinion of the court was delivered by: Dickinson R. Debevoise, U.S.S.D.J.
This matter comes before the Court on a motion submitted by Defendant Wachovia Mortgage, FSB ("Wachovia") requesting judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) dismissing the claims asserted against it by Plaintiffs, John G. Billero and Marlene Billero. For the reasons set forth below, the Motion will be granted and Plaintiffs‟ claims will be dismissed.
Plaintiffs are a married couple who own a single-family home located in Roselle, New Jersey. Prior to the events that give rise to this action, that home was encumbered by two mortgages.
In April 2008, Plaintiffs sought to refinance and consolidate the two mortgages outstanding on their home. Plaintiffs allege that they did so after being contacted by an employee of National Future Mortgage ("NFM"), who told them that they could consolidate their two mortgages into one fixed rate loan with a monthly payment of $1,113.75 that would be applied to both principal and interest. (Compl. ¶ 14.) NFM and its employees apparently arranged for Wachovia to provide financing for the transaction. During a meeting on April 16, 2008, Plaintiffs consummated that transaction by executing several documents, the cumulative effect of which provided that Wachovia would grant Plaintiffs a loan in the amount of $225,000, secured by a mortgage on their home. Plaintiffs used the proceeds of that loan to repay their other two mortgages (which at the time totaled $215,285), thus effectively consolidating the debts secured by their residence into one obligation owed to Wachovia.
Among the various documents*fn1 executed by Plaintiffs on April 16, 2008 were (1) a "Uniform Residential Loan/Equity Line of Credit Application" (the "Loan Application"), (2) an "Adjustable Rate Mortgage Note" (the "ARM Note"), and (3) a "Mortgage" on their home securing that Note. The first specified the "amortization type" for the loan Plaintiffs sought as "ARM" rather than "fixed rate." (Def.‟s Answer, Ex. E at 1.) Additionally, the Loan Application stated that Plaintiffs‟ combined income was $12,050 per month -- $8,500 of which was attributed to Mr. Billero‟s work as a "self-employed quality craftsman" in the construction industry, while $3,550 was derived from Mrs. Billero‟s work as a customer service representative for a major insurance company. (Id. at 1-2.) Finally, the Loan Application set forth the various fees that would be associated with the transaction, stating that the portion of the $225,000 loan paid to Plaintiffs would be reduced by $7,601.92 in closing costs. (Id. at 3.) Both Plaintiffs signed the Loan Application, which was three pages long without a short addendum setting forth their various financial liabilities, on the top of the first page and the bottom of the last. They initialed the bottom of the first and second pages. Just above the signature block on its third page, the Loan Application included an acknowledgement which stated, in relevant part:
Each of the undersigned specifically represents to the Lender . that the information contained in this application is true and correct as of the date set forth opposite my signature and . the Lender . may continuously rely on the information contained in this application. (Id.)
The terms and conditions of Plaintiffs‟ loan were set forth in the ARM Note. The titles of that Note are somewhat confusing. It bore the large bold-face title of "Adjustable Rate Mortgage Note," but included a subtitle stating that Plaintiffs had entered a "Fixed Advantage Pick-A-Payment Loan" -- apparently the designation used by Wachovia for the type of debt obligation at issue in this case. (Def.‟s Answer, Ex. A at 1.) Immediately under that subtitle, it stated "(Monthly Interest Rate Changes)" in a similar font and typeface. (Def.‟s Answer, Ex. A at 1.) It then included a paragraph in slightly smaller boldfaced type, in which it stated that "THIS NOTE CONTAINS PROVISIONS ALLOWING FOR CHANGES IN MY INTEREST RATE, MY MONTHLY PAYMENT AND MY UNPAID PRINCIPAL BALANCE." (Id.) Thus, while the ARM Note used the word "fixed" in one of its subtitles, its title section disclosed in three other places that the loan Plaintiffs were entering was an "adjustable rate" rather than "fixed rate" mortgage.
The substance of the ARM Note included terms elaborating on that disclosure. Under a heading titled "Interest Rate," it specifically stating that the interest rate paid by Plaintiffs would vary throughout the life of their loan. (Def.‟s Answer, Ex. A at 1, ¶ 2.) Thus, while the ARM Note provided for an initial annual interest rate of initial annual interest rate of 7.8 percent, (id. at 1, ¶ 2(A)), that rate could rise to a yearly maximum of 11.95 percent of the loan balance -- a price referred to as the "Lifetime Rate Cap." (Id. at 1, ¶ 2(C).) After setting out the Plaintiffs‟ initial interest rate and the Lifetime Rate Cap, the ARM Note went on to specify exactly how Plaintiffs‟ variable interest rate would be calculated each month, providing that it would be set by adding 3.150 percentage points to the so-called "Cost of Savings Index," a weighted average of interest rates on personal deposits held by Wachovia throughout the United States. (Id. at 2, ¶ 2(D)-(E).) The variations in Plaintiffs‟ interest rate began on June 15, 2008, two months after the ARM Note‟s date of execution. (Id. at 1, ¶ 2(B).) Their interest was recalculated each month thereafter. (Id.)
While Plaintiffs‟ interest rate varied each month, however, the amount of their payments did not. Rather, the ARM Note specified that Plaintiffs‟ initial monthly payment would be $1,113.47 -- slightly less than the $1,113.75 they claim NFM assured them they would be required to pay each month -- and would not vary until June 15, 2013, over five years after the effective date of the loan. (Id. at 2, ¶ 3(B).) After that date, their monthly payment would be recalculated on a yearly basis. (Id. at 2, ¶ 3(C).) Moreover, the ARM Note included a "Payment Cap" provision, which stated that the amount of Plaintiffs‟ monthly payment could not be increased by more than 7.5 percent each year. (Id. at 2, ¶ 3(D).) Thus, Plaintiffs‟ initial monthly payment of $1,113.47 could not have been raised by more than $83.51 on June 15, 2013. The maximum increase for the following years would have been $89.77 per month on June 15, 2014 and $96.51 per month on June 15, 2014. In other words, the ARM Note called for aggregate minimum payments of $13,361.64 each year for the first five years of the loan, which could then increase to $14,363.76 in the sixth, $15,441.00 in the seventh, $16,599.12 in the eighth, and so on in subsequent years.
The Payment Cap provision and Plaintiffs‟ low initial monthly payment combined with another provision in the ARM Note to create a situation in which it was virtually assured that the principal of Plaintiffs‟ loan would increase, rather than decrease, over at least the first 15 years of its term if Plaintiffs made only the minimum payment each month. The ARM Note included a section governing what it referred to as "Deferred Interest," which provided that if Plaintiffs‟ monthly payments were not sufficient to cover the interest accrued in any given month, the difference between the amount of that interest and the amount paid would be added to their principal. (Id. at 3, ¶ 3(E).) The original principal balance of Plaintiffs‟ loan was $225,000, and the initial annual interest rate on that balance was 7.8 percent. Thus, the loan was designed so that interest would accrue at a rate of $1,462.50 per month. Since Plaintiffs‟ initial monthly payment was only $1,113.47, the loan‟s principal increased by $349.03 during the first month. With each passing month, that amount compounded as the difference between the previous month‟s interest and Plaintiffs‟ payment was added to the principal. In sum, the loan‟s design -- the combination of the deferred interest provision, the starting principal of $225,000, and the initial payment of $1,113.47 -- ensured that even without an increase in the monthly interest rate, the amount outstanding on the loan would grow by over $4,200 during the first year of its term, with greater increases in subsequent years. Indeed, the interest rate would have had to drop almost two full points to an annual rate of less than 5.94 percent before the amount of interest accrued each month would have decreased enough to be covered by Plaintiffs‟ payments. For those payments to have dispensed with $5,000 of principal during the first year -- a reduction roughly in keeping with a payment plan that would discharge the loan before its 30-year term expired -- the annual interest rate would have had to drop another two points, to 3.72 percent.*fn2
Plaintiffs could have overcome the negative amortization caused by the Deferred Interest and Payment Cap provisions by exceeding their required monthly payments. However, they could not do so by too great an amount without risking other charges. The ARM Note included a provision that imposed a prepayment charge of two percent on payments of more than $5,000 in any calendar month during the first three years of the loan term. (Id. at 3, ¶ 5.) The prepayment penalty did not apply to payments on deferred interest, and expired three years after the origination of the loan. (Id.) The final page of the ARM Note included a "notice to borrowers," which stated that "BY SIGNING THIS NOTE YOU AGREE TO PAY A PREPAYMENT CHARGE UNDER CERTAIN CIRCUMSTANCES. PLEASE READ THIS ENTIRE NOTE (INCLUDING THE PREPAYMENT PROVISION) BEFORE YOU SIGN IT." (Id. at 6.) Both of the Plaintiffs signed the ARM Note on lines provided just under that acknowledgement. (Id.)
Along with the various agreements the executed on April 16, 2008, Plaintiffs were given several disclosures and acknowledgements. One of those documents, the "Fixed Advantage Pick-A-Payment Loan Disclosure" (the "Loan Disclosure"), contained information relating to the overall terms of their loan, which, as discussed above, was designated by the same title. As with the ARM Note, the title of the Loan Disclosure was followed by a statement in bold-faced type that "(Monthly Interest Rate Changes)." (Def.‟s Answer, Ex. D at 1.) While that statement appeared in slightly smaller type than the one on the ARM Note, in the case of the Loan Disclosure it was also followed by another line, which informed Plaintiffs that they were entering an "ADJUSTABLE RATE MORTGAGE." (Id.)
Like the ARM Note, the Loan Disclosure informed Plaintiffs that their monthly interest rate would vary. (Id.) In fact, the Loan Disclosure explained in detail the relevant information about the so-called "Cost of Savings Index" on which variations in Plaintiffs‟ interest rate would be based. (Id.) It reiterated the provisions of the ARM Note that provided that Plaintiffs‟ interest rate would be adjusted each month while their minimum payment would change annually. (Id.) Finally, the Loan Disclosure explained the negative amortization features of Plaintiffs‟ mortgage, stating:
At various times during the life of your loan the monthly payment may not be sufficient to pay the full amount of interest due. This can occur if the initial payment amount that you select is less than the full amount of interest due. This can also result from increases in the interest rate prior to the Payment Change Date or from a monthly payment that did not increase sufficiently to pay the full amount of interest due because of the 7-1/2% Payment Cap. If the monthly payment is not sufficient to pay the full amount of interest due, the Lender adds this accrued but unpaid interest, called Deferred Interest, to the unpaid principal balance of the loan. Until repaid, Deferred Interest bears interest at the interest rate of the loan. (Id. at 1-2.)
Mr. Billero signed and dated the Loan Disclosure on a line that appeared directly under a paragraph stating:
I have received a copy of this disclosure describing the Fixed Advantage Pick-A-Payment Loan Program. I understand that this disclosure is neither a commitment to make a loan nor a binding contract. The complete contractual terms and conditions of the loan are in the [ARM] Note, Security Instrument, Modification(s), and Rider(s), if any. (Id. at 2.)
In addition to the Loan Disclosure -- which related to the overall terms of their loan -- Plaintiffs received several acknowledgments and disclosures dealing with specific provisions of the ARM Note. One of those documents, a two-page form titled "Deferred Interest Acknowledgement," informed Plaintiffs that:
You have selected a loan product that lets you choose how much you pay each month from among several choices on your billing statement. As described below, if you make a periodic payment that is less than the interest owing on the loan, you will incur deferred interest and the principal balance of your loan will increase. (Def.‟s Answer, Ex. C at 1.)
The next paragraph appeared under the heading, "WHAT IS DEFERRED INTEREST?," and stated that:
Deferred interest (also known as negative amortization) occurs if your mortgage payment is not large enough to pay all of the scheduled interest due on your loan. For example, if you owe $1,000 in interest in a given period but you make a $900 payment that is authorized for your loan, the $100 shortfall is deferred interest that is added to your loan balance. In subsequent months, you will be charged interest on the higher principal balance. You can pay down any deferred interest on your loan at any time. (Id.)
Under a heading titled "HOW MUCH SHOULD YOU PAY?," the Deferred Interest Acknowledgement described situations in which it might be advantageous for the Plaintiffs to pay more than their ...