Daily Development for
Friday, January 7, 1999
By: Patrick A. Randolph,
Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu
LENDER LIABILITY;
DECEPTIVE TRADE PRACTICES: Purchasers of unfinished home may recover statutory
damages from a mortgagee's "unconscionable" violations under the
Texas Deceptive Trade Practices Act (DTPA) as mortgagee provided
"services" to purchasers in funding the construction and purchase of
a home sufficient to grant consumer recovery under the act.
Norwest Mortgage, Inc. v.
Salinas, 999 S.W.2d 846 (Tex. Ct. App. 1999).
Here, the mortgagee had
paid out the mortgage funds to an insolvent builder who failed to complete
construction of the home, had failed to obtain appropriate lien waivers, and
had hired (without the home buyers' approval) a second contractor who also quit
work on the home, leaving the home buyers with full mortgage payments on a home
that was half finished and burdened by multiple mechanics' liens, for which
they had to take out a second mortgage loan and hire a third contractor to complete.
The home buyers finally moved into the home when it was still in an incomplete
condition, after making mortgage payments for a full year.
Norwest apparently had
made an advance agreement with the first builder to fund construction loans for
its customers. The builder advertised Norwest's participation in its
literature, and in fact introduced the plaintiffs to Norwest. Builder, Norwest
and plaintiffs joined together in a single closing initiating the loan and the
construction project. For a fee of $300, Norwest agreed to supervise loan
disbursements. Its own policies required that there be lien waivers for work
done to date prior to every disbursement. The court found that Norwest's
failure to require such waivers and otherwise to supervise the behavior of both
the first and second builder (which Norwest selected without specific approval
of plaintiff) constituted a substantial cause of the plaintiff's damages here.
Out of these facts the
court fashioned substantial relief under the DTPA: $660,000.00 in damages
granted in a case where the home buyers' purchase price was $124,000.00 plus
the cost of the home's lot. The damages included recovery for mental anguish. Forty
percent of the total damages were awarded as attorney's fees.
The court found that the
home buyers were "consumers" with standing under the Act, even though
by definition party who simply borrows money is not a "consumer." The
court concluded that Norwest failed to properly supervise disbursements and to
abide by its mandatory policy of obtaining lien waivers prior to disbursement. These
were "services" they acquired from Norwest in connection with the
loan agreement, and the agreement to purchase these services made them
"consumers."
The court concluded that
Norwest was "inextricably intertwined" in the overall consumer
transaction because the extension of credit formed the means of making the sale
or purchase from the buyer's perspective." Thus the lender was liable
under Texas consumer law for the misbehavior of the builder.
Further, the court held
that the mortgagee was liable for "unconscionable behavior" (as
defined in the DTPA) of its own in financing a home that (because of the
problems with the contractor) had a value "grossly disparate" with
the amount of the home buyer's mortgage loan. The DTPA defines as an
"unconscionable practice" a transaction in which there is a
"gross disparity" between the consideration paid and the value received.
The court concluded that the plaintiffs had paid $300 for loan supervision and
had been required to pay over $52,000 to remedy the problems caused by faulty
performance of this supervision.
Comment 1: This case
undoubtedly comes as a big "shocker" to Norwest, which likely had
viewed itself as in the lending business, and not subject to Texas' tough
consumer laws. But it appears to be a case where the marketing department got
out in front of the legal department. Had Norwest been aware of the dangers
here, it might have been more circumspect in selecting the builders with whom
it would be dealing in this construction finance program. Anyone familiar with
the DPTA would have told them that once your toe is caught in the net, you're going
to be involved with a dangerous lawsuit before one of those notorious Texas
juries.
Comment 2: The discussion
of Norwest's liability for negligent supervision of loan disbursements is
interesting for several reasons. First, the cases around the country are legion
that find no liability for a lender to a borrower when the lender does not
observe its own lending guidelines in supervising loan disbursements. The usual
conclusion is that the lender's guidelines are for its own protection and that
the borrower has not right to rely on those guidelines being followed. There are
some notable exceptions to this line of reasoning, however, and lenders are
well advised to include language in their loan agreements making clear that the
lender's disbursement policies are for its own protection and that borrowers
have no right to rely upon them.
In this case, however,
Norwest went the other way and actually collected (if the court's record is
reliable) a fee specifically chargeable for loan disbursement supervision. Once
again, a good legal department should have warned against this. (It's unlikely
that the question was addressed to experienced counsel). Experienced real
estate lawyers know that in a busy construction season many corners get cut by
loan disbursers in order to keep projects going. Red tape and orderly
construction scheduling don't always make a good match. Therefore, when things
go wrong, it will always be possible to find that the lender did not punctiliously
enforce every loan requirement. In fact, if it had, it is likely that things would
have gone wrong much sooner!
Consequently, a $300 fee
to perform a function that likely will not be performed precisely in
supervising behavior of home builders (who themselves hardly perform with the
precision of the Texas Aggies Marching Band) is a ticket to the courthouse, and
unlikely to show up as a "profit item."
The bottom line: don't
charge fees to consumers for services that you have no hope of performing
precisely in an area that commonly results in consumer dissatisfaction and
damages claims.
Comment 3: The court's
analysis of the "unconscionable behavior" finding is another
interesting aspect of this case. The court appears to be comparing the damages
suffered to the amount of the fee. The real comparison ought to be the services
performed as compared to the amount of the fee. If, for instance, Norwest could
show that it provided extensive services, but that in the end someone messed up
and damages resulted, it might be liable for negligence, but not for
unconscionable behavior. It did provide services in proportion to the fee. By
leaping over the "value of services" computation and going straight
to the "damages resulting" computation, the court again widens the
net of the DPTA. By this standard, any consumer services negligently performed,
resulting in substantial damages, constitute "unconscionable
behavior" and trigger the horrific provisions of the Act attorneys' fees,
punitive damages, etc. The editor is hard pressed to speak for Texas lawmakers,
but this is probably not what they had in mind.
Readers are urged to respond, comment, and argue with the daily development
or the editor's comments about it.
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