Lawyer Article

On August 17, 2005, the North Carolina Court of Appeals issued two significant "predatory lending" decisions. One of the cases emanated from a series of class actions filed in North Carolina and elsewhere alleging violations of state usury laws and deceptive trade practices against all parties in the securitization chain of pools of home mortgage loans. The plaintiffs advanced the novel theory that the Home Owners Equity Protection Act (“HOEPA”) made loan assignees liable for the violations of the loan originator. The other decision was an individual lawsuit with substantially identical claims.

In Skinner v. Preferred Credit et al., the Court of Appeals ruled that the North Carolina courts did not have personal jurisdiction over the securitization trust under North Carolina’s long-arm statute (a law that gives a local state court jurisdiction over an out-of-state company or individual whose actions caused damage locally or to a local resident), and that the statute of limitations under both the North Carolina usury law and the deceptive trade practice law had expired.

In the companion case of Shepard v. Ocwen Federal Bank, FSB et al., the court decided that the statute of limitations on a claim of charging usurious fees started to run at closing, when the fees were paid, and was not triggered anew each time a subsequent payment was made on the loan. The Skinner opinion cites Shepard on the statute of limitations issue.

Background
Garry Lee Skinner and Judy Cooper Skinner obtained a second mortgage loan from defendant Preferred Credit in January 1997. The loan was secured by a lien on their residential real property. After the closing date, the loan was assigned to Trust 1997-1. Trust 1997-1 holds mortgage loans, receives income from the mortgage loans, and distributes that income to holders of its certificates. The Skinners alleged that defendant Preferred Credit charged excessive loan origination fees in violation of North Carolina's usury law. The plaintiffs filed a class action complaint in December 2001 against multiple defendants asserting violations of North Carolina's Usury Statutes and Unfair and Deceptive Trade Practices Act. In June 2004, the trial court dismissed the plaintiff’s claims. Today’s ruling is on the appeal of the dismissal of the class action complaint.

The Court’s Decision
The Skinner jurisdictional decision was based primarily on the fact that the Trust 1997-1 did not regularly do business in North Carolina and had no contacts with North Carolina except indirect receipt of payments for mortgage loans similar to the plaintiffs’ loan. In this ruling, the court also recognized that assignees are not liable for the alleged unfair and deceptive trade practices of the original lender when the assignee [Trust 1997-1] "did not participate in the alleged improprieties." There is a lengthy dissent in this case on the jurisdictional issue, which focuses on the North Carolina public policy aspects of enforcing "predatory lending" laws. The majority in Skinner relied on the companion opinion in Shepard v. Ocwen Federal Bank, FSB et al. on the statute of limitations issue.

The Shepard opinion held that claims for excessive fees arising out of the loan begin accruing at the closing of the loan (and therefore the statute of limitations had run). The Shepard opinion cited the federal decisions in Faircloth v. Nat'l Home Loan Corp. on the statute of limitations issue. In Faircloth, the United States Court of Appeals for the Fourth Circuit held that under North Carolina law the statute of limitations for a claim based on excessive fees began running at closing, when the fees were paid. The Court rejected the plaintiffs’ argument that, since the fees were financed and rolled into the loan, the statute began running anew each time a payment was made on the loan. A similar argument was made and rejected in Shepard.

Womble Carlyle attorneys Hada Haulsee, Ron Davis and Brad Johnson represented the defendants in the Skinner case, with the assistance of Don Lampe’s experience in lending law. Womble also represented the defendants in the Faircloth federal court case (decided last year), which the Shepard Court cited in its opinion. Womble Carlyle also successfully represented the defendants in Dash v. FirstPlus Home Loan Owner Trust 1996-2, et al., which was the first published opinion addressing HOEPA liability for violations of North Carolina law. Womble Carlyle regularly represents creditors and other market participants in major financial services cases and administrative proceedings, combining a substantial consumer financial services law and regulation practice with the top-ranked litigation practice in North Carolina, according to the 2005 Chambers USA Guide to America's Leading Business Lawyers. It is expected that both the Skinner case and the Shepard case will be published.

For more information on these predatory lending decisions, contact Don Lampe, Hada Haulsee (336-721-3655, email), Ron Davis (336-721-3771, email), Brad Johnson (336-721-3593, email), or a member of the Womble Carlyle Capital Markets Practice Group.