Freedom Mortgage has been found guilty of violating New Jersey’s Consumer Fraud Act in a suit brought against the mortgage lender by Mamie Major, who alleged that the lender issued her a home refinance loan knowing that she would not be able to repay the loan.

Major, a 70-year-old resident of Englewood, New Jersey, sued the lender after she was charged $11,479 to refinance the loan on her home. According to court documents, the $63 reduction in her monthly payment would have taken her more than five years to amortize against the additional fees she incurred to lower the interest rate.

She subsequently made six payments on her new mortgage and then defaulted.

“These facts then lead to the conclusion that the loan was granted in order to engender fees for the lender and not for the benefit of the borrower,” Bergen County Superior Court Judge Gerald Escala wrote in his decision.

“The transaction has been demonstrated to be effectively one-sided, for the benefit of the lender. The token reduction in the monthly payment for the borrower while substantially increasing her debt shows only token benefit to her.”

According to court documents, Major was charged the fees to reduce the interest rate on her loan from 5.63% to 5%, which would have lowered her monthly payment from $1963.22 to $1900.38.

At the time of the refinancing, Major worked at Englewood Hospital and earned “somewhat over $30,000” a year, according to court documents. She had hoped to refinance her existing mortgage with Wells Fargo (WFC), on which she owed roughly $341,500 with an interest rate of 5.63%.

Major’s goal was to lower her interest rate and pull equity out of her home to help pay for her grandson’s college tuition.

The court documents reveal just how careless the lender was in agreeing to the loan.

“It appears that most information relative to a refinance was obtained over the telephone and that all papers—including the loan application and related documents—were signed at the closing on her front porch on March 23, 2009,” the decision states.

“She told the interviewer that she made $30,000. The notion of her obtaining any more equity from the house on the refinance appears to have disappeared in the process, and the refinance was directed at reducing the interest rate, from 5.63% to 5%.”

Major’s loan with Wells Fargo was insured by the Federal Housing Administration and current at the time of the refinance.

“Therefore, according to Sheila Harkness, a senior vice-president of Freedom, this refinance could be treated as an FHA ‘streamline loan,’ which would require little or no new or extra documentation, nor would an appraisal be needed,” Escala wrote. “Under the FHA criteria, Freedom was free to depend on the prior mortgage’s underwriting, she testified, in order to refinance to lower the interest rate.”

The fees charged to Major by Freedom Mortgage to refinance the loan were to be rolled into her loan, which would have increased the mortgage amount from roughly $341,500 to $354,005.

With the decrease in interest rate, Major would have owed $2,134.83 less a year in interest, “but by her having to pay some $11,479 in fees to accomplish that reduction in interest, it would take her five plus years to break even.”

Escala writes that Freedom took advantage of the “lax” requirements of the FHA that permitted the use of prior documents that accompanied an existing FHA-insured loan.

“The lender undertook (the loan) regardless of the then age of the borrower (70) in the context of her employment and future income prospects. Had the lender simply checked the annual income of the borrower from its telephone interview notes, it would have seen the obvious – that her annual income did not support the monthly mortgage payment itself. Apparently, not only did the plaintiff proceed to process the loan using the underwriting data of the existing loan, it never examined those documents. It never made diligent inquiry into her then ability to make the loan payments going forward. As demonstrated here, defendant defaulted within a few months. Such default so soon after the making of the loan suggests her then financial frailty.”

Escala found Freedom Mortgage guilty of violating New Jersey’s Consumer Fraud Act but allowed the lender to foreclose on Major’s home as it had demonstrated its right to foreclose, but ordered the lender to forfeit the fees it charged Major to refinance her loan and pay her triple that amount in damages, $34,438.95.

Freedom was also ordered to delay its foreclosure process for one year to allow Major to obtain a buyer for the property or to refinance from other sources. Freedom must also pay Major’s attorney fees of $26,165.

Major’s attorney, Joshua Denbeaux, hailed the decision. "The conventional wisdom is that banks win and homeowners lose," Denbeaux said. "The balance of power has shifted and banks are no longer immune; home owners can now expect to recover money from banks. And this is just the tip of the iceberg.”

Denebaux’s father and partner, Mark, who is also a law professor at Seton Hall, said the decision could lead to more victories for borrowers over lenders.

“This is an enormous breakthrough,” the elder Denebaux said. “For the first time homeowners are being paid money by the banks for the fraudulent loans the banks have written.

“For years banks have been writing these frivolous loans for no other reason than to make a profit from the fees. Whether the homeowners would be able to pay back the loans was irrelevant to them. The judge's ruling should further encourage homeowners to bring actions against banks because the playing field has been leveled."

Escala's full decision can be read here. 

The decision comes on the heels of Freedom Mortgage settling with U.S. Department of Housing and Urban Development over claims that it discriminated against loan applicants with disabilities.

According to HUD, Freedom Mortgage did not apply the same underwriting practices and procedures to people with disabilities as it did to people without disabilities.

HUD determined those actions violated the Fair Housing Act, which makes it unlawful to discriminate in the sale, rental, and financing of dwellings, and in other housing-related transactions, based on race, color, national origin, religion, sex, family status, or disability.

“This includes requiring persons with disabilities to provide medical or other documentation not required of mortgage applicants who are not disabled,” HUD said in a statement.