Free Amended Complaint - District Court of California - California

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MARCUS J. JACKSON, ESQ. (SBN 205792) [email protected] 751 Center Dr., Suite 108-456 San Marcos, CA 92069 Phone: (760) 291-1755; Fax: (760) 432-6109 David M. Arbogast (SBN 167571) [email protected] Ira Spiro (SBN 67641) [email protected] SPIRO MOSS BARNESS LLP 11377 W. Olympic Boulevard, Fifth Floor Los Angeles, CA 90064-1683 Phone: (310) 235-2468; Fax: (310) 235-2456 Jonathan Shub (SBN 237708) [email protected] SEEGER WEISS LLP 1515 Market Street, Suite 1380 Philadelphia, PA 19107 Phone: (215) 564-2300; Fax (215) 851-8029 Paul R. Kiesel (SBN 119854) [email protected] Michael C. Eyerly (SBN 178693) [email protected] KIESEL BOUCHER LARSON LLP 8648 Wilshire Boulevard Beverly Hills, California 90211 Phone: (310) 854-4444; Fax: (310) 854-0812 Jeffrey K. Berns (SBN 131351) [email protected] LAW OFFICES OF JEFFREY K. BERNS 19510 Ventura Boulevard, Suite 200 Tarzana, California 91356 Phone: (818) 961-2000; Fax: (818) 867-4820

Attorneys for Plaintiff and all others Similarly Situated UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA DOREEN E. CHRISTIAN, individually and on ) behalf of all others similarly situated, ) ) Plaintiff, ) ) ) v. ) ) ) AMERICAN STERLING BANK, and DOES 1 ) through 10 inclusive, ) ) Defendants. ) ) ) ) ) ) ) ) ) ) CASE NO. 3:08-CV-0090 LAB (RBBx) FIRST AMENDED CLASS ACTION COMPLAINT FOR: (1) (2) (3) Violations of the Truth in Lending Act, 15 U.S.C. §1601, et seq; Fraudulent Omissions; Violation of Bus. & Prof. Code §17200, et seq. ­ "Unfair" and "Fraudulent" Business Practices; Breach of Contract; and Tortiuous Breach of the Covenant of Good Faith and Fair Dealing; and

(4) (5)

JURY TRIAL DEMANDED

CLASS ACTION COMPLAINT

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Plaintiff, DOREEN E. CHRISTIAN, individually, and on behalf of all others similarly situated alleges as follows:

I. INTRODUCTION 1. This is an action pursuant to the Truth in Lending Act ("TILA"), 15 U.S.C. §1601, et

seq., California's Unfair Competition Law ("UCL"), Bus. & Prof. Code § 17200, et seq., and other statutory and common law in effect. Plaintiff, DOREEN E. CHRISTIAN, individually, and on behalf of all others similarly situated, brings this action against AMERICAN STERLING BANK, and DOES 1-10 (collectively "Defendant"), based, in part, on Defendant's failure to clearly and conspicuously disclose to Plaintiff and the Class Members, in Defendant's Option Adjustable Rate Mortgage ("ARM") loan documents, and in the required Truth In Lending Disclosure Statements ("TILDS"), accompanying the loans, (i) the actual interest rate on which the payment amounts listed in the TILDS are based (12 C.F.R. § 226.17 (c)); (ii) that making the payments according to the payment schedule listed in the TILDS will result in negative amortization and that the principal balance will increase (12 C.F.R. § 226.19); and (iii) that the payment amounts listed on the TILDS are insufficient to pay both principal and interest.

II. THE PARTIES 2. Plaintiff, DOREEN E. CHRISTIAN, is, and at all times relevant to this Complaint, was

an individual residing in Modesto, California. On or about March 6, 2006, Plaintiff refinanced her existing home loan and entered into an Option ARM loan agreement with Defendants. The Option ARM loan was secured by Plaintiff's primary residence. Attached hereto as Exhibit 1 is a true and correct copy of the Note and the Truth In Lending Act Disclosure Statement (hereafter "TILDS") pertinent to this action. 3. Defendant AMERICAN STERLING BANK is a California corporation licensed to do,

and is doing business in California. At all relevant times hereto AMERICAN STERLING BANK was and is engaged in the business of promoting, marketing, distributing and selling the Option Arm loans
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that are the subject of this Complaint. AMERICAN STERLING BANK transacts business in Stanislaus County, California and at all relevant times promoted, marketed, distributed, and sold Option Arm loans throughout the United States, including Stanislaus County, California. AMERICAN STERLING BANK has significant contacts with Stanislaus County, California, and the activities complained of herein occurred, in whole or in part, in Stanislaus County, California. 4. Defendants, AMERICAN STERLING BANK, and DOES 1 through 10, shall hereinafter

be referred to collectively as "Defendant." 5. At all times mentioned herein, Defendants, and each of them, were engaged in the

business of promoting, marketing, distributing, and selling the Option ARM loans that are the subject of this Complaint, throughout the United States, including Stanislaus County, California. 6. Plaintiff is informed, believes, and thereon alleges, that each and all of the

aforementioned Defendants are responsible in some manner, either by act or omission, strict liability, fraud, deceit, fraudulent concealment, negligence, respondeat superior, breach of contract or otherwise, for the occurrences herein alleged, and that Plaintiffs' injuries, as herein alleged, were proximately caused by the conduct of Defendants. 7. Plaintiff is informed, believes, and thereon alleges, that at all times material hereto and

mentioned herein, each of the Defendants (both named and DOE defendants) sued herein were the agent, servant, employer, joint venturer, partner, division, owner, subsidiary, alias, assignee and/or alterego of each of the remaining Defendants and were at all times acting within the purpose and scope of such agency, servitude, joint venture, division, ownership, subsidiary, alias, assignment, alter-ego, partnership or employment and with the authority, consent, approval and ratification of each remaining Defendant. 8. At all times herein mentioned, each Defendant was the co-conspirator, agent, servant,

employee, assignee and/or joint venturer of each of the other Defendants and was acting within the course and scope of said conspiracy, agency, employment, assignment and/or joint venture and with the permission and consent of each of the other Defendants. 9. Plaintiff is informed, believes, and thereon alleges, that Defendants, AMERICAN

STERLING BANK and DOES 1-10, and each of them, are, and at all material times relevant to this
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Complaint, performed the acts alleged herein and/or otherwise conducted business in California. Defendants, and each of them, are corporations or other business entities, form unknown, have, and are doing business in this judicial district. 10. Plaintiff is informed, believes, and thereon alleges, that DOES 1 through 10, inclusive,

are securitized trusts, equity funds, collateralized debt obligations (CDO), CDO underwriters, CDO trustees, hedge funds or other entities that acted as additional lenders, loan originators and/or are assignees to the loans which are the subject of this action. Plaintiff will seek leave of Court to replace the fictitious names of these entities with their true names when they are discovered by herein. 11. The true names and capacities, whether individual, corporate, associate or otherwise, of

Defendants DOES 1 through 10, inclusive, and each of them, are unknown to Plaintiff at this time, and Plaintiff therefore sues said Defendants by such fictitious names. Plaintiff alleges, on information and belief, that each Doe defendant is responsible for the actions herein alleged. Plaintiff will seek leave of Court to amend this Complaint when the names of said Doe defendants have been ascertained. 12. Plaintiff is informed, believes, and thereon alleges, that at all times relevant during the

liability period, that Defendants, and each of them, including without limitation those Defendants herein sued as DOES, were acting in concert or participation with each other, or were joint participants and collaborators in the acts complained of, and were the agents or employees of the others in doing the acts complained of herein, each and all of them acting within the course and scope of said agency and/or employment by the others, each and all of them acting in concert one with the other and all together.

III. JURISDICTION AND VENUE 13. U.S.C. § 1331. 14. This Court has personal jurisdiction over the parties in this action by the fact that This Court has subject matter jurisdiction pursuant to 15 U.S.C § 1601 et seq. and 28

Defendants are either individuals who reside in this District within California or are corporations duly licensed to do business in California. ///
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15.

Venue is proper within this District and Division pursuant to 28 U.S.C. §1391(b) because

a substantial part of the events and omissions giving rise to the claims occurred in this district, and because there is personal jurisdiction in this district over the named Defendant because it regularly conducts business in this judicial district.

IV. FACTS COMMON TO ALL CAUSES OF ACTION 16. AMERICAN STERLING BANK sells a variety of home loans. The Option ARM or

adjustable rate mortgages are the loans that are the subject of this Complaint. 17. The instant action arises out of residential mortgage loan transactions in which

Defendants failed to disclose pertinent information in a clear and conspicuous manner to Plaintiff and the Class members, in writing, as required by law. 18. This action also concerns Defendant's unlawful, fraudulent and unfair business acts or

practices. Defendant engaged in a campaign of deceptive conduct and concealment aimed at maximizing the number of consumers who would accept this type of loan in order to maximize Defendant's profits, even as Defendant knew their conduct would cause many of these consumers to lose their homes through foreclosure. 19. Plaintiff, along with thousands of other similarly situated consumers, were sold an Option

ARM home loan by Defendants. The Option ARM loan sold to Plaintiff and the Class is a deceptively devised financial product. The loan has a variable rate feature with payment caps. The product was sold based on the promise of a low fixed payment based on a low listed interest rate, when in fact Plaintiff and the Class were charged a different, much greater interest rate than promised. Further, Defendant failed to disclose, and by omission, failed to inform Plaintiff of the fact that Defendant's Option ARM loan was designed to, and did, cause negative amortization to occur. Further still, once lured into these loans, consumers cannot easily extricate themselves from these loans because Defendant included in these loans a stiff and onerous prepayment penalty making it extremely difficult, if not impossible, for borrowers to extricate themselves from these loans. 20. The Option ARM loan Defendant sold to Plaintiff and the Class violates the Truth In
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Lending Act (TILA). TILA is supposed to protect consumers; it mandates certain disclosures be made by lenders to borrowers concerning the terms and conditions of their home loans. Defendant failed to make these disclosures in connection with the Option ARM loan sold to Plaintiff and the Class. 21. At all times relevant, Defendant sold their Option ARM loan product to consumers,

including Plaintiffs, in a false or deceptive manner. Defendant's loan documents indicated that the loan would have a very low payment for the first three (3) to five (5) years and there is no indication of negative amortization. In furtherance of their scheme, Defendant listed a low "teaser" rate in the Note(s) and a low corresponding payment schedule in the TILA Disclosure Statement (hereafter "TILDS") to lure Plaintiff and the Class members into purchasing Defendant's Option ARM loan product. However, the low "teaser" rate was illusory, a false promise. Plaintiff and others similarly situated did not receive the benefit of the low rate promised to them. Once signed on to Defendant's loan, the interest rate applied to Plaintiff's and Class members' loans was immediately and significantly increased. 22. Plaintiff and others similarly situated were consumers who applied for a mortgage loan

through Defendant. During the loan application process, in each case, Defendants intended Plaintiff and the Class members to believe that in entering these loan contracts that they would be able to have low mortgage payments. Defendant initiated this scheme in order to maximize the amount of the loans it sold to consumers and to maximize it's profits. 23. Based on the Defendant's representations, and the misconduct alleged herein, Plaintiff

and the Class members agreed to finance their primary residence through Defendant's Option ARM loan. Plaintiff and Class members were sold a home loan with a low interest rate of between 1% and 3.0% interest rate (the "teaser" rate), and a corresponding payment schedule based on that the interest rate for the first three (3) to five (5) years of the loan. Defendant also represented to Plaintiff, and Plaintiff reasonably believed, that if she made payments based on the promised low interest rate, which were the payments reflected in the written payment schedule provided to them by Defendants, that the loan would be a no negative amortization home loan and that Plaintiff's payments would be applied to both principal and interest. 24. After, the purported three (3) - five (5) year fixed interest period, Plaintiff and the Class
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members reasonably believed, based on the representations contained in the documents Defendant provided to Plaintiff and the Class members, that they would be able to refinance their loan and get a new loan before their scheduled payments increased. However, the payment schedule provided by Defendant failed to disclose, and by omission, failed to inform these consumers that due to the negative amortization that was purposefully built into these loans, Plaintiff and the Class members would be unable to refinance their homes as there would be little or no equity left to refinance. 25. Plaintiff believed these facts to be true because that is what the Defendant intended

consumers to believe. Defendant aggressively marketed their product as a fixed, low interest home loan. Defendant knew that if marketed and sold in such a manner, their Option ARM loan product would be a hugely popular and profitable product for them. Defendant also knew, however, that they were selling their product in a false and deceptive manner. While Defendant trumpeted their low rate loans to the public, Defendant knew their promise of a low interest was a mirage. 26. In fact, Defendant's Option ARM loan possessed a low, fixed payment but not a low,

fixed interest rate. Unbeknownst to Plaintiff and the Class members, the actual interest rate they were charged on their loans was not fixed, was not the low teaser interest rate stated in the loan documentation and was in fact considerably higher than going market rates. And, after purchasing Defendant's Option ARM loan product, Plaintiff and the Class members did not actually receive the benefit of the low teaser rate at all or in some cases, at best, received that teaser rate for only a single month. Immediately, thereafter, Defendant in every instance and for every loan, secretly increased the interest rate they charged consumers. The now-increased interest charges incurred by Plaintiff and the Class members, over and above the fixed interest payment rate, were added to the principal balance on their home loans in ever increasing increments, substantially reducing the equity in these borrowers' homes. 27. In stark contrast to this reality, Defendant, through the standardized loan documents they

created and supplied to Plaintiff, stated that negative amortization was only a mere possibility. Defendant concealed and failed to disclose the fact that the loan, as presented and designed, in fact, guaranteed negative amortization. Defendant failed to disclose and omitted the objectively material fact that negative amortization was absolutely certain to occur if consumers followed the payment schedule
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listed by Defendant in the TILDS. This information was objectively material and necessary for consumers to make an informed decision because this would have revealed that the loan's principal balance would increase if the payment schedule was followed, thereby rendering it impossible to refinance the loan at or around the time the prepayment penalty expired and/or by the time the interest and payment rates re-set. In this respect, Defendant utterly failed to place any warning on the Truth and Lending Disclosure Form about negative amortization. 28. At all times relevant, once Plaintiff and the Class members accepted Defendant's Option

ARM loan contract, they had no viable option by which to extricate themselves because these Option ARM loan agreements included a draconian pre-payment penalty for a period of up to three years. 29. The Option ARM loans sold by Defendant all have the following uniform characteristics: (a) There is an initial low interest rate or "teaser" rate that was used to entice the

Plaintiff into entering into the loan. The rate offered was typically 1%-3%; (b) The loan has with it a corresponding low payment schedule. The documentation

provided intended to misleadingly portray to consumers that the low payments for the first three (3) to five (5) years were a direct result of the low interest rate being offered; (c) The initial payments in the required disclosures were equal to the low interest rate

being offered. The purpose was to assure that if someone were to calculate what the payment would be at the low offered interest rate, it corresponded to the payment schedule. This portrayal was intended to further mislead consumers into believing that the payments were enough to cover all principal and interest; (d) (e) The payment has a capped annual increase on the payment amount; and The loan includes a prepayment penalty preventing consumers from securing a

new loan for a period of up to three (3) years. 30. Defendant uniformly failed to disclose, and by omission, failed inform consumers,

including Plaintiff and the Class members, in a clear and conspicuous manner that the fixed "teaser" rate offered by Defendant was actually never applied to their loans, or, at best, was only applied for thirty (30) days. Thereafter, the true interest charged on the loans was significantly higher than the promised rate.
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31.

Defendant uniformly failed to disclose, and by omission, failed to inform consumers,

including Plaintiff and the Class members, that the payments set forth in Defendant's schedule of payments were insufficient to cover the actual amount they were being charged for the loan, and that this was, in fact, a loan that would cause the Plaintiff and the Class members to lose the equity they have in their home. 32. Defendant uniformly failed to disclose, and by omission, failed to inform consumers,

including Plaintiff and the Class members, that when the principal balance increased to a certain level, they would no longer have the option of making the fixed interest payment amount. 33. Disclosing whether a payment will result in negative amortization is of critical

importance to consumers. If the disclosed payment rate is insufficient to pay both principal and interest, one of the consequences of negative amortization is a loss of equity. Defendants are and at all times relevant hereto have been aware that clear and conspicuous disclosure of the actual interest rate and a payment rate sufficient to avoid negative amortization and the concomitant loss of equity is extremely important material information. 34. At all times relevant, Defendants, and each of them, knew or should have known, or were

reckless in not knowing, that: (i) the payment amounts listed in the TILDS were insufficient to pay both interest and principal; (ii) negative amortization was certain to occur if Plaintiff and the Class members made payments according to the payment schedule provided by Defendants; and (iii) that loss of equity and/or loss of Plaintiff's and the Class members residence was substantially certain to occur if Plaintiff and the Class members made payments according to the payment schedule provided by Defendant. 35. In spite of its knowledge, Defendant sold its Option ARM loans as a product that would

provide Plaintiff and the Class members with a low payment and interest rate for the first three (3) to five (5) years of the loan, and at all times relevant, failed to disclose and/or concealed by making partial representations of material facts when Defendant had exclusive knowledge of material facts that negative amortization was certain to occur. This concealed and omitted information was not known to Plaintiff and the Class members and which, at all times relevant, Defendant failed to disclose and/or actively concealed by making such statements and partial, misleading representations to Plaintiff and all others similarly situated. Because the ARM loans did not provide a low interest rate for the first three
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(3) to five (5) years of the Note and the payment disclosed by Defendants were insufficient to pay both principal and interest, negative amortization occurred. 36. The true facts about Defendant's ARM loans is that they do not provide the low interest

rate promised, and are certain to result in negative amortization. 37. Disclosure of a payment rate that is sufficient to pay both principal and interest on the

loans is of critical importance consumers. If the disclosed payment rate is insufficient to pay both principal and interest, one of the consequences is that negative amortization or loss of equity will occur. Defendant is and, at all times relevant hereto, has been aware that the ability of the disclosed payment rate to pay both principal and interest so as to avoid negative amortization is one of the most important terms of a loan. 38. To this day, Defendant continues to conceal material information from consumers, and

the public, that: (i) the payment amounts listed in the TILDS were insufficient to pay both interest and principal; (ii) negative amortization was certain to occur if Plaintiff and the Class members made payments according to the payment schedule provided by Defendants; and (iii) that loss of equity and/or loss of Plaintiff's and the Class members residence was substantially certain to occur if Plaintiff and the Class members made payments according to the payment schedule provided by Defendant. 39. In the end, the harm caused by Defendant's failures to disclose and omissions, as alleged

herein, grossly outweighs any benefit that could be attributed to them. 40. Knowing the truth and motivated by profit and market share, Defendants have knowingly

and willfully engaged in the acts and/or omissions to mislead and/or deceive Plaintiff and others similarly situated. 41. The Option ARM loans have resulted and will continue to result in significant loss and

damage to the Class Members, including but not limited to the loss of equity these consumers have or had in their homes. 42. The facts which Defendants misrepresented and concealed, as alleged in the preceding

paragraphs, were material to the decisions about whether to purchase the Option ARM loans in that Plaintiff and others similarly situated would not have purchased these loans but for Defendant's unlawful, unfair, fraudulent and/or deceptive acts and/or practices as alleged herein.
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43.

Defendant engaged in the unlawful, unfair, fraudulent, untrue and/or deceptive marketing

scheme to induce consumers to purchase their ARM loans. 44. Defendant's unlawful, unfair, fraudulent, untrue and/or deceptive acts and/or practices

were committed with willful and wanton disregard for whether or not Plaintiff or others similarly situated would receive a home loan that would actually provide the low interest and payment rate for the first three (3) to five (5) years of the loan sufficient to pay both principal and interest. 45. Upon information and belief, and at all times relevant during the liability period,

Defendant possessed full knowledge and information concerning the above facts about the ARM loans, and otherwise marketed and sold these ARM loans throughout the United States, including the State of California.

V. CLASS ACTION ALLEGATIONS 46. Plaintiff bring this action on behalf of themselves, and on behalf of all others similarly

situated (the "Class") pursuant to Federal Rule of Civil Procedure, Rules 23(a), and 23(b), and the case law thereunder. The classes Plaintiff seeks to represent are defined as follows: The California Class: All individuals who, within the four year period preceding the filing of Plaintiff's Complaint through the date notice is mailed to the Class, received an Option ARM loan through Defendant on their primary residence located in the State of California. Excluded from the California Class are Defendant's employees, officers, directors, agents, representatives, and their family members; and The National Class: All individuals in the United States of America who, within the four year period preceding the filing of Plaintiff's complaint through the date notice is mailed to the Class, received an Option ARM loan through Defendant on their primary residence located in the United States of America. Excluded from the National Class are Defendant's employees, officers, directors, agents, representatives, and their family members. An appropriate sub-Class exists for the following Class Members:

25 26 27 28 All individuals in the United States of America who, within the three year period preceding the filing of Plaintiff's complaint through the date notice is mailed to the Class, received an Option ARM loan through Defendant on their primary residence located in the United States of America. Excluded from the National sub-Class are Defendant's employees, officers, directors, agents, representatives, and their family members.
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Plaintiff reserves the right to amend or otherwise alter the Class definitions presented to the Court at the appropriate time, or propose or eliminate sub-Classes, in response to facts learned through discovery, legal arguments advanced by Defendants or otherwise. 47. Numerosity: The Class is so numerous that the individual joinder of all members is

impracticable under the circumstances of this case. While the exact number of Class members is unknown at this time, Plaintiff is informed and believes that the entire Class or Classes consist of approximately several thousand members. 48. Commonality: Common questions of law or fact are shared by the Class members. This

action is suitable for class treatment because these common questions of fact and law predominate over any individual issues. Such common questions include, but are not limited to, the following: (1) Whether Defendant's acts and practices violate the Truth in Lending Act, 15 U.S.C. §1601, et seq; (2) (3) (4) Whether Defendant's conduct violated 12 C.F.R. § 226.17; Whether Defendant's conduct violated 12 C.F.R. § 226.19; Whether Defendant engaged in unfair business practices aimed at deceiving Plaintiff and the Class members before and during the loan application process; (5) Whether Defendant, by and through their officers, employees, and agents failed to disclose that the interest rate actually charged on these loans was higher than the rate represented and promised to Plaintiff and the Class members; (6) Whether Defendant, by and through their officers, employees and agents concealed, omitted and/or otherwise failed to disclose information they were mandated to disclose under TILA; (7) Whether Defendant failed to disclose the true variable nature of interest rates on adjustable rate mortgage loans and adjustable rate home equity loans; (8) Whether Defendant failed to properly disclose the process by which negative amortization occurs, ultimately resulting in the recasting of the payment structure over the remaining lifetime of the loans; (9) Whether Defendant's failure to apply Plaintiff's and the Class members'
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payments to principal as promised in the standardized form Note(s) constitutes a breach of contract, including a tortiuous breach of the covenant of good faith and fair dealing; Whether Defendant's conduct in immediately raising the interest rate on consumers' loans so that no payments were applied to the principal balance constitutes a tortiuous breach of the covenant of good faith and fair dealing; Whether Defendant's marketing plan and scheme misleadingly portrayed or implied that these loans were fixed rate loans, when Defendant knew that only the periodic payments were fixed (for a time) but that interest rates were not, in fact, "fixed;" Whether the terms and conditions of Defendant's Option ARM home loan are unconscionable; Whether Plaintiff and the Class are entitled to damages; Whether Plaintiff and the Class members are entitled to punitive damages; and Whether Plaintiff and the Class members are entitled to rescission.

Typicality: Plaintiff's claims are typical of the claims of the Class members. Plaintiff

and the other Class members were subjected to the same kind of unlawful conduct and the claims of Plaintiff and the other Class members are based on the same legal theories. 50. Adequacy: Plaintiff is an adequate representative of the Class because her interests do

not conflict with the interests of the other members of the Class Plaintiff seeks to represent. Plaintiff has retained counsel competent and experienced in complex class action litigation and Plaintiff intends on prosecuting this action vigorously. The interests of members of the Class will be fairly and adequately protected by Plaintiff and her counsel. 51. Ascertainable Class: The proposed Classes are ascertainable in that the members can be

identified and located using information contained in Defendant's mortgage lending records. 52. This case is brought and can be maintained as a class action under Rule 23(b)(1),

23(b)(2), and 23(b)(3): (a) Risk of Inconsistent Judgments: The unlawful acts and practices of Defendants, as
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 53. 54. (c) (b)

alleged herein, constitute a course of conduct common to Plaintiff and each Class member. Prosecution of separate actions by individual Class members would create a risk of inconsistent or varying adjudications which would establish incompatible standards of conduct for Defendant and/or substantially impair or impede the ability of individual Class members to protect their interests; Injunctive and/or Declaratory Relief to the Class is Appropriate: Defendants, and each of them, have acted or refused to act on grounds generally applicable to the Class, thereby making final injunctive relief or corresponding declaratory relief with respect to the Class as a whole appropriate; and Predominant Questions of Law or Fact: Questions of law or fact common to the Class members, including those identified above, predominate over questions affecting only individual Class members (if any), and a class action is superior to other available methods for the fair and efficient adjudication of the controversy. Class action treatment will allow a large number of similarly situated consumers to prosecute their common claims in a single forum, simultaneously, efficiently, and without the unnecessary duplication of effort and expense that numerous individual actions would require. Further, an important public interest will be served by addressing the matter as a class action. The cost to the court system of adjudicating each such individual lawsuit would be substantial.

VI. FIRST CAUSE OF ACTION Violations of Truth in Lending Laws, 15 U.S.C. §1601, et seq. (Against All Defendants) Plaintiff incorporates all preceding paragraphs as though fully set forth herein. 15 U.S.C. §1601, et seq., is the Federal Truth in Lending Act (`TILA"). The Federal

Reserve Board of Governors implements the Federal Truth in Lending Act through Regulation Z (12 C.F.R. §226 ) and its Official Staff Commentary. Compliance by lenders with Regulation Z became
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mandatory October 1, 1982. Likewise, Official Staff Commentary issued by the Federal Reserve Board is also binding on all lenders. 55. reads: §226.1 Authority, purpose, coverage, organization, enforcement and liability. . . (b) Purpose. The purpose of this regulation is to promote the informed The purpose of TILA is to protect consumers. This is stated in 12 C.F.R. § 226.1, which

use of consumer credit by requiring disclosures about its terms and costs. The regulation also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling . . . 56. Reg. Z also mandates very specific disclosure requirements regarding home loans with

which lenders, including Defendant, must comply: § 226.17. General disclosure requirements. (a) Form of disclosures. (1) The creditor shall make the disclosures required by this subpart clearly and conspicuously in writing, in a form that the consumer may keep. The disclosures shall be grouped together, shall be segregated from everything else, and shall not contain any information not directly related to the disclosures required under § 226.18. 57. The purpose of the TILA is to assure a meaningful disclosure of credit terms so that the

borrowers will be able to compare more readily the various credit terms available to them and avoid the uninformed use of credit and to protect the consumer against inaccurate and unfair credit billing practices. 58. Defendant's Option ARM loan violates TILA because Defendants failed to comply with

the disclosure requirements mandated by Regulation Z and Official Staff Commentary issued by the Federal Reserve Board. Defendant failed in a number of ways to clearly, conspicuously and/or accurately disclose the terms of the Option ARM loan to Plaintiff as Defendant was required to do under TILA. These violations are apparent on the face of the TILA Disclosure Forms.
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59. A.

The TILA violations committed by Defendants are more specifically detailed as follows: Defendants' Failure to Clearly and Conspicuously Disclose That the Payment Schedules Are Not Based on the Actual Interest Rate Violates TILA

60.

12 C.F.R. § 226.17 and 12 C.F.R. § 226.19 require the lender to make disclosures

concerning the interest rate and payments in a clear and conspicuous manner. Further, a misleading disclosure is as much a violation of TILA as a failure to disclose at all. 61. As for Plaintiff and the Class members Option ARM loans, Defendant violated 12 C.F.R.

§ 226.17 and 12 C.F.R. § 226.19 in that it failed to clearly and conspicuously disclose the interest rate upon which the payments listed in the TILDS are based. 62. The scheduled payment amounts and interest rate listed in the Note and TILDS for each

of the subject loans are unclear and inconspicuous. In fact, the payment amounts are not based on the interest rate listed but instead, were based upon an interest rate which was neither disclosed nor made conspicuous as required under TILA. 63. At all times relevant, Defendant knowingly and intentionally included in each of the

Notes and TILDS a schedule of payments which was not based upon the interest rate listed in these same documents. Defendant's failure to clearly and conspicuously disclose the interest rate upon which the payment amounts were based was, and is, deceptive. 64. Further, in addition to Defendant's failure to disclose in the Note and the TILDS that the

payments listed were not based upon the interest rate listed, Defendant knowingly and intentionally expressly and/or impliedly represented in the loan documents that the payments would be applied to both principal and interest. However, in truth, if Plaintiff followed the payment schedule provided by Defendant, the payments were guaranteed to be insufficient to pay the principal and interest on the loan. 65. At all times relevant, Defendant failed to clearly and conspicuously disclose to Plaintiff

and the Class members that if they made payments according to the payment schedule set forth in the TILDS, that negative amortization was not just a mere possibility, it was an absolute certainty. 66. At all times relevant, Defendant purposefully and intentionally failed to disclose to

Plaintiff, and all others similarly situated, the interest rate upon which the payment schedule was based in order to mislead and deceive Plaintiff and Class members into believing that they would be getting a
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loan with a low fixed payment rate that would be sufficient to pay both interest and principal. 67. At all times relevant, the payment amount provided by Defendant was intended to and

did deceive consumers into falsely believing they would, in fact, receive the low interest rate upon which the payment schedule is based. While the Note states the amount of Plaintiff's initial monthly payment, however, the initial monthly payment amounts stated in the Note and TILDS are not, in anyway related to the interest rate listed in the Note(s) and TILDS. 68. Defendant employed the aforementioned bait-and-switch tactics in a common and

uniform class-wide basis. In particular, had Defendants clearly and conspicuously disclosed a payment amount sufficient to cover both principal and interest, the payment amounts would have to have been almost double the payment amounts listed. 69. The TILDS are also deceptive for much the same reason. The TILDS list a schedule of

payments, yet for up to the five years the listed payment amounts have no relation to, and are also not based on the interest rate listed in the TILDS. 70. At all times relevant, Defendant failed to clearly, conspicuously, and accurately disclose

a payment amount that corresponds to the actual interest rate being charged on the loan sufficient to pay the true costs of the loan. Plaintiff and the Class members reasonably believed that if they made the payments according to Defendant's payment schedule, the payments would, in fact, be paying off the loan. However, the true fact is that the payment amounts stated in Defendant's payment schedule did not include any principal on the loans at all and only covered a portion of the interest Defendant was charging on these loans. 71. Official Staff Commentary to 12 C.F.R. § 226.17(a)(1) states that "this standard requires

that disclosures be in a reasonably understandable form. For example, while the regulation requires no mathematical progression or format, the disclosures must be presented in a way that does not obscure the relationship of the terms to each other..." 72. At all times relevant, Defendant's Option ARM loans violated 12 C.F.R. § 226.17(a)(1)

in that the relationship between the payments, for up to the first five years of the loans, bear no relationship to the interest rate listed in the TILDS. Therefore, as a direct and proximate result, the form of disclosure used by Defendants obscured the relationship between the interest rate listed in the Note(s)
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and TILDS and the payment schedule provided. B. Defendants' Failure to Clearly and Conspicuously Disclose The Legal Obligation Violates Truth in Lending Laws 73. 12 C.F.R. § 226.17(c)(1) requires that "[t]he disclosures shall reflect the terms of the

legal obligation between the parties." 74. Official binding staff commentary on 12 C.F.R. § 226.17(c)(1) requires that: "[t]he

disclosures shall reflect the credit terms to which the parties are legally bound as of the outset of the transaction. In the case of disclosures required under § 226.20(c), the disclosures shall reflect the credit terms to which the parties are legally bound when the disclosures are provided." 75. The Official binding staff commentary further states, at 12 C.F.R. § 226.17(c)(1)(2), that

"[t]he legal obligation normally is presumed to be contained in the note or contract that evidences the agreement." 76. Official Staff Commentary to 12 C.F.R. § 226.17(c)(1) states that "[i]f a loan contains a

rate or payment cap that would prevent the initial rate or payment, at the time of the first adjustment, from changing to the rate determined by the index or formula at consummation, the effect of that rate or payment cap should be reflected in the disclosures." 77. At all times relevant during the liability period, Defendant's Option ARM loans violated

12 C.F.R. § 226.17(c) in that the Note(s) and TILDS did not disclose, and by omission, failed to disclose what Plaintiff's and the Class members' were legally obligated to pay. In particular, the Note(s) charged these borrowers a much higher monthly amount than what Defendant disclosed. Defendants accomplished this deception by only listing a partial payment in the TILDS, rather than a payment amount that was sufficient to pay what these borrowers were being charged for their loans, and were legally obligated to pay. 78. As a direct and proximate result of Defendant's omissions and failures to clearly and

conspicuously disclose Plaintiff's and the Class members' legal obligations under the loans, Defendant took the partial payments and secretly added the deficit, each month, to principal, thereby causing negative amortization to occur. ///
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C.

Defendants' Failure to Clearly and Conspicuously Disclose The Actual Interest Rate Violates Truth in Lending Laws

79.

12 C.F.R. § 226.17 and 12 C.F.R. § 226.19 require the lender to make disclosures

concerning the interest rate in a clear and conspicuous manner. Further, a misleading disclosure is as much a violation of TILA as a failure to disclose at all. Defendant failed to meet the disclosure mandates required of them concerning the interest rate Defendant actually applied to Plaintiff's and Class members' loans, as well as the interest Defendant actually charged Plaintiff and the Class members. 80. Defendant's disclosure in the Promissory Note concerning the interest rate is, at best,

unclear and inconspicuous. At worst, it is intentionally deceptive. In either instance, it is certainly different than the interest rate set forth by Defendants in the TILD. The interest rate information set forth by Defendants in the Note conflicts with the interest rate information set forth by Defendant in the TILDS. 81. The interest rate set forth in the Note is the teaser rate that Defendant, in fact, applied to

the loan for a single month. However, at all times relevant during the liability period, Defendant did not make it clear in the Note(s) or TILDS that this low promised rate (the same rate upon which Defendant base the written payment schedule provided to Plaintiffs) is only offered for the first thirty (30) days of the loan. In furtherance of their scheme, Defendant employed the most convoluted, confusing and circuitous methodology in describing the interest rate. In particular, Defendant used terms like "may" when discussing potential interest rate increases, when in fact it was an absolute certainty the interest rate listed would only be provided for the first thirty days of the loan, and would be raised when the first payment was due. In one part of the Note, Defendant state that the promised low interest rate is the rate until the "change date." A description of the change date is found in another part of the Note. The convoluted and disjointed method employed by Defendant to provide this information to consumers makes it extremely difficult, if not impossible, for anyone to determine that, in fact, that the change date corresponds to the very first monthly payment Plaintiff and the Class members made on their loans. 82. The convoluted language used by Defendant to disclose the interest rate on Plaintiff's

and the Class members' loans is not clear and conspicuous. Rather, the disclosures used by Defendant
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were purposefully unclear and meant to mislead and deceive Plaintiff and the Class members. In particular, it is virtually impossible to discern when Plaintiff and the Class members would receive the low interest rate they were promised, if, in fact, it can be determined at all. And, the truth is that Plaintiff and the Class members never received the low interest rate, or in some cases received it for only thirty days. Defendant's promise of a low interest rate is and was wholly illusory and the deception, as alleged herein, was uniformly practiced on Plaintiff and all Class members by Defendant to facilitate sales of their loans to consumers. 83. The Note also sets forth the amount of Plaintiffs' and Class members' initial monthly

payments. The "initial monthly payments" amount figure is exactly equal to what the payments would be if the listed low interest rate promised to Plaintiff by Defendant was true and was, in fact, applied to the principal balance on the loans. This is a further deception committed by Defendant, because the real interest rate charged on the loans by Defendant is much higher than the low interest rate promised to Plaintiff and the Class members. Thus, the "initial monthly payments" amount provided by Defendant was intended to and did deceive consumers into falsely believing that they would, in fact, receive the teaser interest rate promised to them. 84. The TILDS is also unfairly confusing and deceptive for much the same reason. The

scheduled payments for the first three (3) to five (5) years of the loan lists payment amounts based on the low "teaser" rate, with the agreed 7.5% annual increase in the payment amount. In truth, however, this payment schedule has no real relation to the interest rate Defendant actually charged Plaintiff and the Class members on their loans. 85. At all times relevant during the liability period, Defendant failed to clearly,

conspicuously and accurately disclose the actual interest rate applied to Plaintiffs' and Class members' loans. Defendant also failed to disclose, and by omission, failed to inform Plaintiff and the Class members that the payment amounts listed in the payment schedule did not include any amount towards the principal on the loan and were, in fact, insufficient to pay all of the interest accruing. Based on the payment schedule listed in the Note and TILDS, Plaintiff and the Class members reasonably believed that the payments would be sufficient to meet the loan obligations in the Note(s). However, the true fact is that the payment schedule provided by Defendant did not pay any principal on the loan at all and only
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included a partial payment towards the interest Defendant charged Plaintiff and the Class members for these loans. 86. At all times relevant during the liability period, Defendant failed to clearly,

conspicuously and accurately disclose in the Note and TILDS a payment amount that was sufficient to pay both principal and interest. Plaintiff reasonably believed that if she made the payments according to Defendant's payment schedule, the payments would, in fact, be paying off both principal and interest. However, the true fact is that the payment amounts stated in Defendant' payment schedule did not include any principal on the loans at all and were only a partial payment of the interest Defendant were charging on these loans. 87. At all times relevant during the liability period, Defendant failed to disclose, and by

omission, failed to inform consumers that if they followed the payment schedule provided by Defendant, their payments will not be applied to principal at all and were not sufficient enough to cover all of the interest Defendant charged on the loan(s). D. Defendant's Failure to Clearly and Conspicuously Disclose Negative Amortization Violates the Truth in Lending Laws 88. home loans: § 226.19. Certain residential mortgage and variable-rate transactions. . . . (b) Certain variable-rate transactions. If the annual percentage rate may increase after consummation in a transaction secured by the consumer's principal dwelling with a term greater than one year, the following disclosures must be provided at the time an application form is provided or before the consumer pays a non-refundable fee, whichever is earlier. . . (vii) Any rules relating to changes in the index, interest rate, payment amount, and outstanding loan balance including, for example, an explanation of interest rate or payment limitations, negative amortization, and interest rate carryover. (Emphasis added.)
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89.

The negative amortization disclosure is required and must be made clearly and

conspicuously, and done in a manner that does not obscure its significance. The disclosure must state whether the loan and payments established under the terms dictated by the Defendant is a negative amortizing loan. 90. In 1995, and continuing each time new Official Staff Commentary was issued, the

Federal Reserve Board made clear that when the loan was a variable rate loan with payment caps, such as those that are the subject of this lawsuit, that the disclosure requires a definitive statement about negative amortization: 12 CFR Part 226 [Regulation Z; Docket No. R-0863] Monday, April 3, 1995 AGENCY: Board of Governors of the Federal Reserve System. ACTION: Final rule; official staff interpretation. "For the program that gives the borrower an option to cap monthly payments, the creditor must fully disclose the rules relating to the payment cap option, including the effects of exercising it (such as negative amortization occurs and that the principal balance will increase)..." (Found at C.F.R. § 226.19) 91. At all times relevant, statutory and common law in effect make it unlawful for a lender,

such as Defendant, to fail to comply with the Federal Reserve Board's Official Staff Commentary as well as Regulation Z and TILA. 92. Defendant sold Plaintiff and the Class members Option ARM loans which have a

variable rate feature with payment caps. Defendant failed to include any reference in the TILDS or in the Note(s) that negative amortization would occur if Plaintiff and the Class members followed the payment schedule provided by Defendant. 93. In fact, the only place in the Note where Defendant even inferentially references negative

amortization caused Plaintiff and all other similarly situated reasonable persons to believe that negative
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amortization was only a mere possibility, rather than an absolute certainty. In fact, these loans were designed in such a way so as to make negative amortization an absolute certainty. And, even when a separate explanation was provided, Defendant omitted the important material fact that these loans and payment schedules would, in fact, guarantee negative amortization. 94. Defendant's statement in the Note(s) that "[i]f the Minimum Payment is not sufficient to

cover the amount of interest due then negative amortization will occur" was an artfully contrived half-truth and did not alert or inform Plaintiff that the payment schedule provided by Defendant would absolutely guarantee that negative amortization was going to occur on these loans. Rather, Defendant made it appear that as long as the payments were made according to the schedule listed in the TILDS, that there would be no negative amortization. 95. At all times relevant, Defendant's statement in the Note, TILDS, and any other

disclosures they provided, described negative amortization as only a mere possibility, and therefore was misleading and deceptive. In fact, Defendant's Option ARM loan was designed in such a way as to guarantee negative amortization. TILA demands more than a statement that the payment could be less, or "may" be less, when Defendant knew that the payments were less, and would always be less, than the full amount required to pay both principal and interest. E. Defendant's Failure to Clearly and Conspicuously Disclose that the Initial Interest Rate is Discounted Violates Truth in Lending Laws 96. As previously stated, the informed use of credit means being able to make decisions, as

well as being able to plan an individual's finances. Every month consumers look at their income and budget where their funds must be paid. The biggest investment in one's life is generally that person's home. In fact, it is often referred to as "the American Dream" to own a home. 97. Variable rate loans are based on a "margin" and an "index." The index is often the Prime

Rate or the LIBOR exchange rate. The margin is the amount the lender charges over that rate, basically it is the lender's profit on the loan. 98. TILA and Regulation Z require disclosures to be clear and conspicuous so people

understand what their obligations are. In particular, when the payment is not based on that index and margin a separate disclosure is required. The disclosure must also inform that interest rate and payment
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may go up and clearly and conspicuously provide the circumstances under which the rate and payment will increase. Further, the disclosure must inform the borrower what the true cost of the loan is. 99. The Federal Reserve Board established disclosure requirements for variable rate loans.

26 C.F.R. § 226.19 requires a lender to disclose the frequency of interest rate and payment adjustments to borrowers. If interest rate changes will be imposed more frequently or at different intervals than payment changes, a creditor must disclose the frequency and timing of both types of changes. 100. The disclosures required pursuant to 12 C.F.R. § 226.19 are extremely important because

Plaintiff and other consumers similarly situated need this information in order to budget their money. They need to know if their house payments are going to go up so that they can plan for it. If the change comes as a surprise, they face a much greater possibility of defaulting on their loans and losing their homes. 101. Here, Defendant states only that the interest rate may increase in the future. However, an

interest rate increase was in fact far more certain than this disclosure led Plaintiff and the Class members to believe. If Defendant had given the Plaintiff and the Class members the promised low interest rate for any initial period of time, the interest rate was guaranteed to go up even without any change in the index. Thus, the increase in the interest rate on these loans was not just a possibility; it was an absolute certainty and Defendant failed and omitted this material information in their disclosures to Plaintiff and the Class members. 102. Defendant's loan documents state that the interest rate may increase during the term of

this transaction if the index increases. This, however, was not the only circumstance that could cause an increase in the interest rate because the disclosed interest rate was discounted. 103. At all times relevant during the liability period, Defendant failed to disclose, and by

omission, failed to inform Plaintiff and the Class members that the initial interest rate was discounted, creating the possibility of an increase even when the index did not rise. Due to the initial discounted interest rate being listed at 1% to 3%, the interest rate would increase because the index and margin were between 5% and 8% higher. Even when Defendant did provide a disclosure that stated the initial payment was not based on the index, it did so in a manner that was not clear and conspicuous. Because the loan documents failed to provide this extremely important material information in a clear and
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conspicuous manner that did not obscure its importance, Defendant's disclosure failed to meet the standards mandated under TILA. 104. Defendant failed to disclose to Plaintiff and the Class members that their interest rate

was, with 100% certainty, going to increase, regardless of whether or not the index upon which their loans are based changed. As such, Defendant violated TILA and Regulation Z by providing Plaintiff and the Class members with unclear, deceptive and poorly drafted or intentionally misleading disclosures. F. Defendant's Failure to Disclose the Composite Interest Rate Violates Truth in Lending Laws 105. Defendant provided Plaintiff and the Class members with multiple, conflicting interest

rates when describing the costs of this loan. On the TILDS, Defendant set forth one interest rate, while on the Note, Defendant set forth one or two other, different interest rates. 106. The official staff commentary to 226 C.F.R. § 17(C)(8) states: Basis of disclosures in variable-rate transactions. The disclosures for a variable-rate transaction must be given for the full term of the transaction and must be based on the terms in effect at the time of consummation. Creditors should base the disclosures only on the initial rate and should not assume that this rate will increase. For example, in a loan with an initial rate of 10 percent and a 5 percentage points rate cap, creditors should base the disclosures on the initial rate and should not assume that this rate will increase 5 percentage points. However, in a variable-rate transaction with a seller buydown that is reflected in the credit contract, a consumer buydown, or a discounted or premium rate, disclosures should not be based solely on the initial terms. In those transactions, the disclosed annual percentage rate should be a composite rate based on the rate in effect during the initial period and the rate that is the basis of the variable-rate feature for the remainder of the term. (See the commentary to section 226.17(c) for a discussion of buydown,
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discounted, and premium transactions and the commentary to section 226.19(a)(2) for a discussion of the redisclosure in certain residential mortgage transactions with a variable-rate feature.) The reason for this requirement is clear. Consumers cannot make an informed decision

when they cannot compare the cost of credit to other proposals. It is therefore incumbent upon Defendant to show the composite interest rate in effect so that the borrowers can understand exactly what they will be paying for the loan. 108. A lender violates TILA, Reg. Z and the OTS guidelines by failing to list the composite

rate in variable rate loans that have a discounted initial rate. The loan sold to Plaintiff and Class members by Defendant is a variable-rate loan. At all times relevant during the liability period, Defendant listed an interest rate in the Note(s) that, in truth, would only be provided for the first thirty (30) to forty-five (45) days of a thirty year loan, and would, with one hundred percent certainty, be increased after that first month. Because Defendant failed to clearly and conspicuously disclose the composite annual percentage rate on these loans, and instead listed different interest rates in different places in the documents provided to consumers, Defendant violated TILA and Regulation Z, and failed to provide disclosures that did not obscure relevant information. 109. As a direct and proximate result of Defendant's violations of TILA, as alleged herein,

Plaintiff and the Class members have suffered injury in an amount to be determined at time of trial. If Defendant had not violated TILA and had instead clearly and conspicuously disclosed the material terms of Defendant's Option ARM loan, as alleged herein, Plaintiff and the Class members would not have entered into the home loan contracts which are the subject of this action. Because Defendant failed to make the proper disclosures required under TILA, Plaintiff and the Class members now seek redress in an amount and/or type as proven at time of trial. G. Defendant's Failure to Clearly and Conspicuously Disclose the Effect of the Payment Cap on the True Cost of the Loan Violates Truth in Lending Laws The Option ARM loans at issue each contained a variable rate feature with an initial

teaser rate with payment caps. The payment cap is a limit on how much the payment may be increased annually. Its purpose is to provide borrowers with a limit on how much their payment can increase from
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year to year. The loans issued by Defendant had a 7.50% payment cap, which means that a borrower would only see their payment rise each year by a maximum of 7.50%. (i.e. a $1,000 monthly payment in year one, could go to a $1,075 payment in year two.) 111. The Official Staff Commentary to 12 C.F.R. § 226.17(c)(1)(10)(iii) states that "[i]f a loan

contains a rate or payment cap that would prevent the initial rate or payment, at the time of the first adjustment, from changing to the rate determined by the index or formula at consummation, the effect of that rate or payment cap should be reflected in the disclosures." Thus, at all times relevant during the liability period, Defendant had a duty to Plaintiff and the Class members to disclose the effect the payment caps would have on the loans in the TILD. 112. At all times relevant during the liability period, Defendant failed to disclose, and by

omission, failed to inform Plaintiff and the Class members that the payment cap would cause hundreds, if not thousands of dollars, each month, to be secre