Borrowers Have Private Right of Action to Recover Damages for Violations of the North Carolina Mortgage Lending Act
By Matthew A. Cordell
(First published October 2009)
During 2001, the North Carolina Mortgage Lending Act ("Act") was enacted as part of the state's continuing effort to address perceived abuses in the mortgage loan industry. The Act applies primarily to mortgage brokers and lenders other than banks. However, portions of the Act do apply to banks, including:
- Section 53-243.11, which prohibits various abusive activities by lenders in connection with a mortgage loan transaction; and,
- Section 53-243.15, which requires exempt lenders (including banks) to file a notice with the Commissioner of Banks if they engage in mortgage brokerage or lending activities.
On August 18, 2009, the North Carolina Court of Appeals issued an opinion in the case of Guyton v. FM Lending Services, Inc., which, for the first time, recognized a borrower's private right of action for damages against a lender for a violation of the Act. Although the defendant in the case was not a bank, the Court's decision was based on § 53‑243.11 (referenced above) which applies to banks. Therefore, the decision would seem to apply equally to banks and non-bank brokers and lenders. Also, rather than being limited to traditional long-term residential mortgage loans, the Act defines "mortgage loan" to include any loan "made to a natural person…primarily for personal, family, or household use, primarily secured by either a mortgage or a deed of trust on residential real property located in North Carolina." Therefore, the case may well serve as precedent supporting suits by borrowers against banks in connection with any of the various types of consumer loans made by banks that are secured by residential real property, including HELOCs.
In Guyton, the borrower applied for a loan to purchase residential real property. While processing the loan application, the lender, as it was required to do by the National Flood Insurance Act ("NFIA"), obtained a flood determination that the property was in a FEMA-designated special flood hazard area. However, the borrower alleged that the lender neither informed the borrower of that fact, as it was required to do by the NFIA, nor provided the borrower with a copy of the report. The borrower alleged that only after the borrower had closed the loan did the lender inform the borrower of the flood hazard and the borrower's obligation to obtain flood insurance for the life of the loan.
The borrower sued the lender and raised, among others, claims for fraud and unfair and deceptive practices. The lender argued that:
- It had no duty under the Act to provide the borrower with property-related information; and,
- Even if it did, the borrower did not have a right to recover monetary damages because the Act did not provide borrowers with a private right of action against lenders for violations.
The trial court agreed with the lender but, on appeal, the North Carolina Court of Appeals reversed the trial court, holding that, if the borrower's allegations were true, the lender had a duty under the Act to disclose information known to it which could affect the borrower's decision as to whether to close the loan. In support of its reasoning, the Court cited the following provisions of § 53-243.11 of the Act:
[It] shall be unlawful for any person in the course of any mortgage loan transaction:(1) To misrepresent or conceal the material facts or make false promises likely to influence, persuade, or induce an applicant for a mortgage loan or a mortgagor to take a mortgage loan, or to pursue a course of misrepresentation through agents or otherwise [or]…(8) To engage in any transaction, practice, or course of business that is not in good faith or fair dealing or that constitutes a fraud upon any person, in connection with the brokering or making of, or purchase or sale of, any mortgage loan.
The Court of Appeals acknowledged the case law regarding the NFIA cited by the lender, but nevertheless held that the Act creates a duty of disclosure under North Carolina law which supported the borrower's claims for common law fraud and unfair and deceptive practices. This had the effect of making civil damages available to the borrower for a violation under the Act even though a private right of action for damages was not available to the borrower for the identical violation of the NFIA.
The Court's opinion did not clearly explain whether the lender could be found liable because it failed to disclose a material fact relating to a term of the loan (i.e., the requirement that the borrower obtain flood insurance), or a material fact relating to the property itself (i.e., the fact that the property was in a flood hazard area). However, because of the broad language in the opinion, courts relying on Guyton in the future could find a private right of action for a failure to disclose facts about the real property rather than about the terms of the loan. Therefore, it is possible – although not certain – that a lender subject to the Act could be held liable to borrowers for failure to disclose other facts about mortgaged property which are known to the lender and which could reasonably be expected to be material to a borrower, such as zoning restrictions, easements, conditions revealed in home or environmental inspections, and the like.
Because § 53-243.11 is one of the two parts of the Act that apply to banks and their subsidiaries, it appears that banks may well be held liable to borrowers for violations of that provision. In light of this newly-inferred private right of action for violations of the Act, banks and other mortgage lenders should review their loan disclosure and compliance policies and procedures with an eye toward the requirements and prohibitions of the Act in order to lessen the risk of unexpected civil liability to borrowers.
The lender argued that even if it had failed to notify the borrower of the special flood hazard information, that was only a violation of the NFIA, and numerous cases have held that no such claims can be brought by borrowers under the NFIA because there is no express or implied private right of action for such a violation. The lender pointed out that the Act, like the NFIA, expressly provides for criminal penalties and civil fines, which are paid to the government, for violations, and contains no express provision for private claims for damages by borrowers. Thus, the lender argued, a similar interpretation should be given to the Act.