Timothy Silverman of Scheer Law Group successfully defended another California private lender (“Client”), being sued for its mortgage crisis era lending practices after an intense five (5) day nonjury trial which concluded last week. The trial took place before Judge Kory Mathewson in San Bernardino County Superior Court in Rancho Cucamonga.
In November 2007, the plaintiff and her partner applied for a $75,000 open-end HELOC loan (“HELOC”) secured by a second priority lien on their Fontana CA residence, expressing a specific need for quick money. After their loan broker refused to make the loan himself, he shopped the loan to other potential lenders. After some negotiation, the Client agreed to make the HELOC priced at 16.95% fixed, a default interest rate of 31.95%, a 10 point loan origination fee, and the usual hard money fees. The HELOC went into default in less than six months, and ultimately in 2011, the borrowers stopped paying the Client completely. The Client chose not to foreclose due to lack of equity in the property. Following three bankruptcies, the Client ultimately foreclosed on the property in 2018, and resold the property in 2021, at a small profit. The plaintiff sued the Client asserting numerous claims, most of which were defeated on demurrer.
The remaining claim at trial was for unfair business practices under Business and Professions Code §17200, alleging an unconscionable interest rate pursuant to Financial Code §22302 which incorporates Civil Code §1670.5. The plaintiff offered testimony including that of an expert witness contending that the 31.95% default interest rate, the high origination fee, and the other fees were egregiously and outrageously excessive.
At trial, the Client offered significant testimony over several days of the lending climate in November 2007 at the leading edge of the mortgage crisis, recounting in great detail how loan default rates were skyrocketing, property values were plummeting, and most institutional lenders ceased lending. The Client explained in detail all of the various factors and considerations justifying the loan pricing including the national economy, the local Inland Empire economy, the severely and rapidly decreasing property values in the Inland Empire/Fontana region, the rapidly rising prime lending rate, the fact that his hard money lender competition were charging similar rates, and the great uncertainty and anxiety that consumed the country which was headed into a recession or possibly another depression.
At the end of five days of witness testimony, the Court ruled in favor of the defendant lender finding that on its face, using a 2025 lens, the rates and fees charged do appear to be excessive and may shock the conscience. However, in the November 2007 timeframe, the 31.95% default rate, the 10 point loan origination fees and the other fees were actually fair and reasonable. In fact, the Court acknowledged that had the loan been sought by the plaintiff six months later into 2008, the Client arguably would not have made the loan because by that time, all the equity in the property had evaporated. The Court further noted that as of November 2007, no one had any inkling of how much worse the economy was going to get over the next several years, and the Client lender’s high loan pricing reflected precisely the fear and anxiety of the lending community at that time.
In a lengthy statement of decision on the record, the Court declared judgment in favor of the Client lender and denied all relief to the plaintiff.
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