Cunningham vs. Nationscredit Financial Services Corporation D/B/A Equicredit Corporation Of Illinois, Loan Center, Incorporated

(United States Court of Appeals for the Seventh Circuit)

Can fraudulent charges imposed on a borrower be included in the limited Section 32 (HOEPA) category? In 1999 Elizabeth and Louise Cunningham refinanced their mortgage to capture some of the equity for repairs. They contacted a contractor to do the repairs, who in turn referred them to Derwin Moore, a loan officer for Equicredit. To qualify for a loan, Moore had the Cunninghams complete a false application. When the loan was funded, $10,500 was paid to D&E Services, a company unknown to the Cunninghams but owned by Moore. Moore later deposited the funds into his personal account.

Two years later Elizabeth Cunningham's attorney (Louise had died) served notice that Elizabeth was rescinding the loan. She claimed this was a high-cost, HOEPA-applicable loan, which required disclosures that were not made. In this case disclosures would have been required if the percentage of fees paid plus the annual percentage rate were eight percent higher than a comparable Treasury security. The fees disclosed brought the rate to 7.97 percent. If the funds paid to D&E are included as mortgage broker fees, the fees would exceed the eight percent trigger.

The Court held that neither Moore nor D&E was a broker on this transaction. The HUD-1 Settlement Statement listed D&E as a creditor and was signed by the borrowers, validating it as an accurate description of the transaction. They also signed a Loan Brokerage Agreement making the Loan Center the sole broker. The court concluded that this was not a high-cost loan, and that HOEPA disclosures were not required. The court said TILA is meant to allow comparisons of borrowing costs, and is not intended to act as a prohibition against fraudulent transactions. Those would have to be addressed elsewhere.