Mortgage Prepayment Penalty Is Enforceable
May 16, 2005
Michael Weissman - Chicago
In Davis v. G.N. Mortgage Corporation, 396 F.3d 869 (7th Cir. 2005) the borrowers challenged a prepayment provision in their mortgage documents based on breach of contract and common law fraud. The challenge was rejected.
In September 1999, Thomas P. Davis and his wife, Cathy M. Davis, obtained a $288,000 adjustable rate mortgage from G.N. Mortgage Corporation (G.N.) to refinance non-business debts and secured the loan with their personal residence in Manhattan, Illinois.
The closing took place at the office of TICOR Title Insurance Company (TICOR) with Patricia Bogdanovich acting as TICOR’s closing agent. At the closing, the Davises were given two stacks of documents, each containing 24 documents and totaling 43 pages. Each stack was represented to contain a duplicate set of documents and to include an agreement for a two-year prepayment penalty which their mortgage broker, Monica Boatman, had negotiated with G.N. The Davises did not read the documents. They signed all the documents in one stack and retained the unsigned stack for their own records. The stack they signed contained an addendum that provided for a five-year prepayment penalty whereas the stack they retained (but did not sign) contained addenda providing for both a two-year and a five-year prepayment penalty. The executed addendum admonished the reader not to sign it prior to signing other documents in the stack which made specific reference to the prepayment penalty. Further, as a matter of law, the Davises were granted a 72-hour period in which to disavow the entire transaction, but they did not do so.
Early in 2000, G.N. sold Davis’ mortgage loan to Countrywide Home Loans, Inc. (Countrywide). In the summer of 2001, the Davises asked Countryside to advise them of the amount needed to satisfy their debt as of September 9, 2001, the second anniversary of their loan. They were told the payoff would have to include a $12,000 prepayment penalty. A lawsuit was filed against G.N. and Countryside contesting the prepayment penalty.
The documentary record revealed that the loan files of G.N. and Countryside did not contain a two-year prepayment addendum but did contain an executed five-year addendum.
Addressing the Davises breach of contract claim, the court said the loan documents were fully integrated, uncomplicated and “specifically state that the loan is subject to a prepayment penalty period of five years duration, as provided in a separately executed addendum.” On that basis, the breach of contract claim failed.
Insofar as common law fraud was concerned, the Davises argued that they relied on the oral representations of the closing agent, Bogdanovich, that the mortgage documents called for a two-year prepayment penalty period. But the court said the reliance was not reasonable in view of the fact that the Davises had “an opportunity and obvious obligation to read the documents before they signed them.” The court also pointed to the 72-hour rescission period that was available to the Davises. No reasonable reliance, therefore, no claim of common law fraud.
What’s the point?
Clear, unambiguous loan documents tendered to a borrower who is given an
opportunity to read them (but declines to do so) will be enforced in
accordance with their terms unless there is clear and convincing evidence of
fraud or deceptive practices.
For more information, e-mail Michael L. Weissman at
michael.weissman@hklaw.com or call toll free, 1-888-688-8500.