eHomeCredit and CitiFinancial

SOUTHEAST TENNESSEE LEGAL SERVICES

eHomeCredit and CitiFinancial

This narrative is composed of allegations taken from the complaint filed by the plaintiff:

Allen L. Wheeler is a decorated veteran of World War II. He is age 77, is no longer married, and has three adult sons.

Mr. Wheeler owns a home located at 8243 Patterson Road, Chattanooga, Tennessee 37421 that is the subject of litigation. He acquired it many years ago and lived there continuously until May 2002. He now resides in Life Care Center of Collegedale, a nursing home. A nephew lives in the home.

Mr. Wheeler is unable to manage his financial and legal affairs and suffers from multi-infarct dementia, a condition which entails a series of strokes that impair or destroy increasingly large and important areas of the brain.

Mr. Wheeler’s only income is a social security benefit, and his expenses regularly consume the entire sum. His sons are assisting him with his monthly mortgage payment of $347.24, and with his other expenses.

In 1998, Mr. Wheeler suffered a debilitating stroke that required him to remain for five days in Memorial Hospital and 24 days at Siskin Rehabilitation Hospital, both in Chattanooga, followed by a lengthy recuperation at home. (It was at least his second stroke, a less severe one having occurred in 1993.) When he returned home, he had lost many of the abilities that previously had permitted him to live alone without assistance. To illustrate, he could not go up and down stairs, could not walk without assistance, could not speak clearly, and could not remember recent details. As a result, his sons arranged for a family friend to stay with him overnight. His long dependence on alcohol and cigarettes thus became, in the view of his sons and his physicians, a safety as well as a health issue.

Solicitation of the Loan

In September 2000, Mr. Wheeler received a call from a telemarketer regarding the financing of his home. It was a young woman with a friendly voice. Living alone and wanting company, even if only by telephone, Mr. Wheeler was responsive to the solicitation. This was one of several occasions when he responded affirmatively to telephone marketing, usually by female callers. His sons later returned products such as a Bowflex exercise machine and a cell phone that were sent to him after the telephone solicitations, products that were entirely inappropriate for a man in his physical and mental condition.

A few days after the telephone call, a young woman (who is believed to be Kim Dawson, an employee of Peter C. Ensign, a Chattanooga attorney and real estate closing agent) called him and requested that she be permitted to visit him. She thereafter went to his home and talked to him about refinancing. Within a few days, he had mortgaged his home, in the manner described below, without telling any of his sons about the transaction.

In December 2000, Mr. Wheeler suffered another major stroke and went first to Memorial Hospital and then to Siskin Rehabilitation Hospital. While he was hospitalized, his sons learned of the refinancing when a debt collector called, threatening foreclosure. They could find no paperwork associated with the transaction. The debt collector would not release any information to the sons, even the address to which payments should be sent. Its representative merely said that the mortgage holder would proceed with foreclosure only a few months after the mortgage loan had been closed.

Mr. Wheeler’s Recollection of the Loan Closing

When he recovered sufficiently to discuss the transaction with his sons, Mr. Wheeler did not recall much of significance about the loan or the closing of it. He did not remember authorizing withdrawals from his bank account to make payments or that a new mortgage company was involved rather than the one with which he had dealt previously. He did not recall how much money he had borrowed or at what interest rate or that his house payments had increased considerably. He did not realize that his homeowner’s insurance and real property tax payments were no longer being paid from an escrow fund.

Mr. Wheeler could recall was that he had been promised $500, that he received payment in cash of an amount he could not remember, that he was told that he would have money to pay bills and to travel, that he had talked with a young woman, and that she had brought him beer and cigarettes. (His sons were unable to locate the cash or to find any record of its deposit to a bank account or other usage.) He remembered that two people (the young woman and a man whom he had not seen previously) were present, that they told Mr. Wheeler that they were in a hurry, and that they pointed to the places where he should sign. He said that a third person (whose identity he could not describe) remained in the automobile in which all three traveled to his home.

The sons, however, did later locate the telephone number of Tennessee Home Loan Mortgage, a mortgage broker, and made arrangements to visit its offices. Its representatives admitted that the first visit by Ms. Dawson was followed swiftly by a second one at which the loan closing occurred on the front porch of Mr. Wheeler’s home in the presence of two people -- Ms. Dawson and a male manager of Tennessee Home Loan. They revealed that the third person was Mr. Ensign. They, however, were uncooperative in other respects, declining for example to furnish Mr. Wheeler’s sons with copies of any documents. They advised that they had spoken with their attorney and had little oral and no written information to reveal. The documents described below in this Complaint were obtained later from other sources.

The Loan Application

The copy of the loan application available now to Mr. Wheeler is not dated but bears what appears to be the signature of Mr. Wheeler. It is on a form provided by eHomeCredit Corp., of Mineola, New York, and was submitted to that company. Despite the fact that the loan was said to have been “closed” on September 28, 2000, the application appears to have been taken thereafter. A fax machine notation appears at the top of the first page as follows: “OCT-O2-00 15:03 From: eHOMECREDIT CORP. 15162483725 T-535 P. 06/10 Job-979.” (As noted below, October 2, 2000 was the day before funds were scheduled to be disbursed but four days after the loan was said to have been closed.)

The application is almost bare of information although it does contain a signature purporting to be that of Mr. Wheeler. It does not list any of the following information:

▪ The purpose of the loan

▪ Whether the property would be used as a primary residence or for another purpose

▪ The original cost of the property

▪ The amount of the existing mortgage

▪ The cost of improvements to the property

▪ The source of payment for the closing charges

▪ The marital status of the applicant

▪ Whether or not the applicant has any dependents and, if so, how many

▪ Any assets of the applicant, whatsoever

▪ Whether the application was the result of a face-to-face interview or one by telephone or mail

▪ The signature of the interviewer

▪ The name of the interviewer

What information the loan application does contain about the income of the applicant is mistaken. It shows monthly income in the amount of $1,075. The correct amount was $860, which was the net amount then paid to Mr. Wheeler by Social Security after an automatic monthly reduction of $45.50 for Medicare premiums. (Nor were Medicare premiums shown as an expense, which should have been done if gross income were used.) The relevant income of the borrower is based on net or disposable income, not a gross figure that includes amounts Mr. Wheeler never received. His net income would not justify a $34,400 loan at an interest rate of 11.75% with monthly payments of $347.24 or 40.4% of a very small income.

The application also reveals the essentials of the proposed refinancing and the substantial increases it would cause:

Present Proposed Increase

Principal amount $ 25,626 $ 34,400 $ 9,626

Monthly payment $ 220.00 $ 347.24 $ 127.24

In return for the $9,626 in additional first mortgage debt, the applicant would pay off a total of $1,683 in unsecured debts and receive an unstated amount in cash.

The Settlement Statement

In the settlement statement, the payoff amount of the first mortgage loan increased without explanation to $26,949.71 from $25,626 in the loan application.

The fees paid to the lender, eHomeCredit, were as follows:

▪ Tax service fee $ 100

▪ Flood certificate $ 25

▪ Underwriting fee $ 495

Some and perhaps all of the charges were for services that were not performed. No escrow was established for taxes. No underwriting (an assessment of the creditworthiness of the borrower) was involved because there wasn’t even a loan application taken until after the loan closing. No credit report was ever obtained.

The fees paid to Tennessee Home Loan were as follows:

▪ Mortgage broker fee $ 1,654

▪ Yield spread premium $ 344

The “mortgage broker fee” presumably was for acting as the representative (hence the term “broker”) of the borrower and was payable by Mr. Wheeler. The “yield spread premium” is a euphemism for a kickback paid by a lender to a mortgage broker for bringing to it a loan for which it can charge a high interest rate, high closing fees, or both. These two separate fees paid to Tennessee Home Loan were unearned, excessive, and the product of illegal conduct. They show that it was being paid by both lender and borrower, that it was attempting to act as the representative of both, and thus that it was acting unfaithfully to Mr. Wheeler.

The fees paid to Mr. Ensign were as follows:

▪ Closing fee $ 235

▪ Title insurance $ 220

▪ Courier fee $ 50

Some and perhaps all of the charges were for services that were not performed. Mr. Ensign was not present at the closing though he may have prepared closing documents. He is not an insurance company though he may be an agent for one. It is unlikely that any expedited delivery charges – courier fees -- were incurred at all or at an inflated fee of $50.

The Mortgage Broker

By an undated document entitled “Mortgage Loan Origination Agreement,” Tennessee Home Loan attempted to define its role in the Wheeler loan transaction. The document apparently bears the signature of Mr. Wheeler, but it is not signed by Tennessee Home Loan. In it, Tennessee Home Loan attempts to characterize its relationship to Mr. Wheeler as that of an independent contractor, not his representative. Even if it had been signed by both parties, the document would not have been descriptive of the actual relationship of the parties. Mr. Wheeler was wholly dependent upon Tennessee Home Loan because he lacked the capacity to make decisions for himself; it had knowledge about real estate financing that he did not; it led him to believe that it was acting for his best interest; and he completely relied upon it in the transaction.

In a “Broker Affidavit” dated September 28, 2000, apparently signed by Mr. Wheeler, and notarized by Mr. Ensign, the fee of $1,654 paid to Tennessee Home Loan is characterized as a “brokerage fee” and a “Mtge. Broker Fee.” The brokerage or agency relationship is thus acknowledged. The existence of fiduciary duties flowing from the agent (Tennessee Home Loan) to the principal (Mr. Wheeler) is thus made clear.

The Promissory Note

The form of the promissory note appears to have been furnished by Fannie Mae and Freddie Mac for use throughout the United States. It is entitled “MULTISTATE FIXED RATE NOTE – Single Family – Fannie Mae/Freddie Mac UNIFORM INSTRUMENT.” It is described as “Form 3200 3/99.” It thus gives the impression that it is a trustworthy and standard form from reputable sources for the most crucial document in a lending transaction.

The note, however, contains a series of three attachments -- described as two riders and an addendum -- prepared by or at the instance of eHomeCredit with the knowledge and complicity of Mr. Ensign who acted as the closing agent and prepared some or all of the documents described in this Complaint. Each of the attachments is confusing and, cumulatively, they contradict the note’s first impression of trustworthiness. They cause it to become misleading.

The first rider becomes applicable only if the borrowed funds are disbursed after the scheduled funding date, an event which did not occur and which eHomeCredit, Tennessee Home Loan, and Mr. Ensign knew would not occur. (If it had applied, as it did not in this case, the rider would have caused the due date of the monthly payment to become, say, the 17^th day of the month to coincide with the date of disbursement which occurred, say, on the 17^th day of a month.) In Mr. Wheeler’s case, the settlement statement recited that the disbursement date would be October 3, 2000, and the note stated that the first payment was due on November 3, 2000. Thus, it was unnecessary to include the rider. The monthly payment would always be due on the 3^rd day of the month. The only purpose served by the rider was confusion.

The “Addendum” contains 24 possible changes to the note. At four pages, it is more verbose and inscrutable than the three-page note itself. Seven of the changes actually are not changes at all; they are specifically made inapplicable through phrases such as:

Please skip this paragraph 3, which applies to 2^nd mortgage notes only. Your loan is a 1^st mortgage loan.

Nine of the changes apply in some cases only to named states or, in other cases, to all states except one or more of the 17 states that are named in one place or another. Those states are: Arizona, Colorado, Delaware, Idaho, Kentucky, Maryland, Massachusetts, New York, North Carolina, Ohio, Oklahoma, Rhode Island, South Dakota, Texas, Utah, Virginia, and Wisconsin. Tennessee is not included.

Some of the remaining changes in the Addendum require the reader to go back and forth between the original text and the changes. To illustrate, Item 7 states:

The section of the Note entitled, “Borrower’s Right to Prepay” or alternatively “Borrower’s Payments Before They are Due,” is amended by: a) adding to the end of the first sentence the following language, “, but the Note Holder may apply any tendered payments first to any amounts then due and owing under this Note or under the Security Instrument.”; b) deleting the sentence which states, “The Note Holder will use all of my prepayments to reduce the amount of principal that I owe under this Note.”; and c) adding after the final sentence the following language, “Except as provided in the ‘Loan Charges’ section (if any) or otherwise provided by applicable law, the Note Holder earns any prepaid finance charge at the time the loan is made and no part of it will be refunded if I pay in full ahead of schedule.”

If a prepayment charge is contracted in connection with this loan, the section of the Note entitled, “Loan Charges” (if any) is amended by adding to the end of the final sentence the following language, “without any prepayment charge.”

The final rider compounds the reader’s difficulty by completely contradicting the language of Item 7 of the Addendum quoted above:

The section of the Note entitled “Borrower’s Right to Prepay” or alternatively “Borrower’s Payments Before They are Due,” is hereby deleted in its entirety and replaced with the following language [replacement language omitted].

The section of the Note regarding application of payments is hereby amended by adding prepayment charges to the list of charges which will be assess separately.

The result of this process was that the Note was unintelligible to many if not most lawyers, to virtually all lay persons, and to anyone in the physical and mental condition of Mr. Wheeler.

The Deed of Trust

The Deed of Trust repeats the same bewildering pattern sponsored by eHomeCredit in which both Mr. Ensign and Tennessee Home Loan participated. It is said to be modeled on “Form 3042 3/99” entitled “TENNESSEE – Single Family – Fannie Mae/Freddie Mac UNIFORM INSTRUMENT.” The borrower presumably is to take comfort in the fact that this 16-page, single-spaced document is approved by two reputable institutions -- Fannie Mae and Freddie Mac. Any such reliance would be entirely misplaced.

As if the 25 sections of the standardized form were not enough, the Deed of Trust in this transaction contains six more single-spaced pages in an Addendum containing 15 sections. It is entitled “MULTISTATE ADDENDUM TO 1^ST/2^ND FNMA/FHLMC SECUTITY INSTRUMENT GENERIC 4/30/98) … AMGO15B.USM.”

On page 4 of the Addendum, the lender, eHomeCredit, waived the requirement that the borrower make payment to the lender for taxes and insurance. It did so without advising Mr. Wheeler in any manner other than this obscure portion of the voluminous documentation for the transaction. It thus created a strong likelihood that insurance and tax payments would be overlooked by a borrower whose previous loan provided for an escrow, thus causing foreclosure to occur because of other provisions in the Deed of Trust.

To compound the inequity, the Addendum provides on page 5 that eHomeCredit may purchase insurance itself, at Mr. Wheeler’s expense, if he fails to do so, and candidly acknowledges that:

This insurance may, but need not, protect Borrower’s interest….The costs may be more than the cost of insurance the Borrower may be able to obtain directly because Lender will be purchasing insurance under a general policy that does not consider Borrower’s individual insurance situation.

The acknowledgement to the Deed of Trust recites that:

I, Peter C. Ensign, a Notary Public in and for [Hamilton County, Tennessee] do hereby certify that Allen L. Wheeler, Sr. whose marital status is: unmarried and who is personally known to me to be the same person(s) whose name(s) subscribed to the foregoing instrument, appeared before me this day in person, and acknowledged that they signed and delivered the said instrument as their free and voluntary act, for the uses and purposes therein set forth. [Italics added; underlining and grammatical flaws in the original.]

Given under my hand and official seal September 28, 2000.

My Commission Expires: 51703

/s/ Peter C. Ensign [seal affixed]

Mr. Wheeler was not known to Mr. Ensign, either personally or by identification through means such as a driver’s license. He did not appear personally before Mr. Ensign, the notary public who was also the lawyer who prepared many if not most of the closing documents. Mr. Ensign remained in the automobile throughout the entire transaction which closed in the peculiar setting of the residence of the borrower. In addition, Mr. Wheeler did not acknowledge that he signed the Deed of Trust, and his signing was not a free and voluntary act. Instead, it was a coerced and involuntary response to a misleading presentation by two representatives of Mr. Ensign and Tennessee Home Loan. Mr. Ensign thus violated his duties as a notary public.

The Truth-in-Lending Statement

The “Federal Truth-in-Lending Disclosure Statement” bears the apparent signature of Mr. Wheeler, the date of September 28, 2000, and notarization by Mr. Ensign. It shows an annual percentage rate of 12.762%, finance charges of $93,080.40, an amount financed of $31,926, and total payments of $125,006.40. The amount financed, and thus the other figures, is believed to be incorrect.

The Disclosure states that Mr. Wheeler wants an itemization of the amount financed, but he never received the same.

An explanation attached to the statement contains the following:

What about courier fees? They are very difficult to exclude as finance charges. The only way to exclude them is within a writing signed by the borrower where the borrower acknowledges that the Lender does not require the charge, and the Borrower wants to pay the fee because they prefer the title or settlement company to do the work instead of doing it themselves. See the annexed borrower fee disclosure as a guide.

The courier fees were apparently excluded from the computation of finance charges, thus lowering them impermissibly. No “borrower fee disclosure” was annexed. Mr. Wheeler signed no acknowledgment that eHomeCredit did not require the charge.

The Notice of the Right to Cancel

The “Federal Truth-in-Lending Notice of Right of Rescission” discloses the right of Mr. Wheeler to “cancel the transaction, without cost, within three business days from whichever of the following events occurs last: (1) the date of the transaction, which is September 28, 2000; or (2) the date you received your Truth in Lending disclosures; or (3) the date you received the notice of your right to cancel.” A fax machine notation appears at the top of the page as follows: “OCT-O2-00 15:02 From: eHOMECREDIT CORP. 15162483725 T-535 P. 02 Job-979.” No date appears on the Federal Truth-in-Lending Notice of Right of Rescission beside or near the apparent signature of Mr. Wheeler. The Truth in Lending disclosures are inaccurate and thus have never been given in the form required by law.

Cumulative Effect of the Documentation

Even if Mr. Wheeler had had the mental capacity to enter into the transaction, he could not have done so intelligently, carefully, and assuredly. No attorney, family member, or other representative was present to act in his behalf. The intention of the individuals and entities presenting documents to him was to overwhelm him with excessive, unnecessary, badly-worded, and mistake-filled documentation that created his total reliance upon those persons. They achieved this malevolent objective because the plethora of documents had the cumulative effect of creating obfuscation, confusion and fraud. These documents were prepared by, for, or for the benefit of eHomeCredit, Tennessee Home Loan, and Mr. Ensign.

CitiFinancial

In the loan closing documents available to Mr. Wheeler, the names “CitiFinancial” and its predecessor “Associates” do not appear. Yet, CitiFinancial now collects payments on the loan to Mr. Wheeler. It may only be the servicer of the loan, or it may also own the loan. Either way, it has the practical ability to trigger foreclosure proceedings if, as now appears likely, Mr. Wheeler is unable to make payments at a time when he is residing in a nursing home on a modest income. It thus is a proper party to the lawsuit.

In any future foreclosure or other legal proceedings, Mr. Wheeler should have available to him defenses that apply against the owner of a loan made under the circumstances described here, even if that owner had no knowledge of illegal conduct performed solely by others. The knowledge of potential defenses in a subsequent legal proceeding is not comforting to Mr. Wheeler, who prefers to determine his rights now and forever, especially because foreclosure seems likely unless he acts to stop it. He thus seeks a declaration of his rights against CitiFinancial.

CitiFinancial is a proper party to the lawsuit for still another reason. The Disclosure Statement says that “We [eHomeCredit] do not service mortgage loans.” It thus appears that servicing by CitiFinancial was anticipated from the outset of this transaction.

The complaint against the defendants alleges fraud, misrepresentation, and violations of the Tennessee Consumer Protection Act, the obligations of a notary public, the Truth in Lending Act, and the Real Estate Settlement Procedures Act. It seeks actual, compensatory, statutory, treble, and punitive damages, as well as the award of attorney fees and injunctive relief.