Gonzalez v. Old Kent Mortgage Co

Brief Fact Summary.

Plaintiff entered into a consumer credit transaction with the defendant. The defendant moved to dismiss several counts of the Amended Complaint.

Synopsis of Rule of Law.

A “home improvement installment contract” is exempt from certain fees, costs, and commissions under the HIFA and the term does not apply when “the loan is a contract for or obtained directly by the retail buyer from the lending institution, person or corporation.” Secondly, the Holder Rule preserves the consumer’s legal claims and defenses.

Facts.

The defendant, Old Kent Mortgage (the “defendant”), filed a motion to dismiss several counts of the Amended Complaint. According to the complaint, the plaintiff contacted Quality Builders concerning some home improvements. Quality Builders promised to obtain financing for the cost of the home improvements which cost $14,900.00. Quality Builders contacted Accelerated Mortgage who in turn, contacted the defendant to arrange financing. Rather than obtaining the original amount of $14,900.00, the plaintiff entered into a consumer credit transaction giving Old Kent a mortgage on her home in the amount of $36,000.00. The mortgage consolidated several debts and included various fees and origination costs.

Issue.

Is the loan considered a “home improvement installment contract” so that certain fees, costs, and commissions that accompanied the loan violate the Home Improvement Finance Act (HIFA)?
Is the defendant liable for the claims that the plaintiff has against Quality Builders?

Held.

Yes. The court found that the loan was a “home improvement installment contract” so the inclusion of certain fees, costs, and commissions was violative of the HIFA. The defendant contended that the loan was not a “home improvement installment contract” because it was a direct loan between the retail buyer and the lender and HIFA provides an exception for direct loans. The court determined that the loan was not a direct loan because “Quality Builders contacted Accelerated Mortgage who contacted Old Kent to arrange for financing.” Accelerated Mortgage identified themselves as an independent contractor who distributed loan products and Accelerated Mortgage received compensation from Old Kent for its services. Therefore, the court found that the loan was not a direct loan between the plaintiff and the defendant.
Yes. There was a contract between the defendant and the plaintiff that consisted of a loan agreement and a promissory note. The defendant failed to include in the promissory note the Notice of Preservation of Claims and Defenses required by the Federal Trade regulation. The defendant’s first claim was that because the Holder Rule Notice was not present, the plaintiff could not establish the necessary elements to prove a breach of contract: (1) the existence of a contact; (2) a breach of that contact; and (3) resulting damages. The defendant argued that since there were no terms in the contract to create liability, the claim should be dismissed. The court ruled that it would be improper to allow the defendant to avoid liability under the contract due to its failure to include the Holder Rule Notice in the loan documents. The defendant’s second argument was that even if the Holder Rule Notice appeared in the note, it would not be applicable to the current circumstances. The cou
rt found that this argument was flawed because “the language of the rule, the FTC commentary, and applicable case law support the use of the rule, if applicable, to preserve claims against the seller to defeat a creditor’s right to be paid under the note.” The FTC stated that the purpose of the rule is: “to preserve the consumer’s legally sufficient claims and defenses so that they may be asserted to defeat or diminish the right of a creditor to be paid, where a seller who arranges financing for a buyer fails to keep his side of the bargain.” The defendant’s final argument was that even if the Holder Rule Notice was present in this case and applied to these facts, it would still not support a claim for affirmative relief. The court found that there was nothing in the plaintiff’s complaint to indicate that the plaintiff was seeking to hold the defendant fully responsible for the plaintiff’s claims against Quality. The plaintiff was only seeking to argue that it need not pay on the
note.

Discussion.

The Notice of Preservation of Claims and Defenses states: “Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant hereto or with the proceeds hereof. Recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder.”