Fraud or Contract? Homebuyers & Citi Argue

OAKLAND, Calif. (CN) – Lawyers for a group of homeowners clashed with Citibank attorneys at a Tuesday hearing on whether the mortgage loan servicer committed fraud by charging delinquent borrowers unnecessary fees for property inspections.

In an order denying the homeowners class certification last year, U.S. District Judge Yvonne Gonzalez Rogers said the case hinges on a contract dispute, as the mortgage terms govern the validity of the charges, and inspection fees are authorized by the plaintiffs’ mortgage agreements under certain circumstances.

“Citi’s liability rises or falls on whether a fact-finder determines that a property inspection fee was authorized by the borrower’s mortgage agreement,” she wrote.

At the Tuesday hearing, Gonzalez-Rogers asked whether the plaintiffs, who live in Alabama, could choose to bring a fraud claim under Alabama law over a breach of contract claim.

In her 2012 lawsuit, lead plaintiff Gloria Stitt claimed Citi colluded with subsidiaries, affiliates and vendors on a profit-making scheme to charge unnecessary and marked-up fees to homeowners for property inspections once they defaulted on their mortgage payments. Stitt said vendors padded fees “often by 100% or more,” but never informed borrowers of the markups or profits. A borrower named Diana Ellis brought a similar lawsuit against J.P. Morgan Chase.

“It’s not a breach of contract to defraud someone of money by asking them for money they’re not obligated to pay: It’s fraud,” said Daniel Alberstone, attorney for the Citi plaintiffs.

He said that Citibank had been told explicitly by investors not to charge delinquent borrowers for certain inspections, but went ahead and charged them anyway.

“It would be like me asking you for money that I had no business asking you for and trying to sneak it by you, and you end up paying because you think that person is charging you for things they’re allowed to. That’s not a breach, that’s fraud,” he told the judge.

But Gonzalez-Rogers said: “If there is no contract, then there is no loan, then there is no relationship, then there are no inspections. You can’t ignore the existence of the document which is fundamental to the claim.”

“I’m not saying to ignore it,” Alberstone said. “But let’s keep it straight here. This is a relationship between the borrower and the lender. Then we enter the world of a loan servicer, which is distinct from a lender. What the loan servicer has done was systematically rob people of money when they were told by the lender not to charge the borrowers. I don’t see how that’s a breach of contract.”

Citibank attorney Stephen Kane countered that the case is about a simple breach of contract, and that the plaintiffs “are just trying to spin a contract claim into a fraud suit.”

He added: “Courts are repeatedly holding that servicers are allowed to charge delinquent borrowers for inspections.”