A recent state Supreme Court ruling makes it significantly tougher for aggrieved North Carolina consumers to prove they were victimized by unfair and deceptive business practices, according to consumer advocates.
The decision, they say, undercuts North Carolina’s consumer protection law, which had been viewed as one of the nation’s strongest.
“It means that victims of unfair practices … won’t have a remedy” in many cases, said Carlene McNulty, director of litigation at the N.C. Justice Center. “The general tenor of the anti-consumer nature of the opinion is troubling.”
But Gary Salamido, a vice president at the N.C. Chamber, praised the high court’s decision.
“We think that the court made a common sense ruling that gives proper consideration to both the consumer rights and the business rights in this particular issue,” he said. “We felt it was fair.”
The Supreme Court’s 5-2 decision in Bumpers v. Community Bank of Northern Virginia, issued Aug. 28, overturned lower court rulings that awarded two consumers thousands of dollars in damages for fees they paid in conjunction with second mortgages. The consumers argued they paid a fee for a discounted loan but never received a discounted interest rate. They also argued that they were charged excessive closing costs.
A critical finding in the majority opinion, written by Justice Paul Newby, was the determination that consumers must show that misrepresentations by the bank were a factor in their decision to enter into the loans, which in legal parlance is known as reliance.
That was the legal argument put forth by Community Bank. The bank contended that the consumers took out the second mortgages based on the total package – the fees and the interest rates – and not “because they believed they were receiving discounted loans,” the court noted.
The court also overturned the claim of excessive fees, reasoning that “in most cases, there is nothing unfair or deceptive about freely entering a transaction on the open market.”
Justices Robin Hudson and Cheri Beasley issued dissenting opinions that contend the majority misread state law and legal precedent.
Beasley wrote that the ruling on the issue of reliance sets an unreasonably high hurdle for consumers that “opens the door to an array of new fees intended to pad a company’s bottom line rather than to reflect the fair cost of a good or service.”
For example, a bank can now impose a “safety deposit box rental fee” without actually renting a safety depot box to a consumer without fear of repercussions, she wrote.
“As long as the customer had some other reason that he might have chosen to do business with the bank, such as being an existing account holder, he can never show that, but for the misrepresentation, he would not have conducted business with the bank,” Beasley wrote.
Attorney General Roy Cooper, whose office filed a brief in support of the consumers, also found the reliance issue problematic.
“You shouldn’t have to show reliance by the consumer if a lender rips them off,” Cooper said in an interview. “It should be enough to show deception and harm.”
Cooper said the ruling is especially worrisome because loans are so complex.
“The bank almost always knows a lot more than the consumer,” he said. “So there should be a high standard of honesty and integrity for the bank in presenting the charges and fees a consumer has to pay.”
650 borrowers estimated
The lawsuit was filed in 1999 and for years was shifted back and forth between Wake County Superior Court and federal court in Pittsburgh.
The lawsuit was brought by two consumers, Travis T. Bumpers of Knightdale and Troy Elliott of Raleigh, but sought certification as a class action.
“Based on information provided by Community Bank in discovery, we estimate that approximately 650 North Carolina borrowers paid loan discount fees on their loans from Community Bank but did not receive a quote discount unquote,” said Jerry Hartzell, a Raleigh lawyer who represented the consumers.
“We are considering what further steps can be taken in light of the Supreme Court’s ruling,” Hartzell added. “We believe there may be other legal theories under which it is improper for a lender to charge loan discount fees but failed to provide loans with a reduction or discount in the interest rates.”
However, the high court ruling found that there was “conflicting evidence” as to whether the consumers received discounted loans or not.
Community Bank of Northern Virginia was acquired by Baltimore-based Mercantile Bankshares in 2005. The corporate parent of Pittsburgh-based PNC Bank purchased Mercantile in 2007.
PNC spokesman Fred Solomon said the bank doesn’t comment on litigation.
The consumers who brought the case obtained second mortgages from Community Bank in 1999 after receiving mailings from the bank.
Bumpers, who borrowed $28,450 at an interest rate of 16.99 percent, paid $4,828 in fees. The fees included a $1,280 loan discount fee and $1,180 in closing fees, which the lawsuit claimed was excessive compared to prevailing rates at that time.
Elliott, who borrowed $35,000 at an interest rate of 12.99 percent, paid $5,650 in fees, including a $1,400 loan discount fee and $1,145 for closing services.
Bumpers, according to court documents, finalized his loan at a women’s lingerie store where a notary public handled the paperwork.
The case was originally filed in Wake County Superior Court, where Judge John B. Lewis Jr. ruled in the consumers’ favor after they requested a summary judgment. The damages awarded, which included interest and treble damages under state law, totaled $9,003 for Bumpers and $9,732 for Elliott.
On appeal, the N.C. Appeals Court affirmed the lower court ruling regarding the loan discount fees but reversed the decision with regard to the claims of excessive title fees. The appellate decision was then appealed by the bank to the state’s highest court.
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