Sarno
v. Wells Fargo Bank

 

 

 

 

 

 

 

Filed
1/23/14  Sarno v. Wells Fargo Bank CA2/3

 

 

 

 

 

NOT TO BE PUBLISHED IN THE
OFFICIAL REPORTS

 

 

 

 

California Rules of Court, rule 8.1115(a),
prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b).  This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115.

 

 

 

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

 

SECOND APPELLATE DISTRICT

 

DIVISION THREE

 

 
>

JOHN C. SARNO,               Plaintiff and Appellant,               v.   WELLS FARGO BANK N.A.,               Defendant and Respondent.

B246952            (href="http://www.mcmillanlaw.us/">Los Angeles County          Super. Ct. No. BC485889)

 

            APPEAL
from judgment of the Superior Court of Los
Angeles County, Malcolm Mackey, Judge. 
Affirmed.

 

            Law
Offices of Barry K. Rothman and Fredric R. Brandfon for Plaintiff and Appellant.

 

            Severson
& Werson, Jan T. Chilton, Jon D. Ives and Kerry W. Franich for Defendant
and Respondent.

_____________________

>INTRODUCTION

Plaintiff
John C. Sarno (Plaintiff) appeals from the judgment entered in favor of
Defendant Wells Fargo Bank, N.A. (Wells Fargo) after the href="http://www.mcmillanlaw.us/">trial court sustained Wells Fargo’s
demurrer without leave to amend.  We
affirm.

In
November 2010, Wells Fargo provided Plaintiff a Good Faith Estimate (GFE) for a
home loan.  The GFE quoted an initial
interest rate of 4.25 percent.  Closing
was to occur at the end of November, but it was postponed for two months.  Immediately prior to the closing, Wells Fargo
allegedly informed Plaintiff that the interest rate had increased to 4.625
percent.  Plaintiff accepted the new
interest rate and proceeded with the closing.

Over
a year later, Plaintiff sued Wells Fargo, claiming the GFE constituted a
binding agreement to make a loan at the listed 4.25 percent interest rate and
that, under the GFE’s terms, the quoted interest rate was “available
indefinitely.”  The trial court rejected
this contention, as do we.

The
federal regulations governing GFEs expressly provide, “[i]f the interest rate
has not been locked, . . . loan terms related to the interest rate may
change.”  (24 C.F.R.
§ 3500.7(f)(5).)  Plaintiff admits
he did not lock the 4.25 percent interest rate quoted in the GFE.  And, contrary to Plaintiff’s contention, the
GFE cannot reasonably be interpreted as a binding href="http://www.sandiegohealthdirectory.com/">agreement to make a loan at
the quoted interest rate for an indefinite period of time.  The judgment is affirmed.

FACTUAL AND PROCEDURAL
BACKGROUND

Because this appeal is from a judgment following
the sustaining of a demurrer without leave to amend, we recite the material facts
pled in the complaint without passing on the truth of the allegations, but
disregard contentions, deductions and legal conclusions.  (Blank
v. Kirwan (1985) 39 Cal.3d 311, 318.)

In the fall of 2010, Plaintiff applied for
a loan from Wells Fargo to purchase real property located in Santa Fe Springs, California.  On
November 9, 2010, Wells Fargo provided Plaintiff a GFE, which set
forth a summary of the anticipated loan terms and estimated settlement
costs.  The GFE included an initial
interest rate quote of 4.25 percent.

In the section entitled
“Important dates,” the GFE provided:

“1.       The interest rate for this GFE is available through  N/A . After this time, the interest rate, some
of your loan Origination Charges, and the monthly payment shown below can
change until you lock your interest rate.

“2.       This estimate for all other settlement
charges is available through         11/22/2010.

“3.       After you lock your interest rate, you must go to href="http://www.fearnotlaw.com/">settlement within  N/A days (your rate lock period) to receive
the locked interest rate.

“4.       You must lock the interest rate at least  10  days
before settlement.”

Plaintiff opened escrow, which was
originally scheduled to close on November 30, 2010. 
However, the close of escrow was postponed to January 24, 2011.

Immediately prior to the January
24, 2011 close of
escrow, Plaintiff alleges Wells Fargo informed him the interest rate on his
loan had been increased to 4.625 percent. 
Wells Fargo did not consult Plaintiff before raising the interest rate.  Plaintiff, nevertheless, accepted the
increased interest rate and proceeded with the close of escrow.  After closing, Plaintiff unsuccessfully
attempted to negotiate with Wells Fargo to reduce the interest rate to 4.25
percent.

On June 4, 2012, Plaintiff filed a
complaint against Wells Fargo, asserting seven causes of action for (1) fraud;
(2) negligent misrepresentation; (3) intentional
interference with prospective economic advantage; (4) violation of Business
and Professions Code section 17200; (5) violation of Civil Code section 1750;
(6) breach of contract; and (7) breach of the implied covenant of good
faith and fair dealing.  Each cause of
action was premised on the legal theory that the GFE constituted a href="http://www.mcmillanlaw.us/">binding agreement to make a loan at an
interest rate of 4.25 percent and that, under the terms of the GFE, the
4.25 percent interest rate was “available indefinitely.”

Wells Fargo demurred to the complaint, asserting,
among other things, that the complaint failed to allege sufficient facts to
state a claim because the GFE did not, as a matter of law, constitute a binding
agreement to make a 4.25 percent interest rate loan for an indefinite period of
time.  In his opposition to the demurrer,
Plaintiff withdrew his claims for intentional interference with prospective
economic advantage and violation of Civil Code section 1750.

The trial court sustained the demurrer to
the remaining causes of action without leave to amend.  On January 29, 2013, the court entered judgment dismissing the
action.

>STANDARD
OF REVIEW AND CONTENTIONS

“We apply the de novo standard to review an
order sustaining a demurrer.  [Citation.]
 Since the trial court sustained the
demurrer without leave to amend, we must determine ‘whether there is a
reasonable probability that the complaint could have been amended to cure the
defect; if so, [we] will conclude that the trial court abused its discretion by
denying the plaintiff leave to amend.’  [Citation.]  It is plaintiff’s burden to establish that
the complaint could be amended to cure any pleading defect.  [Citation.]” 
(Barroso v. Ocwen Loan Servicing,
LLC (2012) 208 Cal.App.4th 1001, 1008 (Barroso).)

Plaintiff challenges the judgment on two
grounds.  First, Plaintiff contends a GFE
is a binding agreement between a loan originator and a borrower, the terms of
which can be amended only by issuing the borrower a revised GFE.  Second, Plaintiff contends the 4.25 percent
interest rate was, under the terms of the GFE provided by Wells Fargo,
available for an indefinite period of time. 
We disagree on both counts.

As we shall explain, although a loan
originator is generally bound by the terms listed in a GFE pertaining to loan
settlement service charges, the governing federal regulations make clear that
with respect to the listed interest rate, the lender is bound only during the
period specified in the GFE or while the interest rate is locked.
(24 C.F.R. § 3500.7(c), (e)(1)(ii) & (f)(5).)  Plaintiff admits that he did not lock the
4.25 percent interest rate.  As for
Plaintiff’s contention that the 4.25 percent interest rate was available for an
indefinite period of time, we hold that the terms of the GFE are not reasonably
susceptible of this interpretation.

DISCUSSION

1.         The
Interest Rate Listed on a GFE Is Binding Against the Loan Originator Only During
the Period Specified or While the Interest Rate Is Locked

The Real Estate Settlement Procedures Act (RESPA)
requires mortgage lenders to disclose the costs associated with real estate
closings.  (12 U.S.C. § 2601.)  The statute aims to ensure that loan
applicants are “provided with greater and more timely information on the nature
and costs of the settlement process and are protected from unnecessarily high
settlement charges . . . .”  (>Ibid.) 
To advance this purpose, RESPA requires lenders to provide “a good faith
estimate [GFE] of the amount or range of charges for specific settlement
services the borrower is likely to incur in connection with settlement . . .
.”  (12 U.S.C. § 2604(c).)

Effective January 16, 2009, the Department
of Housing and Urban Development (HUD) revised its regulations governing GFE’s
(24 C.F.R. § 3500.7) and adopted a new GFE form that requires lenders to
disclose certain loan terms, including the initial interest rate, along with
the various settlement charges that RESPA seeks to regulate.  (73 Fed.Reg. 68204, 68213-68216 (Nov.
17, 2008).)  In adopting this requirement, HUD determined
that “consumer understanding of mortgage loans and of their settlement costs
will be greatly enhanced by requiring disclosure of certain loan terms in a
clear, user-friendly format on the GFE.” 
(Id. at p. 68214.)  In HUD’s view, the disclosure of key loan
terms “furthers RESPA’s purpose to ‘provide more effective advance disclosure
to homebuyers and sellers of settlement costs’ ” since “disclosure of [certain]
settlement costs [would be] meaningless (and therefore ineffective), absent the
context provided by simultaneous disclosure of some loan terms.”  (Id.
at p. 68215.)

Given RESPA’s focus on settlement charges,
it is not surprising that the interest rate receives different treatment in
HUD’s governing regulations.  Under HUD’s
regulations, “the estimate of the charges and terms for all settlement services
must be available for at least 10 business days from when the GFE is provided . . . .”  (24 C.F.R. § 3500.7(c).)  However, the estimates for “the interest rate
[and] charges and terms dependent upon the interest rate” are “excepted from
this requirement[.]”  (>Ibid.) 
In its comments concerning the “Period During Which the GFE Terms Are
Available to the Borrower,” HUD stated it was “not requiring the interest rate
to be available for any specific length of time”; rather, the “the interest
rate stated on the GFE [would] be available until a date set by the loan
originator for the loan.”href="#_ftn1"
name="_ftnref1" title="">[1]  (73 Fed.Reg., supra, at p. 68216.) 
“After that [date], the interest rate [and] the interest rate related
charges . . . could change until the interest rate is locked.”  (Ibid.)

Consistent with this exception from the 10
business days requirement, HUD’s regulations create additional carve-outs for
the interest rate listed on the GFE. 
Indeed, this is true of paragraph (f), which Plaintiff relies upon as
the lynchpin for his argument that Wells Fargo could not change the interest
rate without issuing a revised GFE. 
Paragraph (f) provides:  “The loan
originator is bound, within the tolerances provided in paragraph (e) of this
section, to the settlement charges and terms listed on the GFE provided to the
borrower, unless a revised GFE is provided prior to settlement consistent with
this paragraph (f) . . . .”  (24 C.F.R. §
3500.7(f).)  The carve-out for “the
tolerances provided in paragraph (e)” is notable, because paragraph (e)
specifically addresses charges related to the quoted interest rate.  With respect to those charges, paragraph (e)
expressly states that those charges are binding only “[w]hile the borrower’s
interest rate is locked.” 
(24 C.F.R. § 3500.7(e) [“the actual charges at settlement may not
exceed the amounts included on the GFE for [¶] . . . [¶] (ii) >While the borrower’s interest rate is locked,
the credit or charge for the interest rate chosen; [¶] (iii) >While the borrower’s interest rate is locked,
the adjusted origination charge . . . .”], italics added.)

Likewise, paragraph (f)(5) provides that “[i]f the
interest rate has not been locked, or a locked interest rate has expired, the
charge or credit for the interest rate chosen, the adjusted origination charges,
per diem interest, and loan terms related to the interest rate may change.”  (24 C.F.R. § 3500.7(f)(5).)  As HUD explained, this exemption for interest
rate-related charges necessarily extends to the quoted interest rate
itself:  “The final rule also clarifies
that, where a borrower has not locked a particular interest rate . . . all
interest rate-dependent charges on the GFE are subject to change. . . . >Of course, the various specific places where
the interest rate is identified on the GFE would also be subject to change if
the interest rate is not locked.”  (73
Fed.Reg., supra, at p. 68221, italics
added.)  Further, it is only “[w]hen the
interest rate is later locked, [that]
a revised GFE must be provided showing the revised interest rate-dependent charges
and terms.”  (24 C.F.R.
§ 3500.7(f)(5), italics added; see also 73 Fed.Reg., supra, at p. 68221 [“If the borrower later locks the interest
rate, a revised GFE should be provided at that time to show the revised
information.”].)

“ ‘Generally, the same rules of
construction and interpretation which apply to statutes govern the construction
and interpretation of rules and regulations of administrative agencies.  [Citation.]’  [Citation.]  Courts do not examine statutory language ‘in
isolation, but in the context of the statutory framework as a whole in order to
determine its scope and purpose and to harmonize the various parts of the
enactment.’  [Citation.]  We are required to construe a provision ‘with
reference to the entire scheme of law of which it is part so that the whole may
be harmonized and retain effectiveness’ [citation] and to avoid an
interpretation that renders language a nullity [citation].’ ”  (May v.
City of Milpitas (2013) 217 Cal.App.4th 1307, 1336.)  “ â€˜While the interpretation of a statute
is ultimately a question of law, appellate courts will defer to an
administrative agency’s interpretation of a statute or regulation involving its
area of expertise, unless the interpretation flies in the face of the clear
language and purpose of the interpreted provision.’ â€  (Estrada
v. City of Los Angeles (2013) 218 Cal.App.4th 143, 148-149.)

Plaintiff’s contention that a lender must provide a
revised GFE before it may settle a loan at a different interest rate is not
consistent with RESPA’s statutory purpose or the regulatory framework governing
GFEs.  HUD’s regulations and the agency’s
interpretation of those regulations make clear that the initial interest rate
is disclosed in the GFE to give context to the settlement charges that are
RESPA’s primary focus.  Thus, while most
of the settlement charges are binding against the lender for a minimum of
10 business days after the GFE is issued, the regulations expressly exempt
the interest rate from this requirement. 
The interest rate is binding against the lender only during the period
of time specified in the GFE.  (See 24
C.F.R. § 3500.7(c), (e)(ii) & (e)(iii).)

The obligation to provide a revised GFE
also has a carve-out for the interest rate. 
Unlike other settlement charges, with respect to the interest rate, the
regulations contemplate that a revised GFE will be provided only “[w]hen the
interest rate is later locked . . .
.”  (24 C.F.R. § 3500.7(f)(5), italics
added.)  Focusing on paragraph (f) in
isolation, as Plaintiff urges, would ignore the various carve-outs and express
exemptions provided for the interest rate in the regulations governing GFEs.href="#_ftn2" name="_ftnref2" title="">[2]

Congress intended RESPA and the GFE to
protect prospective borrowers from exorbitant settlement charges by
facilitating shopping among lenders.  (73
Fed.Reg., supra, at p. 68216 [“[a]
central purpose of RESPA regulatory reform is to facilitate shopping in order
to lower settlement costs”].)  Neither
RESPA nor HUD’s regulations manifest a legislative intent to establish the GFE
as a substitute for an interest rate lock agreement.  On the contrary, HUD’s regulations and its
interpretive commentary suggest just the opposite.

Here, Plaintiff admits he never locked an
interest rate.  He nevertheless contends
he had no reason to “concern himself with a future change in [interest] rate,
because the date on which those future changes would begin to occur was not
specified” in the GFE.  Consequently,
Plaintiff avers, he “never thought that his rate was subject to change.”  We now consider whether the subject GFE is
reasonably susceptible of Plaintiff’s proffered interpretation.

2.         The GFE Is Not
Reasonably Susceptible of the Interpretation that the Listed Interest Rate
Would Be Available for an Indefinite Period of Time

Plaintiff contends that, under the terms of
his GFE, Wells Fargo was bound by the listed 4.25 percent interest rate
indefinitely, if it ever decided to make the loan.  Plaintiff premises his contention on the
following clause from the “Important dates” section of the subject GFE:  “The interest rate for this GFE is available
through                                                                                       N/A
.  After this time, the interest rate,
some of your loan Origination Charges, and the monthly payment shown below can
change until you lock your interest rate.” 
Plaintiff contends that, “[b]y not providing a date after which the
interest rate may change, [Wells Fargo] was informing [Plaintiff] that there
was no such date,” and the interest rate could not be changed.href="#_ftn3" name="_ftnref3" title="">[3]  We disagree.

“ ‘Where a written contract is pleaded by
attachment to and incorporation in a complaint, and where the complaint fails
to allege that the terms of the contract have any special meaning, a court will
construe the language of the contract on its face to determine whether, as a
matter of law, the contract is reasonably subject to a construction sufficient
to sustain a cause of action for breach.’  [Citation.]  Moreover, ‘[t]he rule on demurrer is simply a
variation on the well-recognized theme that “[i]t is . . . solely a judicial
function to interpret a written instrument unless the interpretation turns upon
the credibility of extrinsic evidence.” [Citations.]’ [Citation.]”  (Davies
v. Sallie Mae, Inc. (2008) 168 Cal.App.4th 1086, 1091.)

“A contract must receive such an
interpretation as will make it lawful, operative, definite, reasonable, and
capable of being carried into effect, if it can be done without violating the
intention of the parties.”  (Civ. Code, §
1643.)  “ ‘ “The court must avoid an
interpretation which will make a contract extraordinary, harsh, unjust, or
inequitable.” â€™ â€  (>Barroso, supra, 208 Cal.App.4th at p. 1013.)

The clause providing that “[t]he interest
rate for this GFE is available through
N/A
” cannot be reasonably interpreted to bind Wells Fargo to the quoted 4.25
percent interest rate indefinitely.  Such
an interpretation would make an extraordinary contract, and one with
potentially harsh and inequitable consequences for both parties.  This case demonstrates the point.  After a two-month postponement of the
closing, Wells Fargo was willing to make the loan only at an interest rate of
4.625 percent.  As Plaintiff
acknowledges, and paragraph (g) of HUD’s governing regulations provides, “[a]
GFE is not a loan commitment” and nothing in the GFE is to be interpreted to “require
a loan originator to make a loan to a particular borrower.”  (24 C.F.R. § 3500.7(g), italics omitted.)  Thus, if Plaintiff’s interpretation of the
clause were correct, Wells Fargo would be left with only two options:  (1) make the loan to Plaintiff on terms that
are not supported by prevailing market rates, or (2) refuse to make the
loan—leaving Plaintiff without means to purchase the desired real property.href="#_ftn4" name="_ftnref4" title="">[4]  That cannot be what the parties intended.

If “N/A” in the subject clause does not
mean that the interest rate would be available indefinitely, then it can only
mean that the rate was not guaranteed for any amount of time.  Such an interpretation comports with common
usage of the abbreviation “N/A,” which “can mean ‘not available’ as well as ‘not
applicable.’ ”  (In re C.B. (2010) 190 Cal.App.4th 102, 146; see also Evid. Code, §
451, subd. (e).)  The interpretation also
is consistent with the governing HUD regulations, which make clear that there
is no minimum period of time for which the lender must make the interest rate
listed in a GFE available to a prospective borrower.  (24 C.F.R. § 3500.7(c); see also 73 Fed.Reg.>, supra, at p. 68216.)  And, this interpretation is bolstered by the
GFE’s definite statement that the “estimate for all other settlement charges is
available through 11/22/2010”—10 business days after the November 9, 2010 date
of the GFE, as required by the governing regulations.  (24 C.F.R. § 3500.7(c).)

Because the 4.25 percent interest rate
listed in the subject GFE was not binding upon Wells Fargo for any period of
time, each of Plaintiff’s causes of action fails as a matter of law.  The demurrer was properly sustained without
leave to amend.

DISPOSITION

The judgment
is affirmed.  Defendant is awarded its costs
on appeal.

 

            NOT TO BE
PUBLISHED IN THE OFFICIAL REPORTS

 

 

 

 

                                                                                    KITCHING,
J.

We concur:

 

 

 

 

                                    KLEIN,
P. J.

 

 

 

 

                                    ALDRICH,
J.