Find Legal Information

FIFTH DIVISION

November 13, 1998

No. 1-98-0930

JUSTICE GREIMAN delivered the opinion of the court:

This is a case of first and last impression for Illinois, the Illinois General Assembly havingrecently addressed the issue about which plaintiffs complain. Unfortunately for plaintiffs, the newstatute is prospective in its application.

Plaintiffs Maria and Joaquin Perez filed a class action complaint against defendants CiticorpMortgage, Inc., and Citibank, F.S.B. (collectively referred to as Citicorp), and John Does 1through 10, representing the unnamed corporate officers of Citicorp. Plaintiffs based theircomplaint on the allegation that Citicorp, as a mortgage lender, improperly failed to disclose toplaintiffs, as mortgage borrowers, the circumstances under which borrowers could terminate theirpayment of private mortgage insurance (PMI). PMI protects the mortgage lender in the event themortgage borrower defaults.

Upon Citicorp's section 2-615 motions (735 ILCS 5/2-615 (West 1996)), the trial court dismissedplaintiffs' three counts, as alleged in both their original and amended complaints, for failure tostate a cause of action. We affirm the order dismissing all three counts of plaintiffs' complaints.

The three issues raised on appeal are whether a mortgage lender's failure to disclose to mortgageborrowers the circumstances under which the payment of PMI premiums can be terminated (1)constitutes an unfair and deceptive practice under the Illinois Consumer Fraud and DeceptiveBusiness Practices Act (Act) (815 ILCS 505/2 (West 1996)), (2) breaches the covenant of goodfaith and fair dealing, and (3) unjustly enriches the lenders.

Although no Illinois court has yet addressed these issues, the disclosure regarding cancellation ofPMI, as urged by plaintiffs-mortgagors, is now required by law under the Mortgage InsuranceLimitation and Notification Act (765 ILCS Ann. 930/1 et seq. (Smith-Hurd Supp. 1998)). Section15 of this new act is entitled "transaction disclosure" and specifically provides as follows:

"After July 1, 1998, if a person enters into a transaction to obtain a mortgage for his or herprincipal residence and private mortgage insurance may be required in connection with thattransaction, the mortgagee shall disclose in writing all of the following:

(1) Whether private mortgage insurance will be required to be obtained or maintained withrespect to the mortgage.

(2) The period during which the insurance shall be required to be in effect.

(3) The conditions under which the mortgagor may cancel the insurance.

(4) That the mortgagor will be notified not less than annually of an address and telephonenumber that may be used to contact the mortgagee to determine whether or not theinsurance may be terminated and, if the insurance may be terminated, the conditions andprocedures for termination." 765 ILCS Ann. 930/15 (Smith-Hurd Supp. 1998).

This act only applies to mortgages obtained on or after July 1, 1998, i.e., the effective date of thenew act (765 ILCS Ann. 930/5, 99 (Smith-Hurd Supp. 1998)), and, therefore, does not apply tothe present appeal.

On November 27, 1984, plaintiffs entered into a 30-year adjustable rate mortgage in the amountof $27,900 with Citicorp to purchase their home. In the fall of 1986, plaintiffs requested that themortgage be converted to a 15-year fixed rate mortgage and Citicorp executed the conversion inearly 1987. For both mortgage loans, Citicorp required plaintiffs to purchase PMI because theyhad less than 20% equity in their home at the time of the transactions. The mortgage contract,however, required plaintiffs to pay for PMI "until the Note is paid in full."

By early 1983, plaintiffs' loan was less than 80% of the value of the property, although Citicorpcontinued to bill plaintiffs for PMI. In May 1996, plaintiffs requested cancellation of their PMIand Citicorp canceled the PMI policy in September 1996.

On March 14, 1997, plaintiffs filed their original complaint with three counts, alleging a violationof the Act (count I), a breach of the covenant of good faith and fair dealing (count II), and unjustenrichment (count III). Citicorp filed a section 2-615 motion to dismiss plaintiffs' complaint.Following a hearing on October 20, 1997, the trial court dismissed counts I and II but allowedplaintiffs leave to amend their complaint as to these two counts. The trial court dismissed theunjust enrichment count with prejudice.

On November 17, 1997, plaintiffs filed their amended complaint, again alleging violations of theAct (count I) and the covenant of good faith and fair dealing (count II). Also in their amendedcomplaint, plaintiffs specifically incorporated by reference the unjust enrichment count from theiroriginal complaint and thereby preserved the right to appeal that count. Thereafter, the trial courtgranted Citicorp's section 2-615 motion to dismiss for failure to a state a cause of action.

In their amended complaint, plaintiffs stated that Citicorp required mortgagors to purchase PMIwhere their equity in the property constituted less than 20% of the loan-to-value (LTV) ratio.Plaintiffs alleged that Citicorp was aware that it would sell its residential loans to an investor andretain servicing rights. Investors require PMI coverage for all loans in which the borrower hasless than 20% equity in the property and Citicorp's contracts with investors dictate thecircumstances under which PMI coverage may be terminated. Once the borrower has at least 20%equity in the property, and certain other conditions are met, investors require servicers, such asCiticorp, to permit mortgagors to cancel their PMI coverage. Plaintiffs maintained that PMIcovers only the top 20% of the loan value and, thus, no benefit obtains after the 80% LTV hasbeen reached.

Plaintiffs' complaint further alleged that Citicorp was aware of these conditions for cancellationof PMI for as long as it had serviced mortgages on behalf of investors and did not informmortgagors, unless they affirmatively requested such information, that it had assigned theborrower's loan or that investors would permit PMI cancellation. Plaintiffs stated that they didnot realize that they could cancel PMI until reading a newspaper article relating to lawsuitsregarding PMI cancellation.

Plaintiffs further alleged that contracts and policy manuals, which govern the relationshipbetween Citicorp and investors, are not readily available to mortgagors. Mortgagors wereunaware of their right to cancel PMI pursuant to the contracts between Citicorp and investors.Plaintiffs are neither parties to the PMI contract nor do they have access to the policy documents.Citicorp assumes responsibility for determining the need for PMI, arranging PMI coverage, andcalculating, collecting and paying the amounts due for PMI each year.

Plaintiffs alleged that Citicorp receives "commissions and/or kickbacks from the insurancecompany which provides the PMI coverage." Citicorp has a practice of charging the same PMIpremium over the course of the loan rather than reducing the premiums to reflect the reduced riskby reason of the reduction of the borrower's debt. Plaintiffs asserted that Citicorp had a duty todisclose the terms and circumstances under which PMI coverage could be terminated becauseCiticorp was in a position of superior knowledge to the mortgagors and because Citicorp chargedand collected PMI coverage.

Plaintiffs alleged that Citicorp deliberately and intentionally failed to disclose to plaintiffs and itsother mortgagors the fact that PMI coverage may be canceled, the terms and conditions underwhich PMI can be canceled, and its written policies regarding PMI cancellation. Furthermore,Citicorp continued to charge mortgagors for PMI coverage after they had more than 20% equityin the homes.

Regarding the statutory fraud count (count I), plaintiffs alleged that they suffered injury becausethey were unable to compare Citicorp's terms regarding cancellation of PMI with those of otherlenders on the terms offered or to make informed decisions regarding the amount of a downpayment and/or additional principal payments. Plaintiffs further alleged that the terms of the PMIcancellation constituted a material fact to the mortgagors and the payment of PMI premiumsconstituted a significant expense to the mortgagors. Citicorp is further alleged to have intendedthat the mortgagors act in reliance on its failure to disclose the terms under which PMI coveragemay be terminated and such failure to disclose is a proscribed unfair and deceptive practice.

In count II, plaintiffs alleged that Citicorp breached the implied covenant of good faith and fairdealing in the contracts with the mortgagors by (1) continuing to bill for the PMI premium afterthe 80% LTV ratio had been reached, (2) collecting unnecessary PMI premiums from themortgagors, and (3) failing to disclose the terms and conditions under which PMI can beterminated.

The unjust enrichment count in the original complaint (count III) alleged that Citicorp obtainedimpermissible profits from its mortgagors' PMI policies by failing to disclose the circumstancesunder which the mortgagors could avoid, minimize or terminate payment of PMI premiums.Plaintiffs alleged that these profits obtained by Citicorp wrongfully conferred a benefit uponCiticorp and to allow Citicorp to retain such benefit would be inequitable.

On February 26, 1998, the trial court granted Citicorp's section 2-615 motion to dismiss theamended complaint with prejudice. Our review of a dismissal under section 2-615 is de novo.Vernon v. Schuster, 179 Ill. 2d 338, 344 (1997). We must take as true all well-pled allegations offact contained in the complaint and construe all reasonable inferences therefrom in favor of theplaintiff. Vernon, 179 Ill. 2d at 341. A section 2-615 motion attacks the legal sufficiency of acomplaint and our inquiry under these circumstances is whether the allegations of the complaint,when viewed in a light most favorable to the plaintiff, are sufficient to state a cause of actionupon which relief can be granted. Vernon, 179 Ill. 2d at 344.

First, plaintiffs assert that their complaint stated a cause of action for violation of the Act, arguingthat Citicorp engaged in an unfair and deceptive practice by its concealment, omission andsuppression of material facts concerning the right to cancel PMI at the request of the mortgagorsand by requiring mortgagors to pay for an unnecessary and unwanted product. Plaintiffs maintainthat PMI serves no purpose where the value of the property is sufficient to support the loan and,thus, is useless. Plaintiffs further argue that the terms of their mortgage contract do not precludetheir claims because the issue is not what the mortgage says but Citicorp's concealment of itspolicy and practice. Moreover, the cancellation was not prohibited by the mortgage.

Citicorp contends that plaintiffs failed to plead any unfair or deceptive conduct on the part ofCiticorp. Citicorp argues that plaintiffs have no "right" to cancel PMI and, thus, have no "right"to disclosure of cancellation information. The mortgage agreement fully discloses and expresslyrequires that plaintiffs pay PMI "until the Note is paid in full." Citicorp further argues thatrequiring life-of-loan PMI is not an "unfair practice" and, contrary to plaintiffs' claim, the PMIpolicy provides valuable insurance coverage until the loan is fully repaid. We agree withCiticorp.

The instant mortgage specifically provides that plaintiffs pay PMI premiums for the life of theloan. Paragraph two of the mortgage provides in relevant part as follows:

"Subject to applicable law or to a written waiver by Lender, Borrower shall pay to Lenderon the day monthly payments are due under the Note, until the Note is paid in full, a sum('Funds') equal to one-twelfth of: (a) yearly taxes and assessments imposed bygovernmental bodies which may attain priority over this Security Instrument; (b) yearlyleasehold payments or ground rents on the Property, if any; (c) yearly hazard insurancepremiums; (d) yearly mortgage insurance premiums, if any." (Emphasis added.)

Paragraph seven of the mortgage provides in relevant part as follows:

"If Lender required mortgage insurance as a condition of making the loan secured by thisSecurity Instrument, Borrower shall pay the premiums required to maintain the insurance ineffect until such time as the requirement for the insurance terminates in accordance withBorrower's and Lender's written agreement or applicable law."

The note and mortgage do not disclose the conditions under which PMI may be terminated.

The PMI policy expressly confers 20% coverage to the lender for the life of the loan in the eventthe borrower defaults, regardless of the amount of equity accrued by the borrower. If theborrower defaults, the amount the lender would obtain depends primarily on the amount of theunpaid balance. The policy states:

"The amount of loss payable to the insured [Citicorp] shall be limited to the unpaidprincipal due under the mortgage loan agreement, accumulated interest computed at thecontractual rate provided therein through the date of the tender of conveyance (penaltyinterest excluded), real estate taxes and hazard insurance premiums necessarily advancedby the insured, any reasonable and necessary expenses incurred by the insured in thepreservation of the mortgaged real estate, and all necessary expenses of any appropriateproceedings, including court costs and reasonable attorneys' fees not exceeding three percent (3%)of such unpaid principal balance and accumulated interest."

As a mortgage lender, Citicorp is subject to the Act (Mid-America National Bank v. First Savings& Loan Association, 161 Ill. App. 3d 531, 540 (1987) (the Act may be applied to mortgagelenders)), which provides as follows:

"Unfair methods of competition and unfair or deceptive acts or practices, including but notlimited to the use or employment of any deception, fraud, false pretense, false promise,misrepresentation or the concealment, suppression or omission of any material fact, withintent that others rely upon the concealment, suppression or omission of such material fact,or the use or employment of any practice described in Section 2 of the 'Uniform DeceptiveTrade Practices Act', approved August 5, 1965, in the conduct of any trade or commerceare hereby declared unlawful whether any person has in fact been misled, deceived ordamaged thereby." 815 ILCS 505/2 (West 1996).

The elements of a claim under section 2 of the Act are: (1) a deceptive act or practice by thedefendant; (2) the defendant's intent that the plaintiff rely on the deception; and (3) theoccurrence of the deception in the course of conduct involving trade and commerce. Connick v.Suzuki Motor Co., 174 Ill. 2d 482, 501 (1996); Elson v. State Farm Fire & Casualty Co., 295 Ill.App. 3d 1, 14 (1998); First Midwest Bank, N.A. v. Sparks, 289 Ill. App. 3d 252, 257 (1997).

Consumer fraud includes an omission or concealment of a material fact in the conduct of trade orcommerce. Connick, 174 Ill. 2d at 504. "Concealment is actionable where it is employed as adevice to mislead and the concealed fact must be such that, had the other party been aware of it,he would have acted differently." First Midwest Bank, 289 Ill. App. 3d at 257. To state a validclaim based on an omission or concealment under the Act, it is not necessary to plead a commonlaw duty to disclose (Connick, 174 Ill. 2d at 505), nor is actual reliance required (Siegel v. LevyOrganization Development Co., 153 Ill. 2d 534, 542 (1992)).

Whether conduct is unfair under the Act is determined on a case-by-case basis. Saunders v.Michigan Avenue National Bank, 278 Ill. App. 3d 307, 313 (1996). To establish unfair conduct,the court looks to "(1) whether the practice offends public policy; (2) whether it is oppressive;and (3) whether it causes the consumer substantial injury." Saunders, 278 Ill. App. 3d at 313,citing Federal Trade Comm'n v. Sperry & Hutchinson Co., 405 U.S. 233, 31 L. Ed. 2d 170, 92 S.Ct. 898 (1972).

The deceptive or unfair act alleged by plaintiffs is the failure of Citicorp to inform them of theterms and conditions upon which the PMI may be canceled. Although no Illinois case has beenfound on this issue, courts in other states have held squarely against plaintiffs' position. Deermanv. Federal Home Loan Mortgage Corp., 955 F. Supp. 1393 (N.D. Ala. 1997); Hinton v. FederalNational Mortgage Ass'n, 945 F. Supp. 1052 (S.D. Tex. 1996); May v. Old Kent Bank & TrustCo., No. 95-2697 (Mich. Cir. Ct., July 15, 1996); Siegl v. Twin City Federal Mortgage Corp, No.CT 95-2306 (Minn. Dist. Ct. July 26, 1995); Blair v. Source One Mortgage Services Corp., No.96-2497 (E.D. La. May 8, 1997); Rossbach v. FBS Mortgage Corp, Nos. C3-97-1622 &C9-97-1852 (Minn. App. April 7, 1998). Plaintiffs do not, and indeed cannot, offer any viabledistinctions between their case and the above-cited cases. We decline plaintiffs' invitation todepart from their persuasive holdings.

As succinctly stated in Deerman:

"Although plaintiffs [home mortgagors] seek relief under a variety of legal theories, theirobligations to pay for mortgage insurance premiums rests ultimately on the terms of themortgage contracts they signed. Those instruments contemplate life-of-loan mortgageinsurance, and they do not provide a specific right of cancellation to the borrower."Deerman, 955 F. Supp. at 1397, citing Hinton, 945 F. Supp. at 1056, May, No. 95-2697,slip op. at 2, and Siegl, CT-95-2306, slip op. at 13.

Likewise, the instant mortgage contract does not provide any obligation on the part of the lenderto cancel PMI at any point in time and, instead, requires that PMI must be paid "until the Note ispaid in full." See Deerman, 955 F. Supp. at 1402 (same language). Similarly, in the instant case,as in Deerman, "nothing in the mortgage contracts *** provides for notice to the borrowers abouthow PMI might be canceled." Deerman, 955 F. Supp. at 1403.

To find for plaintiffs, this court would have to require, by judicial fiat, a lender to discloseinformation about the possible subsequent cancellation of PMI at the time the mortgage wasexecuted. In response to this argument, the May court "respectfully decline[d] the impliedinvitation to create such a requirement" and found that "[i]f such is to be done, it should be by thelegislators and/or regulators." May, No. 95-2697-CK, slip op. at 3. In fact, the Illinois legislaturehas done just that in the enactment of the Mortgage Insurance Limitation and Notification Act.765 ILCS Ann. 930/15 (Smith-Hurd Supp. 1998) (eff. July 1, 1998).

Moreover, to accept plaintiffs' position, this court would be rewriting mortgage contracts. Asstated in Deerman: "While the notion that borrowers at some appropriate time should be relievedof their obligations to pay for mortgage insurance premiums may have some equitable appeal, thestandard form mortgages, which plaintiffs signed, do not provide for such a right. No authorityhas been presented that would warrant the court rewriting literally thousands, if not millions, ofmortgage contracts. Deerman, 955 F. Supp. at 1406 (plaintiffs alleged a putative nationwide classaction, which accounts for the references to "thousands" and "millions").

Plaintiffs direct our attention to two cases to support their position: Racher v. GMAC MortgageCorp., No. 95-4588 (D.N.J. May 8, 1996), and Walts v. First Union Mortgage Corp., No.605222/96 (N.Y.Cty. S. Ct. June 17, 1998). Both cases are readily distinguishable. In Racher, thefederal district court remanded plaintiffs' putative class action to state court because thecomplaint failed to establish federal jurisdiction. Obviously, since the plaintiff's case was decidedon a jurisdictional issue (the amount in controversy was less than $50,000), the Racher court didnot address, let alone decide, the merits or substance of plaintiffs' claims.

In Walts, the trial court allowed the plaintiff-borrowers' claim based on New York's consumerprotection statute to withstand a dismissal motion by the lender. The mortgage contract at issue"provided that the obligation to continue to pay PMI would continue so long as required by law."Walts, slip op. at 9. New York law required the termination of mortgage insurance when the LTVratio reached 75%. Walts, slip op. at 5. Contrary to New York law, the lender in Walts continuedto bill plaintiff for PMI premiums after the LTV ratio was less than 75%. Walts, slip op. at 9.Unlike New York, Illinois has no such law that requires termination of mortgage insurance whena particular circumstance occurs. Even the new law effective July 1, 1998, only requires that themortgagor be notified about the conditions and procedures for termination of insurance, but doesnot mention any specific terms.

We find that a lender's failure to inform mortgagors that cancellation of PMI might be permittedat the discretion of the mortgage lender or servicer, notwithstanding the clear obligation stated intheir mortgage contracts, does not constitute a deceptive or unfair practice under the Act. Thevery nature of PMI is to protect the lender in the event of default by the borrower. A lendermakes a credit risk judgment at the outset of a loan, including whether PMI is needed, andnecessarily assesses the need for PMI based on several factors, including, but not limited to, thedown payment and creditworthiness of a borrower. Moreover, in the present case, the clear termsof the mortgage require payment of PMI premiums for the life of the loan and the PMI policyconfers a financial benefit to the lender throughout the life of the loan, notwithstanding the factthat the dollar value of the benefit decreases proportionally with the decrease in the amount ofunpaid balance. PMI protects the lender against default and does not automatically becomeworthless based solely on the amount of equity a borrower has in a home. The amount of aborrower's equity does not necessarily protect a lender from a borrower's default, as a continuedneed for PMI may be prudent in some cases. Circumstances, including the personal finances of aborrower and the value of a home, inevitably change and, unfortunately, not always for the better.

In light of our holding that plaintiffs failed to state a cause of action under the Act, we need notaddress the alternative argument presented by Citicorp, contending that its alleged compliancewith the Truth in Lending Act (15 U.S.C.