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Unconscionability and Funky Mortgages

posted by Nathalie Martin

People have posted some comments to the funky mortgage story and I wondered if anyone had any experience using the doctrine of unconscionability to help ward off foreclosure and keep people in their homes.  As a contracts teacher, I know the doctrine is old and tired and disparaged, but it is still out there and was used with a least some success in the days of the phony home repairs/unfavorable mortgage refinancing schemes popular in the late 90's. See, e.g., Matthews v. New Century Mortgage Corp., 185 F. Supp. 2d 874 (S.D. Ohio 2002). The Restatement of Contracts includes one unconscionability factor that seems right on in these situations, namely that the stronger party had no reasonable believe that the weaker party would be able to receive substantial benefits under the contract, which I read to include situations where the weaker party has no chance of actually performing the contract. There also is language in the Restatement about how the weaker party is unable to reasonably protect his interests by reason of . . . ignorance, illiteracy, or inability to understand the language of the agreement.   Various state consumer protection statutes invite courts to weigh similar factors. Does any of this get us anywhere, or is this just wishful thinking?  Or, is this another one of those times where securitization will eliminate the defense because unconcionabilty cannot be asserted against a successor in interest? Do tell....

Comments

Hello, I'm Jo Carrillo from UC Hastings. I've been reading the blog. Thanks in advance for letting me respond to a few recent points.

On the question of unconscionability: unconscionability is the theoretical basis for specific legislation in California (Cal Civ. Code 1632) that covers the question of language proficiency and credit disclosures. This legislation requires summary translation of documents into one of 5 languages widely spoken in California -- Spanish, Chinese, Korean, Vietnamese and Tagalog. The legislation does not yet apply across the board to all mortgage loans, but it does cover mortgage loans originated by brokers. Amendments to CCC 1632 have been passed that would allow it to apply to all mortgages, but those amendments (A.B. 512) have not yet been signed into law. Cases are being filed in the 9th Circuit that invoke CCC 1632's protections. There are technical issues with the legislation that may get settled, and at least will be addressed if Assembly Bill 512-- the proposed amendments to CCC 1632 -- gets signed into law.

Whether CCC 1632 applies to mortgages is an ongoing question.

But I send this comment because it's my view that legislation like Cal. Civ. Code 1632 should be taught in Contracts classes. It's relevant nationally. And it goes to issues of contract theory, like some of those mentioned in this blog.

I've written about this in a recent paper. In Translation for the Latino Market Today: Acknowledging the Rights of Consumers in a Multilingual Housing Market, 11 Harvard Latino Law Review 1 (2008). It's not out in paper yet, but it's available online at SSRN author = 30289. I've also addressed consumer class action cases for rescission in a recent paper: Dangerous Loans: Consumer Responses to Adjustable Rate Mortgages 1 (2008), 5 Berkeley Business Law Journal 1 (2008). (Also, not yet out in paper, but available at SSRN author = 30289.)

Unconscionability is a doctrine that is getting a lot of attention by the California courts of appeal. There have been a number of recent published opinion on the subject. Most of the cases address arbitration clauses in consumer contracts. The courts look for a one-sided provision such as barring class actions on contracts that involve small fees. In that case the court held that because the small amount of each claim (less than $50) the class action was the only way to get redress. Another case threw out a clause that required arbitration in a distant forum. I have a case on appeal now in which I am seeking to extend the doctrine to construction contracts that give general contractors tremendous advantages over subcontractors in resolving claims. I believe the doctrine has legs. I think success hinges on showing a huge imbalance of claims rights. You might want to tie unconscionability with the doctrine of good faith and fair dealing if the mortgage has provisions that really prevent the borrowers from fulfilling their obliegations and drives them into default.

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