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United States District Court, Northern District of Illinois, Eastern Division

April 16, 2003


The opinion of the court was delivered by: James B. Zagel, United States District Judge


The FTC and Illinois have sued OSI Financial Services and Mark Diamond over allegedly illegal loan practices. One count is under the FTC Act and the other under the Illinois Consumer Fraud and Deceptive Business Practice Act. Defendants move to "dismiss" the state law count. Count Two alleges acts with respect to four persons. I reiterate briefly.

A. In June 1999, a man who said he was Mark Diamond solicited Ivette Cruz to take out a home equity loan which he could get — a 30-year fixed rate whose monthly payments would include payments for taxes and insurance. He gave her papers to sign which she did. The papers had unfilled blanks. She did not see anything telling her the size of the payments or any other details, i.e., term of loan, whether it was a balloon, what was the APR, what Diamond and/or the home improvement company would get. Nor did he tell her it was not the kind of loan he initially described to her. He did not give her a copy of the papers until weeks after the closing. The payments did not include sums for taxes and insurance.

B. In December of 1998, Diamond solicited Virgie Brown to take a 15-year fixed-rate loan for low fees and, he said, he could refinance it at a lower rate within a year for no additional fees and the payments included taxes and insurance. The closing for her was like the closing for Ivette Cruz. In fact, the loan was a 15-year balloon, a $90,000 loan and $9,000 went to the mortgage broker and there was a prepayment penalty of $2,700 for any refinancing within three years. The payments did not include money for taxes and insurance.

C. In 1999, a home improvement company referred Lela Gill to Mark Diamond, who solicited her to take a loan which would pay for the improvements and also pay off her outstanding bills. At closing he told her and her husband it was a 30-year fixed rate. It was, in fact a 15 year balloon loan. Moreover, after deduction of broker's fees, the proceeds were insufficient to pay for the home improvements. So he offered to refinance for a larger amount, which was done on September 26th. He said it was a 30-year fixed and, if timely paid, a new loan with lower payments could be made. He did not tell them there was a prepayment penalty. Nor did he tell them it was a 15-year balloon. He did not give them copies of the papers until well after the closing.

D. In March 1999, Levester Gibbons called Mark Diamond, who offered him a 15-year loan that would be paid off at the end of the loan term. When Ms. Gibbons noticed the word "balloon" in the papers at the closing, Diamond stated it meant the loan payments decreased after the first few payments. The closing was on May 18, but the papers were dated May 13, and Diamond explained this by saying he was behind in his work and needed to catch up. The loan was for $70,000. A few months later, another person at OSI called with an offer to refinance with lower payments. Diamond came to Ms. Gibbons' home and suggested a larger loan of $105,300, which would have lower payments than the current loan. At the closing, Ms. Gibbons did not see a monthly payment set forth in the papers, and she believed it was a 15-year fixed-rate loan, fully amortizing, with payments that would take care of taxes and insurance. In fact, the payments were higher, taxes and insurances were not included and the loans were balloon loans.

The reason I put quotation marks around the word "dismiss" is because the motion says that one cannot make the state law claim where the Federal Truth in Lending Act disclosures are made and "the factual allegations of Count II . . . . are directly contradicted by the deposition testimony of the four customers and the documents that they signed and acknowledged." This seems to invoke summary judgment rather than dismissal.

The defendants think that the allegations fail for particularity under Rule 9(b). There might be some force to this claim with respect to a detail or two, but as a whole it is quite wrong. Exact dates and places are alleged with respect to all four cases. And, at the minimum, there are allegations of the actual contents of the misrepresentations or omissions and to whom they were made or omitted. Of course, one can always make an "angels dancing on the head of a pin" sort of argument against any allegation, but the allegations here are far more detailed than those found in the reported cases that threw out fraud claims on 9(b) grounds. In the context of these allegations, failing to tell someone that the loan is a balloon loan, its payments will not cover taxes and insurance, and that there is a prepayment penalty may constitute fraud. I regard the defendants' argument as tongue-in-cheek, and I would rebuke them for it but for the fact that the Attorney General has made two tongue-in-cheek arguments of her own, both of which I reject.*fn1

The second basic argument of defendants is that they complied with the disclosure requirement of the Truth in Lending Act and when this is done, it precludes the state law claim alleged here. There are cases where this is a good argument, but the complaint alleges non-compliance with TILA because (and I assume here that this is true) the written disclosures were incomplete at the time of the loan closing and were not provided until after the loan had closed. This may or may not be bad enough, but when combined with allegations of misrepresentations in soliciting the loan and at the time of closing the loan, the existence of TILA compliant papers signed by those who accepted the loans is not enough to destroy the case at the pleading stage.*fn2

As to the summary judgment aspect of the motion to dismiss, I decline to dismiss, and I decline to convert the motion into a Rule 56 motion. I doubt that defendants would prevail, but even if they would, it would divert the case from what I regard as an appropriate course for the case-that is document discovery, depositions and routine discovery. I recognize that in some cases, a party is entitled to prompt disposition on summary judgment, but this is not one of those cases. Enough has been alleged to allow Count Two to go forward. I recognize that defendants would, in any event, have to defend their conduct on Count One, but there are valid policy reasons to permit this case to go through at least some discovery before summary judgment is addressed on the state law claim.

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