A mortgage lender that settled a lawsuit accusing it of charging illegal fees has been threatened with contempt after it rejected the vast majority of claims under the settlement.
In an order Thursday, the special master overseeing the claims process suggested that First Horizon Home Loan Corp. had acted in bad faith when it refused to pay legitimate claims made by borrowers who filed for bankruptcy.
The special master, Kansas City attorney Richard Ralston, blasted the lender for refusing to recognize “the clear language” of the $36 million settlement agreement.
Ralston ordered the company to explain within 10 days why the matter should not be referred to Jackson County Circuit Court “for a contempt citation for its failure to comply with a lawful judgment of that court.”
First Horizon officials could not be reached for comment Thursday.
Fred Walters, one of the plaintiffs’ attorneys, said that First Horizon had been “recalcitrant” throughout the claims process.
“This is about a corporation not doing what it had promised,” he said.
The settlement, which First Horizon agreed to more than a year ago, was aimed at resolving a seven-year-old lawsuit alleging the company charged loan origination, processing, underwriting and other fees not permitted under Missouri law. The agreement covered an estimated 4,000-plus homeowners who obtained second-mortgage loans from First Horizon or McGuire Mortgage Co. between Nov. 16, 1994, and April 13, 2005.
First Horizon acquired McGuire, which was based in the Kansas City area, in 1999.
Borrowers who received loans from the companies before Jan. 1, 1999, were eligible to receive average amounts of $10,171, with payments ranging from $339 to $54,162, according to court documents. Borrowers who received the loans after Jan. 1, 1999, were eligible to receive average amounts of $773, with payments ranging from $250 to $4,353.
After Jackson County Circuit Judge Vernon Scoville III approved the settlement, a claims process was set up to adjust payment amounts and to weed out fraudulent claims.
First Horizon challenged 1,750 of the approximately 2,500 claims that were filed. Only a small percentage of the claims, however, were found to be invalid by Ralston and another special master. Ralston said that fact lent credence to the claim by the plaintiffs’ attorneys that most of First Horizon’s challenges were not made in good faith.
The plaintiffs’ request to have First Horizon held in contempt concerned a narrow swath of borrowers, namely those who ended up filing for Chapter 7 bankruptcy. In 93 such cases, First Horizon had refused to pay, even though the borrower and the bankruptcy trustee had submitted claims under the settlement agreement. The money at issue totaled $1.28 million.
First Horizon justified its refusal to pay by invoking a provision of the settlement agreement referring disputes over loans in bankruptcy to the bankruptcy court.
Ralston said that was a deliberate misreading of the provision, which was intended to give the bankruptcy court authority to determine the distribution of the money, not to determine whether the debtor was entitled to the money in the first place.
“The refusal of First Horizon to pay the claims in issue is not only at odds with its previous position in this case, but it ignores the express provisions of the settlement agreement itself,” he wrote. “In the absence of a good faith argument, not currently apparent, it thus appears that the refusal of First Horizon to pay these claims is in willful defiance of the order of the Circuit Court.”
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