Lender Can’t Require Arbitration

Donald and Helen, ages 80 and 76, obtained a reverse mortgage secured by their home. They received a lump sum, plus monthly payments, for about two years until they decided to sell their residence.

The lender’s reverse mortgage payoff demand, at the time of sale, was for $72,018 borrowed principal, plus interest, and $75,000 in “contingent interest,” which was 50% of the home’s market value appreciation during the two-year loan period.

Donald and Helen objected to the lender claiming 50% of their home’s market value appreciation. They paid the lender’s payoff demand “under protest.” The borrowers then sued their reverse mortgage lender for unfair business practices, violations of the Consumer Legal Remedies Act, fraud, unlawful prepayment penalties and bad faith.

The lender included a clause in the loan agreement requiring that disputes go to binding arbitration, rather than a court trial. The arbitration clause did not limit the lender’s right to foreclose if the borrowers breached the agreement.

Donald and Helen opposed binding arbitration, arguing it was unfair to bar them from a court trial and a right to appeal.

If you were the judge would you rule the lender can require borrowers to accept binding arbitration for disputes?

The judge said no.

When Donald and Helen arranged their reverse mortgage, the judge began, the lender dictated “take it or leave it” terms. They had no ability to negotiate, he noted. Since there was no “bilaterality” in the arbitration clause, this was a contract of adhesion, the judge explained. That means the borrowers had no opportunity to negotiate, he added.

The arbitration clause was completely one-sided in favor of the lender, the judge said.

“Realistically, the mandatory arbitration provisions apply to claims of the borrower, but not vice versa. We conclude that this unilateral obligation to arbitrate is so one-sided as to be substantively unconscionable,” the judge ruled. The arbitration clause is unenforceable, so the borrowers may proceed to a trial court to resolve their dispute, he said.

Based on the 2001 California Court of Appeal decision in Flores vs. Transamerica HomeFirst Inc., 113 Cal.Rptr.2d 376.