January 8, 2014
by Courtney McGahhey Miller
Wilson & Associates, PLLC – USFN Member (Arkansas, Tennessee)
The Arkansas Home Loan Protection Act prohibits predatory lending in the home mortgage market and bars certain practices regarding high-cost home loans. A.C.A. §§ 23-53-101, et seq. The Arkansas Supreme Court recently relied upon a portion of the Act in evaluating a Columbia County circuit court’s determination that a lender’s actions were unconscionable and predatory. In Gulfco of Louisiana, Inc., D/B/A Tower Loan of Springhill, Louisiana v. Brantley, 2013 Ark. 367 (2013), the court reviewed the denial of Gulfco’s request to foreclose on the Brantleys’ home.
The Brantleys, who reside in Arkansas, obtained four loans from Gulfco in its Louisiana location over a two-year period, all with very high finance charges and annual interest rates ranging from 24.09 to 40.20 percent. The first loan was obtained to pay household bills that were about to become delinquent. The second loan was used to pay the first loan, a hospital bill, delinquent property taxes, and to purchase a logging truck. To secure the second note, the Brantleys executed a mortgage on their home. The third loan was used to pay arrears on the second loan and to pay household bills. The final loan was used to pay off the third loan and pay an arrearage on the mortgage.
Gulfco filed a notice of default and intention to sell in the circuit court, and planned to foreclose upon the Brantleys’ home. The Brantleys filed a petition for preliminary injunction, asserting that the notes were unconscionable, as Gulfco took advantage of their lack of sophistication and induced them to mortgage their home with knowledge that they did not have stable, full-time employment.
On appeal, the Arkansas Supreme Court reviewed the standards regarding unconscionability. An act is unconscionable if it affronts the sense of justice, decency, and reasonableness. The court relied upon the totality of the circumstances surrounding the negotiation and execution of the mortgage. Consideration was given to the gross inequality of bargaining power between the parties, whether the Brantleys were aware of and comprehended the provisions at issue, and whether there was a belief by Gulfco that there was no reasonable probability the Brantleys would fully perform the contract.
Gulfco was aware that Mr. Brantley worked part-time for a moving company and Mrs. Brantley only earned $120 per week. Gulfco was also aware that the Brantleys fell behind on the first loan because work was slow and Mrs. Brantley became ill. Gulfco’s loan agent called the Brantleys about the delinquency on the first loan and suggested that they take out a second loan.
The court then turned to the Arkansas Home Loan Protection Act. The Act prohibits lending without due regard to repayment. A creditor cannot make a high-cost home loan unless the creditor reasonably believes the obligors will be able to make the scheduled payments based upon a consideration of their current and expected income, current obligations, employment status, and financial resources other than the borrower’s equity in the house that secures repayment. A.C.A. § 23-53-104(l). Any violation of the Act is an unconscionable or deceptive act or practice under the Arkansas Deceptive Trade Practices Act. A.C.A. § 23-53-106(a).
The Supreme Court determined that the evidence showed the Brantleys were not capable of making payments from the beginning. Subsequent loans were made to pay off prior notes or bring payments current. Despite their demonstrated inability to pay, Gulfco continued to loan the Brantleys money. Each loan, with high fees and interest rates, placed the Brantleys further in debt, to the point where default was practically inevitable. The court held that the circuit court did not err in refusing to enforce the mortgage, as doing so would contravene the public policy of Arkansas.
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