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United States District Court 

For the Northern District of California 

IN THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF CALIFORNIA 

MARY LABRADOR, individually and on 

behalf of all others similarly 

situated, 

Plaintiff, 

v. 

SEATTLE MORTGAGE COMPANY, 

Defendant. 

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Case No. 08-2270 SC 

ORDER DENYING MOTION FOR 

SUMMARY JUDGMENT; GRANTING 

LEAVE TO FILE FIRST AMENDED 

COMPLAINT 

I. INTRODUCTION

 Two motions are now before the Court in this matter. The 

first is the Motion for Summary Judgment ("MSJ") filed by Defendant 

Seattle Mortgage Company ("SMC" or "Defendant")). Docket No. 48. 

The second is Plaintiff Mary Labrador's ("Labrador's" or 

"Plaintiff's") Motion for Leave to File First Amended Complaint 

("Mot. to Amend"). Docket No. 51. Both Motions are fully briefed. 

Docket Nos. 56 ("Pl.'s Opp'n to MSJ"), 58 ("SMC Opp'n to Mot. to 

Amend"), 60 ("SMC Reply re MSJ"), 62 ("Pl.'s Reply re Mot. to 

Amend"). Having reviewed all of the briefing submitted by both 

parties, the Court hereby DENIES SMC's Motion for Summary Judgment, 

and GRANTS Plaintiff leave to file a first amended complaint, for 

the reasons stated below. 

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II. BACKGROUND

 This is a class action involving the legitimacy of certain 

fees that SMC has charged mortgagors who have entered into reverse 

mortgage transactions with SMC. According to Plaintiff's 

Complaint, a reverse mortgage, also known as a Home Equity 

Conversion Mortgage ("HECM"), is a type of home equity loan 

available only to senior homeowners whereby the homeowner is able 

to convert his or her home equity into cash while maintaining 

ownership of the home. Notice of Removal, Docket No. 1, Ex. A 

("Compl.") ¶ 12. Unlike a typical mortgage, where the borrower 

makes monthly payments to the lender, in a reverse mortgage the 

lender makes monthly payments to the borrower. Id. These cash 

payments may in turn be used by the homeowner for living expenses, 

health care, or any other purpose. Id. The loan is secured by a 

deed of trust on the home. Id. Depending on the terms of the 

reverse mortgage, the borrower may not have to repay either the 

loan principal or the accrued interest so long as he or she remains 

living in the home. Id. If and when the homeowner is no longer 

able to care for him or herself and requires nursing-home care, or 

when the homeowner dies, the subsequent sale of the home is 

expected to generate the proceeds to repay the principal of the 

loan, as well as any interest, fees and expenses. Id. ¶ 13. 

 In July of 2006, a representative of Home Center Mortgage 

("Home Center") contacted Plaintiff concerning the possibility of 

entering into a reverse mortgage loan. Id. ¶ 22. Plaintiff then 

entered into a reverse mortgage loan originated by SMC. Id. ¶ 23. 

At the close of the loan, Plaintiff paid an "origination fee" of 

$7,255.80 to SMC. Id. ¶ 24. This fee was conveyed in its entirety 

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by SMC to Home Center. In addition, SMC paid a "correspondent fee" 

to Home Center in the amount of $490 in connection with Plaintiff's 

loan. Id. ¶ 25. Although Plaintiff was told that the $490 fee was 

paid to Home Center for the servicing rights to the loan, she 

contends that the fee was in fact an incentive fee designed to 

motivate brokers to steer mortgagors to SMC. Id. ¶¶ 29-32. 

 The crux of Plaintiff's Complaint is that SMC violated the 

federal regulation 24 C.F.R. § 206.31(a)(1) ("§ 206.31(a)(1)"). 

This section states, in part, that a mortgage broker's fee may be 

included in the origination fee charged to the borrower "only if 

the mortgage broker is engaged independently by the homeowner and 

if there is no financial interest between the mortgage broker and 

the mortgagee." 24 C.F.R. § 206.31(a)(1). Plaintiff alleges that 

SMC, in paying the $490 "correspondent fee" to the mortgage broker 

Home Center, sought to induce Home Center to steer loans to SMC, 

and thereby created a financial interest between SMC and Home 

Center. Plaintiff alleges that, because this financial interest 

existed, SMC was prohibited under § 206.31(a)(1) from charging 

Plaintiff the origination fees she paid in connection with her 

reverse mortgage loan. 

 Plaintiff's Complaint currently includes four causes of 

action: (1) financial elder abuse, in violation of California's 

Elder Abuse and Dependent Adult Civil Protection Act ("Elder Abuse 

Act"), Welfare and Institutions Code § 15657.5 et seq.; (2) 

unlawful, deceptive, and unfair business practices, in violation of 

California Business and Professions Code § 17200 et seq.; (3) 

unjust enrichment; and (4) declaratory relief. See Compl. ¶¶ 45-

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77.1

 

III. LEGAL STANDARD

A. Summary Judgment

 Entry of summary judgment is proper "if the pleadings, the 

discovery and disclosure materials on file, and any affidavits show 

that there is no genuine issue as to any material fact and that the 

movant is entitled to judgment as a matter of law." Fed. R. Civ. 

P. 56(c). Material facts are those that may affect the outcome of 

the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 

(1986). The court must not weigh the evidence. Id. at 255. 

Rather, the nonmoving party's evidence must be believed and "all 

justifiable inferences are to be drawn in [the nonmovant's] favor." 

United Steelworkers of Am. v. Phelps Dodge Corp., 865 F.2d 1539, 

1542 (9th Cir. 1989) (en banc) (quoting Anderson, 477 U.S. at 255). 

Where the party opposing summary judgment bears the burden of proof 

on a dispositive issue, it must offer specific evidence 

demonstrating a factual basis on which it is entitled to relief. 

Anderson, 477 U.S. at 256. The non-moving party must set forth 

specific facts, through affidavits or other materials, that 

demonstrate disputed material facts. Id.

B. Leave to Amend

 A party may amend its pleadings with leave of the court, and 

"[t]he court should freely give leave when justice so requires." 

Fed. R. Civ. P. 15(a)(2). This policy should be applied with 

 

1

 The Complaint also includes a claim for violation of California's 

Consumers Legal Remedies Act ("CLRA"), California Civil Code § 1770 

et seq., however this Court previously dismissed this cause of 

action following SMC's Motion to Dismiss. Docket No. 32. 

Plaintiff has not attempted to amend this cause of action. 

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"extreme liberality." Eminence Capital, LLC v. Aspeon, Inc., 316 

F.3d 1048, 1051 (9th Cir. 2003). However, district courts may deny 

amendments that would cause undue prejudice to the defendant, that 

are sought in bad faith, that are futile, or that would cause undue 

delay. Bowles v. Reade, 198 F.3d 752, 757-58 (9th Cir. 1999). 

"Ordinarily, courts will defer consideration of challenges to the 

merits of a proposed amended pleading until after leave to amend is 

granted and the amended pleading is filed." Netbula, LLC v. 

Distinct Corp., 212 F.R.D. 534, 539 (N.D. Cal. 2003). 

IV. DISCUSSION

A. Motion for Summary Judgment

 Plaintiff relies upon § 206.31(a)(1) to establish the 

illegality of SMC's loan origination fee. This subsection lists 

the permissible "fees at closing," and it includes the following: 

A charge to compensate the mortgagee for expenses 

incurred in originating and closing the mortgage 

loan, which may be fully financed with the 

mortgage. The Secretary may establish 

limitations on the amount of any such charge. 

HUD will publish any such limit in the Federal 

Register at least 30 days before the limitation 

takes effect. The mortgagor is not permitted to 

pay any additional origination fee of any kind to 

a mortgage broker or loan correspondent. A 

mortgage broker's fee can be included as part of 

the origination fee only if the mortgage broker 

is engaged independently by the homeowner and if 

there is no financial interest between the 

mortgage broker and the mortgagee. 

24 C.F.R. § 206.31(a)(1). Plaintiff's case rests upon the 

proposition that SMC violated the restriction in the fourth 

sentence of this subsection; i.e., that SMC charged her a "mortgage 

broker's fee" even though the mortgage broker was not "engaged 

independently by the homeowner" or there was a "financial interest 

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between the mortgage broker" and SMC. 

 SMC rests its Motion for Summary Judgment on a single 

argument, which is based upon its interpretation of this 

subsection. SMC argues that Home Center could not have been a 

"mortgage broker" as this regulation uses the phrase, because it 

was instead a "loan correspondent." See MSJ at 6-7. SMC notes 

that the third sentence forbids unauthorized payments by a 

mortgagor to both "a mortgage broker or loan correspondent." 

However, the fourth sentence -- upon which Plaintiff's claims rest 

-- forbids origination fees only to nonindependent "mortgage 

brokers," and makes no reference to "loan correspondents." SMC can 

therefore prevail if it can establish that Home Center was not a 

"mortgage broker" within the meaning of the subsection. 

 SMC has provided evidence to establish that Home Center is and 

was a loan correspondent approved by the United States Department 

of Housing and Urban Development ("HUD"). See SMC Request for 

Judicial Notice, Docket No. 49, Ex. A ("HUD Home Center Summary").2 

SMC does not argue that Home Center was not acting as a mortgage 

broker as the term is generally used. Rather, it is making a 

purely legal argument based on its reading of the regulation, and 

concedes that there are no disputes of underlying fact. Id.; SMC 

Reply re MSJ at 1. SMC claims that, if a party is acting as a 

 

2

 SMC has requested judicial notice of a printout from Neighborhood 

Watch, a web site that displays data on lenders and appraisers, 

located at https://entp.hud.gov/sfnw/public/. Plaintiff does not 

object to this request, nor does she contest the facts contained 

therein. Because these facts are not subject to reasonable 

dispute, and are capable of determination using sources whose 

accuracy cannot reasonably be questioned, this Court takes judicial 

notice of the fact that Home Center is a HUD-approved loan 

correspondent. See New Mexico ex rel. Richardson v. BLM, 565 F.3d 

683, 702 n.22 (10th Cir. 2009) (taking judicial notice of data on 

web sites of federal agencies). 

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"loan correspondent," then that party can never be subject to the 

constraints placed on "mortgage brokers" by the fourth sentence of 

§ 206.31(a)(1). See MSJ at 6-7. 

 Plaintiff counters that Home Center's status as a loan 

correspondent is irrelevant, because the terms "mortgage broker" 

and "loan correspondent" are not mutually exclusive. Pl.'s Opp'n 

to MSJ at 1. Plaintiff argues that Home Center was operating as a 

"mortgage broker" when it helped originate Plaintiff's reverse 

mortgage loan, and urges this Court to read the term "mortgage 

broker" in the fourth sentence of § 206.31(a)(1) to include Home 

Center. Id.

 The term "mortgage broker" is not defined by the relevant HECM 

regulations, Part 206 of the Code of Federal Regulations Title 24. 

In fact, as SMC points out, § 206.31(a)(1) is the only time that 

Part 206 uses the term "mortgage broker" at all. Black's Law 

Dictionary defines a "mortgage broker" as, "An individual or 

organization that markets mortgage loans and brings lenders and 

borrowers together; A mortgage broker does not originate or service 

mortgage loans." Black's Law Dictionary 220 (9th ed. 2009). This 

is consistent with the definition of "mortgage broker" that HUD has 

issued for regulations pursuant to the Real Estate Settlement 

Procedures Act ("RESPA"), which state that a "[m]ortgage broker 

means a person . . . or entity that renders origination services 

and serves as an intermediary between a borrower and a lender in a 

transaction involving a federally related mortgage loan . . . ." 

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24 C.F.R. § 3500.2.3 

 Plaintiff has submitted evidence that an agent of Home Center 

contacted her, and arranged for her to enter into an HECM loan with 

SCM, and arranged for her to sign the necessary documents to 

establish the loan. See Johnson Decl. Ex. F ("Fullam Depo.") at 

21:17-22:24, 25:23-26:09, 29:16-30:11.4

 Yet SMC, and not Home 

Center, served as the lender and mortgagee for this loan. Id.

72:25-73:14; Johnson Decl. Ex. B ("HUD-1 Settlement Statement"). 

For the purposes of summary judgment, the Court accepts, and SMC 

has not denied, that Home Center marketed, and provided origination 

services for, a loan to Plaintiff for which SMC was the lender; 

Home Center therefore appears to have functioned as a "mortgage 

broker" as the term is generally understood. 

 SMC therefore faces something of an uphill battle; to prevail, 

it must show that § 206.31(a)(1) uses the term "mortgage broker" in 

a unique way that somehow excludes Home Center. It attempts to do 

so by arguing that "HUD regulations use those words as a term of 

art. A loan correspondent is a HUD-approved loan origination 

company; whereas, a mortgage broker is not. HUD has always 

restricted the participation by non-approved entities in FHAinsured mortgage programs. Hence, § 206.31(a)(1)’s greater 

restrictions on payments to non-approved mortgage brokers." MSJ at 

7. SMC claims that HUD generally has more controls and checks in 

 

3

 As discussed further below, this definition explicitly includes 

"loan correspondent[s] approved under 24 CFR 202.8 for Federal 

Housing Administration programs . . . ." 24 C.F.R. § 3500.2. 

4

 Mark. T. Johnson ("Johnson"), counsel for Plaintiff, submitted a 

declaration in support of the Opposition to the Motion for Summary 

Judgment. Docket No. 57. This declaration included excerpts from 

a transcript of the deposition of Michael Fullam ("Fullam"), a real 

estate salesperson employed by Home Center. Fullam Depo. at 21:17-

22:24. 

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place over approved entities than it does over non-approved 

entities, and the last sentence of § 206.31(a)(1) was meant as a 

check on non-approved entities, whose role in the origination of 

HECM loans has been significantly circumscribed by HUD. Id. at 9. 

 SMC has recounted the development and context of 

§ 206.31(a)(1) through its regulatory history, various HUD 

Mortgagee Letters and HUD Handbooks, in which HUD has described the 

roles that different institutions can play in reverse mortgage 

transactions. MSJ at 7-12. However, the Court finds little 

support for SMC's proposed special reading of the term "mortgage 

broker" in HUD's HECM-related publications, which only occasionally 

use the term. Rather, as described more fully below, HUD's use of 

the phrase "mortgage broker" in the HECM context has been ambiguous 

and inconsistent at best. 

 The Court first addresses HUD Mortgagee Letter 2008-14 (May 

16, 2008) ("HML 08-14").5 The Court begins its analysis with this 

document because it describes precisely what SMC means when it 

refers to "non-approved entities," and because it is the 

publication that SMC relies upon most heavily. This Letter 

addresses "the use of non FHA-approved mortgage brokers, 

subsequently referred to as a non-approved entity or third party 

(i.e., advisor, consultant, mortgage broker)." HML 08-14 at 1. 

 According to HML 08-14, loan origination can only be performed 

by FHA-approved entities, which include loan correspondents and 

sponsors (such as Home Center and SMC). See id. "However, FHA 

policy permits a non-approved entity or third-party to assist in 

 

5

 The various HUD Mortgagee Letters cited in this Order are 

available on HUD's website, and are located at 

http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/. 

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the origination of insured loans in certain limited ways, and to 

receive compensation for such services actually provided under 

certain limited circumstances." Id. Whereas FHA-approved entities 

must complete the origination process in order to receive 

compensation, a non-approved entity may only provide limited 

services "and may be compensated for those limited services under 

the circumstances described in this Mortgagee Letter and applicable 

FHA and RESPA regulations." Id. The Letter identifies certain 

activities that can be performed only by FHA-approved entities 

(such as taking information from the borrower and filling out loan 

applications, analyzing a borrower's eligibility for reverse 

mortgages, etc.), as well as activities that non-approved entities 

can perform (so-called "advisor" services, including education 

services, advising borrowers on different loan products, etc.). 

Id. at 1-2.6

 HML 08-14 specifically recounts that, "[u]nder 24 C.F.R. 

§ 206.31(a)(1), a non-approved entity or third party must be 

'engaged independently by the homeowner,' and there must be 'no 

financial interest between the mortgage broker and the mortgagee.'" 

Id. at 2. This Letter therefore unambiguously confirms one aspect 

of SMC's reading of § 206.31(a)(1): There is no question that nonapproved entities may be considered "mortgage brokers" for the 

purposes of the fourth sentence of the subsection. However, this 

Letter does not suggest that the fourth sentence applies 

exclusively to non-approved entities, or that the term "mortgage 

 

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08-14 was issued. After October 1, 2008, only HUD-approved 

mortgagees or loan correspondents "may participate and be 

compensated for the origination of HECMs to be insured by FHA." 

HUD Mortgagee Letter 2008-24 (Sept. 16, 2008) at 1-2. 

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broker" categorically excludes "loan correspondents" or approved 

entities in general. As one might expect from a Letter explicitly 

directed towards non-approved entities, HML 08-14 comments on the 

applicability of § 206.31(a)(1) to non-approved entities without 

offering any comment whatsoever upon the applicability of the 

subsection to loan correspondents. Its silence in this respect is, 

at best, meager evidence in support of SMC's reading of 

§ 206.31(a)(1). 

 SMC next attempts to describe the historical development of 

§ 206.31(a)(1). MSJ at 10-12. The subsection did not include 

either the current third or the fourth sentences when it was 

originally passed in 1989. See 54 Fed. Reg. 24822, 24837 (June 9, 

1989). According to SMC, the rule embodied by these sentences 

first appeared in HUD Mortgagee Letter 1993-22, ¶ 12(I) (July 19, 

1993). In a section addressing "Third-Party Fees," the Handbook 

states: 

Mortgage Broker's Fees. The borrower may pay 

only if the broker is engaged independently by 

the mortgagor. A broker's fee is prohibited if 

there is any financial interest between the 

broker and the mortgagee. The broker agreement 

must be submitted with the mortgage insurance 

application. 

Id.7

 Neither this provision, nor any of the surrounding 

provisions, suggests that the term "mortgage broker" was being used 

as a specialized term of art by the handbook, or that it was used 

to exclude loan correspondents. 

 In 2000, HUD issued Mortgagee Letter 2000-10 (Mar. 8, 2000) 

 

7

 This same provision again appeared in HUD's HECM Handbook, Dir. 

No. 4235.1 REV-1 (Nov. 18, 1994) ¶ 6-13(I). The HUD Housing 

Handbooks cited in this Order are available on HUD's website, and 

are located at 

http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/. 

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("HML 00-10"), in response to Congress's decision to make the HECM 

program permanent. In language that closely resembles the current 

§ 206.31(a)(1), HUD stated: 

The financed origination fee is now the full 

amount that the borrower can pay for the 

origination and underwriting of the mortgage and 

must also include the full amount of any mortgage 

broker fee or loan correspondent fee. The 

borrower is not permitted to pay any additional 

origination fees of any kind to a mortgage broker 

or loan correspondent. Lenders are reminded that 

a mortgage broker fee can be included as part of 

the origination fee only if the mortgage broker 

is engaged independently by the homeowner and 

that a mortgage broker's fee is prohibited if 

there is any financial interest between the 

mortgage broker and lender. 

HML 00-10 at 1 (emphasis in original). This brief comment 

reproduces, rather than illuminates, any ambiguity in 

§ 206.31(a)(1). Once again, the context does not suggest whether 

the term "mortgage broker" was used to exclude loan correspondents. 

 HUD proposed revising § 206.31(a)(1) in June of 2001. Home 

Equity Conversion Mortgage Program; Insurance for Mortgages To 

Refinance Existing HECMs, 66 Fed. Reg. 30278, 30281 (June 5, 2001). 

The proposed amendment permitted the following payment: 

A charge to compensate the mortgagee for expenses 

incurred in originating and closing the mortgage 

loan, which may be fully financed with the 

mortgage. The Secretary may establish limitations 

on the amount of any such charge. Any limitation 

on the origination fee shall include any fees 

paid to correspondent mortgagees approved by the 

Secretary. HUD will publish any such limit in 

the Federal Register at least 30-days before the 

limitation takes effect. 

Id. The proposed amendment therefore mentioned correspondent fees, 

even though it made no mention of broker fees. This omission was 

addressed by several commenters during the ensuing notice and 

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comment period, and HUD eventually amended § 206.31(a)(1) to mirror 

the language set out in in HML 00-10. See Home Equity Conversion 

Mortgage Program; Insurance for Mortgages To Refinance Existing 

HECMs, 69 Fed. Reg. 15586, 15590-91 (Mar. 25, 2004). HUD stated: 

Comment: . . . The commenters wrote that, by only 

referring to loan correspondent fees, the third 

sentence of proposed § 206.31(a)(1) appears to 

undercut the guidance provided in Mortgagee 

Letter 00-10. According to the commenters, the 

proposed regulatory language could be interpreted 

to permit only loan correspondent mortgagees, and 

not also mortgage brokers, to receive fees within 

the origination fee cap. The commenters urged 

that § 206.31(a)(1) be revised to more closely 

track the language of the Mortgagee Letter, and 

explicitly provide that the origination fee shall 

include fees paid to mortgage brokers under the 

circumstances permitted by the Secretary. 

HUD response: . . . HUD agrees that the proposed 

regulatory language was confusing and has revised 

the language for purposes of clarity. The 

revised language more closely tracks the guidance 

provided in Mortgagee Letter 00-10, and clarifies 

that the HECM origination fee limit includes the 

full amount of any fee related to the origination 

of the HECM loan paid to a mortgage broker or 

loan correspondent. 

Id. Following the above comments and response, HUD amended 

§ 206.31(a)(1) to its current form. 

 It is significant that, prior to the most recent amendment of 

§ 206.31(a)(1), when the subsection only addressed "correspondent 

fees" and omitted reference to "mortgage broker fees," the 

subsection did not include the restrictions upon which Plaintiff 

now relies. Only when HUD revised the regulation to explicitly 

address mortgage broker fees did it include this restriction. 

While this suggests that correspondent fees and broker fees may be 

distinct concepts -- and that the restrictions in the fourth 

sentence of § 206.31(a)(1) are related only to broker fees -- it 

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does not suggest that these concepts are mutually exclusive. 

Plaintiff provides a coherent explanation for how these two 

concepts can be different without treating them as exclusive. 

There are correspondents who are not brokers -- for example, HUD's 

FHA Title II Mortgagee Approval Handbook, Dir. No. 4060.1 REV-2 

(Aug. 14, 2006) ("FHA MAH"), sets out the various types of approved 

mortgagees, and recognizes both "supervised" and "non-supervised" 

loan correspondents. Id. ¶ 1-2A to 1-2D. A supervised loan 

correspondent is a "supervised mortgagee" that has received 

approval to act as a loan correspondent. Id. ¶ 1-2D. The 

definition of supervised mortgagee "is limited to financial 

institutions that are members of the Federal Reserve System, and 

financial institutions whose accounts are insured by the Federal 

Deposit Insurance Corporation (FDIC), or the National Credit Union 

Administration (NCUA)," and includes "banks, savings associations, 

and credit unions." Id. ¶ 1-2A. Unlike non-supervised loan 

correspondents, supervised loan correspondents may originate HECM 

loans and hold insured mortgages in their own portfolio. Id. ¶¶ 2-

28, 2-29. A supervised loan correspondent therefore may act as a 

loan correspondent without acting as a mortgage broker. 

Consequently, HUD could use the terms "loan correspondent" and 

"mortgage broker" as distinct but overlapping concepts, with the 

latter excluding supervised loan correspondents but including nonsupervised correspondents, as well as non-approved entities like 

the ones described in HML 08-14. 

 SMC does not dispute that Home Center is a non-supervised loan 

correspondent. See HUD Home Center Summary. Plaintiff has 

identified several instances in which HUD has referred to nonCase 3:08-cv-02270-SC Document 64 Filed 01/15/10 Page 14 of 19
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supervised loan correspondents as "mortgage brokers." The most 

explicit example of this was the FHA Title II Mortgagee Approval 

Handbook, in which HUD titled its definition of non-supervised loan 

correspondents as "Non-supervised Loan Correspondent (i.e., 

mortgage brokers)." FHA MAH ¶ 1-2C. HUD's website also refers to 

Home Center as a "broker" in tables that track the HECM 

originations of Home Center and various non-supervised loan 

correspondents. See Pl.'s Request for Judicial Notice ("Pl.'s 

RJN"), Docket No. 55, Exs. D, E.8 In other contexts, specifically 

in its RESPA regulations, HUD explicitly includes loan 

correspondents within its definition of "mortgage broker," stating 

that "[a] loan correspondent approved under 24 CFR 202.8 for 

Federal Housing Administration programs is a mortgage broker for 

purposes of this part." 24 C.F.R. § 3500.2. While none of this 

conclusively establishes that HUD had non-supervised correspondents 

in mind when it used the term "mortgage brokers" in § 206.31(a)(1), 

it does suggest that HUD often blurs these categories, and it 

undermines SCM's claim that loan correspondents generally, and Home 

Center in particular, cannot be "mortgage brokers" for the purpose 

of interpreting the fourth sentence of § 206.31(a)(1). 

 Although the exclusive distinction between "loan 

correspondent" and "mortgage broker" that is urged by SMC is 

plausible, it is not well supported by related HUD publications or 

regulatory history. And while it is clear HUD is not using the 

term "mortgage broker" in a purely traditional sense in the fourth 

 

8

 The Court takes judicial notice of these exhibits for the same 

reasons that it took judicial notice of the exhibit submitted by 

SMC, discussed in footnote 2, supra. 

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sentence of § 206.31(a)(1),9 there is no evidence that HUD meant to 

exclude the common referent of the term when it drafted 

§ 206.31(a)(1) (i.e., one who "brings lenders and borrowers 

together," Black's Law Dictionary 220). The Court is therefore not 

persuaded that the restrictions in the fourth sentence of 

§ 206.31(a)(1) necessarily exclude loan correspondents in general, 

or Home Center in particular. SMC's Motion for Summary Judgment is 

therefore DENIED. 

B. Leave to Amend

 Plaintiff has also filed a Motion for leave to add a claim for 

negligence against SMC. Mot. to Amend at 3-5. Plaintiff claims 

that SMC acted negligently by allowing its employees to charge 

Plaintiff a fee that was unlawful under § 206.31(a)(1). See Becker 

Decl. Ex A ("Proposed First Am. Compl.") ¶¶ 63-72.10 SMC's 

objections to this Motion can be organized into two categories: (1) 

the request is futile, and (2) the request is untimely or 

prejudicial. 

1. Whether the Proposed Amendment Would be Futile

 Plaintiff responds that "a proposed amendment is futile only 

if no set of facts can be proved under the amendment to the 

pleadings that would constitute a valid and sufficient claim." 

Pl.'s Reply re Mot. to Amend at 7 (quoting Miller v. Rykoff-Sexton, 

Inc., 845 F.2d 209, 214 (9th Cir. 1988)). However, as another 

 

9

 In particular, HUD's Mortgagee Letters make it clear that the 

term "mortgage broker" is being used to capture activities that do 

not appear to be central to the concept of "mortgage broker," such 

as educational services. See HML 00-10 at 2. 

10 Nance Becker ("Becker"), Counsel for Plaintiff, submitted a 

declaration in support of the Motion to Amend, which attached the 

Proposed First Amended Complaint as Exhibit A. The Becker 

Declaration was filed as Attachment #1 to the Motion to Amend. 

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district court in California has recently observed, "in light of 

the recent Supreme Court decisions in Iqbal v. Ashcroft, 129 S.Ct. 

1937 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 

(2007), it might more appropriately be said that an amendment is 

futile when the proposed amended complaint fails to allege 'enough 

facts to state a claim to relief that is plausible on its face.'" 

Williams v. County of Ventura, No. 07-7655, 2009 U.S. Dist. LEXIS 

110167, *39-40 (C.D. Cal. Aug 7, 2009) (quoting Twombly, 550 U.S. 

at 570). A claim has "facial plausibility when the plaintiff 

pleads factual content that allows the court to draw the reasonable 

inference that the defendant is liable for the misconduct alleged." 

Iqbal, 129 S.Ct. at 1949. 

 SMC argues that the proposed negligence claim is futile 

because, as a general rule, "a financial institution owes no duty 

of care to a borrower when the institution's involvement in the 

loan transaction does not exceed the scope of its conventional role 

as a mere lender of money." Nymark v. Heart Fed. Savings & Loan 

Ass'n, 231 Cal. App. 3d 1089, 1096 (Ct. App. 1991). Nymark

involved the question of whether a lender owed a borrower a duty of 

care "in appraising the borrower's collateral to determine if it is 

adequate security for a loan." Id. at 1095-96. "Liability to a 

borrower for negligence arises only when the lender 'actively 

participates' in the financed enterprise 'beyond the domain of the 

usual money lender.'" Id. (quoting Wagner v. Benson, 101 Cal. App. 

3d 27, 35 (1980). As the panel in Nymark wrote: 

In California, the test for determining whether a 

financial institution owes a duty of care to a 

borrower-client involves the balancing of various 

factors, among which are [1] the extent to which 

the transaction was intended to affect the 

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plaintiff, [2] the foreseeability of harm to him, 

[3] the degree of certainty that the plaintiff 

suffered injury, [4] the closeness of the 

connection between the defendant's conduct and 

the injury suffered, [5] the moral blame attached 

to the defendant's conduct, and [6] the policy of 

preventing future harm. 

Id. at 1098 (citations and internal quotation marks omitted). 

 Plaintiff is alleging that SMC engaged in an unlawful scheme 

with certain brokers to steer prospective borrowers towards SMC's 

business. She is not alleging that SMC violated a duty to her by 

inadequately performing certain functions that lenders normally 

perform to protect their own interest, such as appraisal or 

assessment of collateral. C.f. id. at 1095-96. The Court finds 

that the existence of a duty to Plaintiff in this context is 

questionable, but defensible. As such, the Court finds that 

Plaintiff's proposed amendment is not so weak as to preclude 

consideration. The prudent procedure would be to allow Plaintiff 

to amend her complaint and defer ruling on the existence of a duty 

until this issue is further developed. See Netbula, 212 F.R.D. at 

539. 

2. Timeliness of this Motion

 SMC claims that this Motion is untimely, and that SMC would be 

subject to prejudice should Plaintiff be permitted to file the 

amended complaint. SMC Opp'n to Mot. to Amend at 4-9. There is no 

basis for concluding that this Motion, which was filed three days 

after SMC's Motion for Summary Judgment, was intended to (or even 

had the potential to) frustrate SMC's Motion for Summary Judgment. 

This claim rests, like all of Plaintiff's other claims, primarily 

upon Plaintiff's ability to prove a violation of § 206.31(a)(1). 

If Plaintiff fails to prove such a violation, her proposed 

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negligence cause of action will likely fail with each of her other 

claims. The proposed cause of action simply attaches an additional 

legal theory to the same facts that Plaintiff had previously 

alleged. For this reason, the Court does not believe that the 

proposed amendment threatens to significantly alter the prospective 

legal or factual landscape of this suit. This suit is still in its 

early stages, and discovery related to class certification is still 

ongoing. In light of this circuit's liberal policy towards 

allowing amended pleadings, the Court finds it appropriate to GRANT 

Plaintiff's Motion to Amend in spite of her delay in filing it. 

V. CONCLUSION

 Defendant SMC's Motion for Summary Judgment is DENIED. 

Plaintiff Labrador's Motion to Amend is GRANTED. Plaintiff must 

submit her amended complaint no later than five (5) days after the 

date of this Order. 

IT IS SO ORDERED. 

Dated: January 14, 2010 

UNITED STATES DISTRICT JUDGE

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