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LAW OFFICES

GORDON, THOMAS, HONEYWELL, MALANCA, 

PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

THE HONORABLE ROBERT J. BRYAN 

UNITED STATES DISTRICT COURT 

WESTERN DISTRICT OF WASHINGTON 

AT TACOMA

CAMERON PIERCE and PATRICIA PIERCE, 

husband and wife; KAREN KIRBY, a single 

woman; GREGORY SHERMAN and PAULA 

SHERMAN, husband and wife, MICHAEL 

LEPAGE and GERTRUDE LEPAGE, husband 

and wife; RALPH MARTINELLI; and LARRY

BROWN, 

 Plaintiffs, 

vs. 

NOVASTAR MORTGAGE, INC, a foreign 

corporation, 

 Defendant. 

NO. C05-5835 RJB 

DEFENDANT NOVASTAR MORTGAGE, 

INC.'S TRIAL BRIEF

I. INTRODUCTION

Pursuant to the Court’s Pretrial Order, Defendant NovaStar Mortgage, Inc. 

(“NovaStar Mortgage”), by counsel, respectfully submits this Trial Brief. This matter is 

set for a trial by jury on June 11, 2007. 

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LAW OFFICES

GORDON, THOMAS, HONEYWELL, MALANCA, 

PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

II. FACTUAL BACKGROUND

The Court has certified the following class: 

• You entered into a federally-regulated mortgage loan that was subject 

to the requirements of Washington Law and secured by property within 

the State of Washington, at any time from December 30, 2001 to the 

present; and 

• NovaStar paid money to your mortgage broker in return for negotiating 

a higher interest loan for you (“Payment”); and 

• Neither NovaStar nor the broker adequately disclosed to you the 

Payment on a good faith estimate dated no later than three days after 

the date on which NovaStar received your loan application or, if you 

application was received fewer than three days before you signed final 

loan documents, the date on which you signed final loan documents; 

and 

• You paid the mortgage broker compensation in the form of an 

“origination fee” or “broker fee” in addition to the Payment that 

NovaStar paid to the broker. 

This class includes loans of two different types: (1) brokered loans (the “broker 

class”) and (2) loans obtained by NovaStar Mortgage in the secondary mortgage market 

(the “secondary market” class).1

A. The Brokered Loans Obtained by NovaStar Mortgage

NovaStar Mortgage is a residential nonconforming lender headquartered in 

Kansas City, Missouri. Most of NovaStar Mortgage’s loans come from mortgage 

brokers. NovaStar Mortgage has contractual agreements with hundreds of mortgage 

brokers in Washington State that submit potential loans to NovaStar Mortgage. 

 

1

 On May 31, 2007, plaintiffs filed a motion to modify the class definition which is set for a hearing on 

Friday, June 15, 2007, or five days after the start of the trial in this matter. Defendant will be filing its 

opposition to the motion to modify the class definition within the time frame permitted under the rules of 

this Court. 

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LAW OFFICES

GORDON, THOMAS, HONEYWELL, MALANCA, 

PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

NovaStar Mortgage makes the brokers aware of the current “wholesale” interest 

rates available to them by posting what are called “rate sheets” on a web site accessible 

by password. Significantly, NovaStar Mortgage does not market or offer these 

“wholesale” interest rates directly to the public. Instead, these loans can only be 

obtained through brokers. The broker and the borrower ultimately agree on an interest 

rate that takes into account, inter alia, the way that the broker is to be compensated. 

Like all businesses, brokers seek to pay their overhead expenses and make some 

profit. A broker may be compensated by both the borrower and the lender. Typically, 

the broker receives compensation from both. NovaStar Mortgage compensates brokers 

through payments that it labels “yield spread premiums.” 

In addition to identifying the wholesale interest rates, the rate sheets also identify 

the compensation available to brokers for different loans. The rate sheets describe the 

compensation in terms of points. A point is one percent of the loan amount. Testimony 

at trial will show that when the broker receives some or all of his or her compensation 

from the lender, the borrower may, – but does not always – pay a higher interest rate 

than if the borrower had elected to pay all of the broker’s compensation out of his or her 

own pocket. Plaintiffs claim that some 1000 class members have brokered loans. 

B. The Loans Obtained by NovaStar Mortgage in the Secondary Mortgage 

Market

Some class members have loans that NovaStar Mortgage purchased from 

correspondent lenders in the secondary mortgage market. 

NovaStar Mortgage has contracts with certain correspondent lenders that permit 

those lenders to submit closed and funded loans to NovaStar Mortgage for possible 

purchase. As discussed in Section II.A.6 below, when NovaStar Mortgage purchases a 

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LAW OFFICES

GORDON, THOMAS, HONEYWELL, MALANCA, 

PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

loan in the secondary mortgage market, no yield spread premium is involved and 

RESPA’s disclosure requirements do not apply. 

Plaintiffs claim that the LePages and approximately 50 other class members have 

secondary market loans. 

C. The Named Plaintiffs’ Claims

There are eight named plaintiffs involved in the case: (1) Cameron and Patricia 

Pierce: (2) Larry Brown; (3) Karen Kirby; (4) Gregory and Paula Sherman; (5) Ralph 

Martinelli and (6) Michael and Gertrude LePage. 

1. Cameron and Patricia Pierce 

The Pierces obtained a mortgage loan through a mortgage broker from NovaStar 

Mortgage in August 2003. At the time they were seeking to refinance their loans, the 

Pierces were seriously delinquent on their real estate taxes. The testimony at trial will be 

that they needed to pay overdue taxes in the amount of $12,590.46, and that they had 

only $3,000 in their savings account. The refinance loan that the Pierces obtained from 

NovaStar Mortgage allowed them to pay their overdue taxes and they received cash back 

from the closing in the amount of $1,347.64. The Pierces are suing NovaStar Mortgage 

because it paid the Pierces’ broker, their friend Ruth Klein, $2,040 in connection with 

this refinance transaction. 

Mr. Pierce, who has nearly 20 years of experience in the mortgage business, is 

fully familiar with yield spread premiums. Mr. Pierce hired a friend of his, Ruth Klein, 

to serve as his mortgage broker. There are four Good Faith Estimates in the Pierces’ 

loan file. All of the Good Faith Estimates are dated June 11, 2003. Three of those Good 

Faith Estimates project that a YSP of 2 percent will be paid. The fourth GFE was signed 

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GORDON, THOMAS, HONEYWELL, MALANCA, 

PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

by the Pierces on August 12, 2003, and does not list a YSP. The Pierces contend that 

they never received any of the three GFEs that do list the YSP. Mr. Pierce also contends 

that, despite his familiarity with YSPs and knowledge of their widespread usage in the 

lending industry, he never asked Ms. Klein whether there was a yield spread premium 

associated with his loan. Mr. Pierce says he learned only at loan closing that a YSP was 

involved with his loan. He conceded, however, that he knew what the interest rate on his 

loan would be well in advance of loan closing and did nothing to shop that rate around 

despite his knowledge and industry contacts. 

Although Mr. Pierce claims that he was angry with Ms. Klein for not disclosing 

the yield spread premium to him, he still hired her the next year when he again 

refinanced his loan with NovaStar Mortgage. A comparison of those loans illustrates 

another fallacy in plaintiffs’ logic – their apparent belief that their mortgage brokers 

would have foregone the compensation provided by the YSP without increasing their upfront charges. The HUD-1 Settlement Statement showed that the broker received the 

following broker compensation for the Pierces’ 2003 loan: 

2003 Loan Broker Fees 

(Note Interest Rate 9.125%) 

Loan Origination 1% Points Paid by 

Borrower 

$2,125.00 

Processing Fee Paid by Borrower $420.00 

Broker Fee Paid by Borrower $500.00 

Yield Spread Differential (P.O.C.) by 

NovaStar 

$2,040.00 

TOTAL $5,085.00 

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LAW OFFICES

GORDON, THOMAS, HONEYWELL, MALANCA, 

PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

In August of 2004, the Pierces refinanced their mortgage again with NovaStar 

Mortgage to pay off an additional $13,000 in debt. When the Pierces refinanced, they 

agreed to another two-year adjustable rate mortgage, but with a higher initial interest rate 

of 9.6 percent. 

The broker received the following fees for the 2004 loan: 

2004 Loan Broker Fees 

(Note Interest Rate 9.600) 

Loan Origination 2% Points Paid by 

Borrower 

$4,845.00 

Processing Fee Paid by Borrower $400.00 

Broker Fee Paid by Borrower $495.00 

No Yield Spread Paid 0 

TOTAL $5,740.00 

Therefore, the broker earned approximately the same amount in fees for both 

loans but for the 2004 loan – the loan with no yield spread – the Pierces made up the 

difference by paying the broker more out of their own pocket. For the 2004 loan, the 

Pierces paid a two percent origination fee compared to a one percent origination fee in 

the 2003 loan. In the 2003 loan, the additional one percent came from the yield spread 

premium paid by NovaStar Mortgage to the broker. Despite the absence of a yield 

spread premium, the 2004 loan had a higher interest rate. 

2. Larry J. Brown 

Larry J. Brown contacted a NovaStar Home Mortgage Inc. branch in 

Indianapolis, Indiana, in May of 2004 to discuss refinancing the mortgage on his home in 

Tacoma, Washington. At the time, Mr. Brown was seriously delinquent on several credit 

cards. As a result of the refinance loan he obtained, Mr. Brown was able to pay off 

$19,935 in outstanding credit card debt and he walked away from the closing table with 

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LAW OFFICES

GORDON, THOMAS, HONEYWELL, MALANCA, 

PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

$8,713.23 in cash. Mr. Brown’s claim relates to the payment by NovaStar Mortgage in 

the amount of $3,150 to NovaStar Home. 

Mr. Brown was behind on his credit cards, had low credit scores and had been 

delinquent on his mortgage payments because he had decided to take nearly two years 

off from work and live on unemployment compensation because he needed “a long rest.” 

NovaStar Home Mortgage asked Mr. Brown to write a letter explaining his credit 

problems and he agreed. Here is what Mr. Brown wrote: 

Hi! I am writing you this letter to explain why I need a loan from your 

company. I have been unemployed for about 22 months. I am working 

now and want to consolidate my bills to a level that will fit my new 

income. 

I was working for the Yankee Grill & Roaster restaurant for 3 years (part 

of Mitzels Corporation, which I worked for 10 years) when the owner 

came in one day and said “today is the last day; the restaurant is closed.” I 

was laid off for the first time in my work history. I decided this would be 

a good time to collect my unemployment and take a long rest, which I 

needed after working for Mitzels Corporation. 

*** 

I needed the break from work. Now I am well rested and ready to work 

for another 30 years. I have a new job now with McDonald Corporation. 

It has lots of opportunities for me so I will be there for a long time. I like 

the job and when that happens I am there for 10 years or longer.

Please consider my request for little help in my time of need. You will 

receive a lot of karma points if you decide to grant me the loan. The 

universe will smile upon you for your kindness of heart. 

Not surprisingly, Mr. Brown had been rejected by two other mortgage brokers or 

lenders at the time that he contacted NovaStar Home Mortgage. NovaStar Home 

Mortgage provided Mr. Brown an initial disclosure package that included a Good Faith 

Estimate that disclosed a possible yield spread of 0-3 percent. Mr. Brown received a 

loan from NovaStar Home Mortgage on May 28, 2004. 

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LAW OFFICES

GORDON, THOMAS, HONEYWELL, MALANCA, 

PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

3. Karen Kirby 

In the summer of 2003, Ms. Kirby contacted a mortgage broker to help her obtain 

a mortgage loan for the purchase of a home in Olympia, Washington. On Ms. Kirby’s 

behalf, the broker applied to NovaStar Mortgage for what is known as a stated income 

loan. For a stated income loan, NovaStar Mortgage verifies employment but does not 

require documentation of income. Instead, NovaStar Mortgage relies upon the income 

stated by the borrower in the application. A stated income loan carries a higher interest 

rate than a loan supported by full documentation. 

Ms. Kirby and her broker agreed to falsely overstate her income on her loan 

application. Even though she made approximately $2,000 a month at that time, Ms. 

Kirby stated her income as over $3,000 a month. She signed a certification stating that 

the information on the loan application was accurate, even though she knew her income 

was overstated. 

Additionally, Ms. Kirby ended up with a below-par interest rate, i.e., her rate was 

below the rate that NovaStar Mortgage made available to the mortgage broker with no 

yield spread being paid. There was a 0.75 yield spread premium paid to the broker on 

Ms. Kirby’s loan. That would have raised her rate to an above par rate of 6.74. 

NovaStar Mortgage, however, made a rate exception of one point for Ms. Kirby, 

reducing her note rate to 5.75 percent. Ms. Kirby’s claim involves the payment of 

$714.00 by NovaStar Mortgage to her mortgage broker. 

4. Gregory and Paula Sherman 

The Shermans received a mortgage loan in June of 2003 to refinance their home 

in Chattaroy, Washington. The Shermans contacted Krista Whitley, a loan officer at 

Progressive Lending LLC, a mortgage broker and lender in Spokane, Washington. 

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LAW OFFICES

GORDON, THOMAS, HONEYWELL, MALANCA, 

PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

Ms. Whitley provided the Shermans a Good Faith Estimate that estimated that a yield 

spread premium of 0-4 percent would be paid. While the Shermans complain this 

disclosure was inadequate, Ms. Whitley has testified that she explained to the Shermans 

that her fees could be paid by the lender in the form of a yield spread premium, by the 

borrower in the form of fees charged up front, or by some combination of fees from both 

the lender and the borrower. She testified that the Sherman chose to have part of her fees 

paid by the lender in the form of a yield spread premium. Ms. Whitley will also testified 

that if the Shermans had not agreed to the yield spread premium that she would have 

charged them more in fees. Mrs. Sherman testified that although she knew the interest 

rate that she would receive before her loan closing, she did no comparison shopping. 

As a result of the refinance loan that the Shermans were able to obtain from 

NovaStar Mortgage, they were able to payoff a number of outstanding debts which 

totaled approximately $8,000, and they walked away from the closing table with $5,000 

in cash. 

5. Ralph Martinelli 

In 2005, Ralph Martinelli wanted to refinance his home. Mr. Martinelli first 

contacted a mortgage broker called Creative Concepts, but was told that they could not 

help him get a mortgage because of his “less than desirable” credit. 

Mr. Martinelli contacted West Valley Mortgage (“West Valley”) because he 

knew West Valley loan officer Ed Bennett. On April 19, 2005, Mr. Bennett provided 

Mr. Martinelli a loan disclosure package. That package included a Mortgage Loan 

Origination Agreement and a Good Faith Estimate. 

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LAW OFFICES

GORDON, THOMAS, HONEYWELL, MALANCA, 

PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

Mr. Bennett reviewed the disclosure documents with Mr. Martinelli line-by-line. 

This line-by-line review included the Good Faith Estimate. The GFE included a 

disclosure of YSP 0-3. Mr. Bennett went over the YSP disclosure in his review of the 

GFE with Mr. Martinelli. 

In connection with his refinancing, Mr. Martinelli was able to pay off an 

outstanding debt to Ford Credit in the amount of $5,883, and he walked away from the 

closing table with $10,687.97 in cash. Mr. Martinelli’s claim relates to the payment of 

$2,273.00 by NovaStar Mortgage to his original lender, West Valley Mortgage, when 

NovaStar Mortgage purchased this loan. 

6. Michael and Gertrude LePage

In June of 2003, Michael and Gertrude LePage wanted to refinance the mortgage 

on their home in Addy, Washington. The LePages applied for a mortgage loan with CLS 

Mortgage, Inc., in Spokane, Washington. CLS is a mortgage lender. CLS has 

contractual agreements with various investors under which it submits closed and funded 

loans to those investors for possible purchase on the secondary market. One of those 

investors is NovaStar Mortgage. 

In August of 2003, CLS Mortgage originated, funded and closed the mortgage 

loan with the LePages in its own name. CLS later sold the loan to NovaStar Mortgage in 

a secondary mortgage market transaction. The Court previously ruled that this was a 

secondary market transaction not subject to RESPA. Dkt. 140 at 7-8. 

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LAW OFFICES

GORDON, THOMAS, HONEYWELL, MALANCA, 

PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

III. LEGAL ANALYSIS

A. NovaStar Mortgage Has Not Violated the CPA as to the Broker Class

To prove a Washington Consumer Protection act claims, the class members must 

establish; (1) an unfair or deceptive act or practice, (2) occurring in the conduct of trade 

or commerce, (3) impacting the public interest, and (4) proximately causing (5) injury to 

the plaintiff in his or her business or property. Hangman Ridge Training Stables, Inc. v. 

Safeco Title Ins. Co., 105 Wn.2d 778, 784-85, 719 P.2d 531, 535 (1986). Failure to 

prove anyone of these elements is fatal to plaintiffs’ claims. Id. at 793. 

1. NovaStar Mortgage Has Not Committed Unfair and Deceptive Acts 

With Regard to the Broker Class 

The broker class alleges that the disclosure of the yield spread premium failed to 

comply with the Real Estate Settlement Procedures Act (“RESPA”). Plaintiffs argue that 

a violation of RESPA is a violation of the Consumer Loan Act. In turn, a violation of the 

Consumer Loan Act is a per se unfair and deceptive act under the Consumer Protection 

Act. The broker class will not be able to prove that NovaStar Mortgage committed an 

unfair and deceptive act. 

The vast majority of the members of the broker class received a YSP disclosure 

on their GFEs.2

 The most common form of disclosure was as a range. The vast majority 

of the class members did receive a disclosure in the form of a range. The range 0 to 3 

percent is the most common but other ranges were used as well. These ranges include 

 

2

 The Court already has ruled that Good Faith Estimates that make no mention of a yield spread premium 

on loans that included yield spread premiums are inadequate under RESPA, and therefore violate the CLA 

and represent an unfair and deceptive act under the CPA. Only a small percentage of the class members 

received no yield spread premium disclosure on the GFE. 

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LAW OFFICES

GORDON, THOMAS, HONEYWELL, MALANCA, 

PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

2-3%, 1-4%, 1-3%, 1-2%, and 0.5-3%. In every instance where the YSP was disclosed 

as a range, the ultimate YSP payments were within the stated range. 

When the plaintiffs’ loans were made, NovaStar Mortgage appropriately relied 

upon the mortgage brokers to provide the Good Faith Estimate disclosures.3 These 

disclosures are made very early in the process. The broker is supposed to provide the 

disclosures within three days of application. At this time, the existence and amount of 

any yield spread premium may simply not be known.4 Appropriately, given the early 

nature of these disclosures, the plain language of the relevant federal regulation and 

statutes provide that the estimate may be disclosed as a range. 

The relevant federal regulations state with regard to disclosure of a yield spread 

premium that: 

[A]ny other fee or payment received by the mortgage broker from either 

the lender or the borrower arising from the initial funding transaction, 

including a servicing release premium or yield spread premium is to be 

noted on the Good Faith Estimate and listed in the 800 series of the 

HUD-1 Settlement Statement. 

24 C.F.R. pt. 3500, App. B – Illustrations of Requirements of RESPA. 

In turn, RESPA, Section 2604(c) provides: 

(c) Estimate of charges: 

Each lender shall include with the booklet a good faith estimate of the 

amount or range of charges for specific settlement services the borrower 

 

3

 The regulations implementing RESPA state: 

A mortgage broker must provide a good faith estimate within three days of receiving a 

loan application based on his or her knowledge of the range of costs. As long as the 

mortgage broker has provided the good faith estimate, the funding lender is not required 

to provide an additional good faith estimate, but the funding lender is responsible for 

ascertaining that the good faith estimate has been delivered. 

24 C.F.R. § 3500. 

4

 Indeed, a significant percentage of the brokered loans that NovaStar Mortgage acquires through brokers 

in Washington state have no yield spread premiums at all. 

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LAW OFFICES

GORDON, THOMAS, HONEYWELL, MALANCA, 

PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

is likely to incur in connection with the settlement as prescribed by the 

Secretary. 

The accompanying regulations instruct: 

(c) Content of good faith estimate. A good faith estimate consists of an estimate, 

as a dollar amount or range, of each charge which: 

(1) Will be listed in section L of the HUD-1 or HUD-1A in accordance with the 

instructions set forth in Appendix A to this part; and 

(2) That the borrower will normally pay or incur at or before settlement based 

upon common practice in the locality of the mortgaged property. Each such 

estimate must be made in good faith and bear a reasonable relationship to the 

charge a borrower is likely to be required to pay at settlement, and must be based 

upon experience in the locality of the mortgaged property. As to each charge 

with respect to which the lender requires a particular settlement service provider 

to be used, the lender shall make its estimate based upon the lender's knowledge 

of the amounts charged by such provider. 

(emphasis added). Thus, the clear language of the RESPA and its accompanying 

regulations permit the yield spread premium to be disclosed as a range. 

In their Motion for Partial Summary Judgment filed February 1, 2007, plaintiffs 

sought a ruling that the good faith estimates for the named plaintiffs listing the YSP as a 

range beginning with “0%” and either a dollar amount of “$0.00” or no dollar amount at 

all are inadequate as a matter of law. Dkt. 103, at 10. 

In its March 15, 2007 Order Granting in Part and Denying in Part Plaintiffs’ 

Motion for Partial Summary Judgment, the Court declined to so rule. Rather, the Court 

specifically held that fact questions regarding whether the disclosures of the YSP 

payments were in good faith precluded such a ruling. Specifically, the Court held: 

plaintiffs fail to demonstrate that NovaStar’s estimation that a borrower 

would not, or may not, be required to pay a YSP is inadequate or 

otherwise unlawful. In other words, the plaintiffs fail to demonstrate that 

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PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

this estimation was not in good faith or that NovaStar was not permitted 

to pay a YSP due to such a disclosure. 

Dkt. 126, at 11. 

In so holding, the Court noted that the following fact questions were relevant to 

determining whether any particular disclosure was made in good faith: 

• when NovaStar Mortgage knew that a YSP would be charged 

• when NovaStar Mortgage knew what rate would be charged 

• whether NovaStar Mortgage knew the YSP rate at the time of the good 

faith estimate 

Id.

5

 Plaintiffs will not be able to make these factual showings. 

2. Mr. Pierce’s Claim Is Outside the Scope of the CPA Because He Is a 

Sophisticated Consumer 

Given his bonanza of experience in, and knowledge of, the financial industry, and 

his specific acknowledgment that he was well aware of the purpose and payment of yield 

spread premiums to mortgage brokers, Mr. Pierce may not properly seek relief under the 

Washington Consumer Protection Act. This is because Washington courts consistently 

have to refused to extend the scope of the CPA to experienced business persons “not 

representative of bargainers subject to exploitation and unable to protect themselves.” 

Pacific Northwest Life Ins. Co., v. Turnbull, 51 Wash. App. 692, 703, 754 P.2d 1262, 

1269 (1988). When a plaintiff has “sufficient sophistication,” he removes himself from 

the regular class of bargainers, and thereby removes himself from the ambit of the CPA. 

Segal Co. v. Amazon.com, 280 F. Supp. 2d 1229, 1234 n.5 (W.D. Wash. 2003) (the CPA 

“does not provide extra protection for those individuals who, like [Mr. Pierce], have 

 

5

 NovaStar Mortgage continues to maintain that the necessity of establishing these same “facts” for each 

and every borrower in the class precludes class treatment of plaintiffs’ CPA claim. 

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POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

sufficient sophistication to remove them from the class of bargainers subject to 

exploitation”). 

Here, there can be no reasonable dispute that Mr. Pierce is not a “regular 

consumer” when it comes to interest rates and the payment of yield spread premiums. 

As discussed above, Mr. Pierce testified to his nearly twenty years of experience in the 

lending industry, to his specific understanding of the role of yield spread premiums in 

broker compensation, and to explicit awareness that loan terms are subject to negotiation. 

Mr. Pierce cannot contend that he did not have the knowledge to review his loan, ask 

appropriate questions and bargain as he saw fit. In fact, his broker – Ms. Klein – was a 

friend with whom Mr. Pierce had dealt with on numerous times over the years. Given 

Mr. Pierce’s level of sophistication and close association with, and knowledge of, the 

lending process, he may not now seek to feign surprise that his broker was compensated 

through a yield spread premium. 

3 Ms. Kirby Is Precluded from Recovering Under the CPA Because 

She Falsely Stated Her Income 

Ms. Kirby’s admission that she falsely stated her income – a material term of her 

loan application – precludes her from recovering under the CPA. 

“The CPA exists to protect consumers, not to aid and abet fraud.” Mutual of 

Enumclaw Ins. Co. v. Cox, 110 Wn.2d 643, 652, 757 P.2d 499, 504 (1998). 

Accordingly, Washington courts have consistently rejected plaintiffs’ attempts to recover 

under the CPA where they have engaged in fraud. Id.; Tornetta v. Allstate Ins. Co., 94 

Wn. App. 803, 810-11, 473 P.2d 8, 12 (1999); Wickswat v. Safeco Inc. Co., 78 Wn. App. 

958, 971, 904 P.2d 767, 774 (1995). Because the facts will lead the jury to conclude that 

Ms. Kirby engaged in fraud, her CPA claim fails. Id. (“we find that the trial court in this 

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1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

case correctly directed the jury not to consider plaintiff’s bad faith and CPA violation 

claims if it found that he intentionally misrepresented or concealed material facts during 

the claims process.”). 

4. The Broker Class Members Will Not Be Able to Prove Proximately 

Caused Injury 

Even if the named plaintiffs and broker class members should show a deceptive 

act, they still must prove under Washington law that the alleged deceptive act 

proximately caused their injury. See Hangman Ridge, 719 P.2d at 539. This requires 

plaintiffs to prove “proximate cause.” See Washington State Physicians Ins. Exch. & 

Ass’n v. Fisons Corp., 122 Wn.2d 299, 314, 858 P.2d 1054, 1062 (1993). Proving 

proximate cause requires plaintiffs to show that (1) “but for” the deceptive act or practice 

they would have received a “par” interest rate, City of Seattle v. Blume, 134 Wn.2d 243, 

251-52, 947 P.2d 223, 227 (1997); see also Nuttall v. Dowell, 31 Wn. App. 98, 110-11, 

639 P.2d 832 (1982), and that their higher interest rate “would not have” happened in the 

absence of NovaStar Mortgage’s purported failure to disclose the yield spread premium. 

Fisons Corp., 122 Wn.2d at 314-15, 858 P.2d 1062; 6A Wash. Prac., Wash. Pattern Jury 

Instr. Civ., WPI 310.07 (5th ed. 2004) (defining proximate cause for CPA claims as “a 

cause which in direct sequence produces the injury complained of and without which such 

injury would not have occurred.”). 

To demonstrate that they would have received the par rate for their loan had 

proper disclosure been made, Washington law requires plaintiffs and the class to prove 

that either (1) their broker would have made the rate available to them without increasing 

their up front fees, or (2) they could have obtained a loan at a lower rate from a different 

broker or lender without paying more in fees. Plaintiffs also must show they had no 

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PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

knowledge separate and apart from the good faith estimate of the connection between the 

yield spread premium and the interest rate that they received. 

First, the plaintiffs must show that their particular broker was willing to make 

their individual par rate available to them without a corresponding increase in the fees 

that they would have to pay. This showing is required because NovaStar Mortgage does 

not make these “wholesale” loan interest rates available directly to borrowers. These 

rates can only be obtained through mortgage brokers. Therefore, plaintiffs will have to 

show that the broker they dealt with would have foregone the yield spread premium rate 

and provided them their par interest rate without increasing their fees. Plaintiffs cannot 

make this showing. In fact, the broker associated with the Sherman loan has testified 

that she would not have given up the yield spread compensation without increasing the 

fees required of the borrower. 

Lacking evidence that their broker would have relinquished the yield spread 

premium compensation, the named plaintiffs and class members would need evidence 

that they could have obtained a loan with a lower interest rate for the same out of pocket 

fees from another broker or lender. The named plaintiffs cannot produce this evidence 

either. Not a single named plaintiff made any attempt to determine if a loan with a lower 

interest rate would have been available from a different broker or a different lender. 

Additionally, plaintiffs cannot establish proximate cause – even if the yield 

spread premium was not adequately disclosed on the GFE – if they had actual knowledge 

of the YSP from another source. Of course, there can be no dispute that plaintiffs’ actual 

knowledge is relevant to deciding whether proximate cause exists. If plaintiffs had 

actual knowledge of the yield spread premium from discussions with their mortgage 

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PETERSON & DAHEIM LLP

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POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

broker or any other sources, they cannot claim to have been deceived even if it was 

mistakenly omitted from the GFE. Sheldon v. American States Preferred Ins. Co., 123 

Wn. App. 12, 17-18, 95 P.3d 391, 393-94 (2004), review denied, 153 Wn.2d 1030, 110 

P.3d 756 (2005) (holding that technical violation of notice provision is not actionable 

when consumer has actual notice from another source.); Robinson v. Avis Rent-a-Car 

System, Inc., 106 Wn. App. 104, 117-18, 22 P.3d 818, 825 (finding no deceptive act 

where plaintiffs had actual knowledge of alleged omitted fact); Fisons, 122 Wn.2d at 

315, 858 P.2d at 1062 (doctor would not have CPA claim if he had knowledge from 

another source of information allegedly omitted by drug manufacturer). 

The broker associated with the Shermans’ loans has testified that she explained 

the yield spread and its link with the interest rate to the Shermans and that the Shermans 

agreed to the higher interest rate well in advance of loan closing to keep their upfront 

costs down. There will be other broker testimony regarding individual brokers’ practices 

and procedures about explaining the link between the yield spread premium and the 

interest rate and giving the borrower the option to pay more in up front fees or take a 

higher interest rate. 

5. Ms. Kirby Cannot Show Injury Because She Received a Below Par 

Loan 

Additionally, Ms. Kirby and similarly situated class members cannot demonstrate 

injury because they received a below-par loan and can claim no basis at all for injury. 

The rate sheet used for Ms. Kirby’s loan showed the following rates: 

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PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

2 Year Fixed – 80% 

2-YR 

Points Rate 

1 6.250

0 6.625

(1) 7.125

(2) 7.750

Thus, the starting point to determine the par rate for Ms. Kirby’s loan was the 

rate corresponding to 0 – 6.625. That is only a beginning point because NovaStar 

Mortgage calculates an individual par rate for each borrower. Ms. Kirby’s individual par 

rate is calculated by: (1) adding 0.375 because the loan is a stated income loan with a 

loan to value rate of 80 percent, (2) adding 0.125 because she also took out a second 

mortgage and the combined loan to value rate of both mortgages was between 90 and 95 

percent and (3) subtracting 0.75 because her FICO (credit) score was between 680 and 

699. Thus the par rate for Ms. Kirby’s loan was 6.375. 

There was a 0.75 yield spread premium paid to the broker on Ms. Kirby’s loan. 

That would have raised her rate to an above par rate of 6.74. NovaStar Mortgage, 

however, made a rate exception of one point for Ms. Kirby, reducing her note rate to 

5.75 percent. This is 0.625 below par. 

Evidence at trial will demonstrate that three of the named class members, and at 

least 455 members of the putative class, were given rate exceptions that more than 

canceled out any interest increase allegedly related to the yield spread premium. As in 

Ms. Kirby’s case these borrowers cannot prove any injury at all. 

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PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

6. The Secondary Market Class Will Not Be Able to Show an Unfair 

and Deceptive Act 

The secondary market class is not relying on a statutory violation to establish an 

unfair or deceptive act. Instead, the secondary market class claims that the CPA itself 

somehow creates an independent obligation that required NovaStar Mortgage to disclose 

to the LePages on a GFE the amount that NovaStar Mortgage paid acquire their loan in a 

secondary market transaction. 

The secondary market class will not be able to establish any such obligation and 

their claim will fail as a matter of law. 

First, there simply is no authority to support this claim. Lenders currently are 

under no obligation to identify on GFEs compensation paid for a secondary mortgage 

transaction. Such a duty should not be retroactively imposed in the absence of any 

statute, or regulation (federal or otherwise) that even hints at such a requirement. 

Second, there is no obligation on the part of the acquiring lender in a secondary 

market transaction to provide a GFE to the borrower. The GFE is the responsibility of 

the lender that funds and closes the loan. Plaintiffs can identify no disclosure obligation 

of any kind imposed upon the acquiring lender in a secondary market transaction. 

Third, under its plain language, the CPA cannot be properly invoked here. Under 

RCW 19.86.170, the CPA does not apply to actions and transactions that are permitted, 

prohibited or regulated by federal laws and regulatory bodies. It is beyond dispute that 

RESPA and its related regulations control the content of Good Faith Estimates. It is also 

beyond dispute that in those related regulations, HUD has exempted secondary market 

transactions from RESPA’s disclosure. Because HUD specifically permits that sums 

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PETERSON & DAHEIM LLP

1201 PACIFIC AVENUE, SUITE 2100 

POST OFFICE BOX 1157 

TACOMA, WASHINGTON 98401-1157 

(253) 620-6500 - FACSIMILE (253) 620-6565

paid to acquire a loan on the secondary market need not be disclosed on the GFE, as a 

matter of law, the CPA does not apply here. 

For these reasons the secondary market class will not be able to prove its claim. 

7. The Secondary Market Class Cannot Prove Proximately Caused 

Injury 

For the same reasons set out above with regard to the broker class members, the 

secondary market class members will not be able to prove proximately caused injury. 

Dated this 4th day of June, 2007. 

 //S// 

Salvador A. Mungia, WSBA # 14807 

smungia@gth-law.com 

Stephanie Bloomfield, WSBA #24251 

sbloomfield@gth-law.com 

GORDON, THOMAS, HONEYWELL, 

MALANCA PETERSON & DAHEIM 

1201 Pacific Avenue, Suite 2100 

Tacoma, WA 98402 

(253) 620-6500 (Telephone) 

Mitchel H. Kider 

Donald C. Brown, Jr. 

WEINER BRODSKY SIDMAN KIDER, PC 

1300 Nineteenth Street, N.W. 

Washington DC 20036 

(202) 628-2000 (Telephone) 

Attorneys for Defendant NovaStar Mortgage, 

Inc. 

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