The Compounding Effects of Void Court Decisions That Are Contrary to Timely TILA Rescissions Sent Pursuant to 15 U.S.C. §1635 and 12 C.F.R. §226.23
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In 1968 the Federal Truth In Lending Act was enacted and signed into law in order to establish enforceable laws and regulations to promote the informed use of consumer credit. Faced with a choice of establishing a huge bureaucracy or allowing private actions for violations the 90th United States Congress chose private action. Anyone who is acquainted with court action involving this Federal Act knows that judges don’t like it and refuse to apply it.
Since the entire premise of the Act was informed use of credit, consumers need to be informed of terms and circumstances of their proposed credit transaction before they signed any documents. Lenders and other prospective creditors are required to disclose the real economic terms of the proposed deal and to disclose who is receiving compensation and in what amount.
If those disclosures were ignored, the lawmakers gave broad authority to government and individual consumers to take action on their own that would enable the consumers to cancel the transaction with a simple letter. The effect of the letter (Notice of Rescission) was to cancel the loan transaction, rendering the note void and any security instrument void by operation of law. 15 U.S.C. §1635 and 12 C.F.R. §226.23. Since the loan agreement consists of the note and mortgage, the cancellation must void the note and mortgage or else the loan agreement would not be canceled, contrary to the TILA Rescission statute.
The promissory note and the mortgage deed (or deed of trust) must be void because (a) that is exactly what is expressly stated in the statute and regulations and (b) because that is the only logical conclusion. Void means a legal nullity in this instance which means that in terms of any post rescission subsequent action or events no party, court, lawyer or banker can legally or equitably invoke the existence of the note or mortgage. In plain language, foreclosure is not an option in a post rescission world.
With the surge of the use of financial tools like securitization of debt, the disclosures to consumers failed to inform the borrower about the new broader parameters of the entirety of the proposed loan transaction, including the actual viability of the loan, and the fees and profits generated contemporaneously with the proposed loan.
Lenders, unknown to borrowers, were no longer operating on the premise of potential risk of loss from nonpayment because the named lenders and even the actual lenders had no risk of loss. This fundamental change in the dynamics of the marketplace was and remains largely unknown to consumers of debt products.
Lenders and their agents and affiliates were able to generate huge sums in fees and profits from instruments arising directly as a result of the execution of the loan agreement by the borrowers. Contrary to disclosure requirements under TILA, named lenders continued to render disclosures as if no such changes had occurred thus excluding the bulk of the fees, commissions and profits generated by the loan.
As a result the very thing that the 90th United States Congress and all subsequent congresses have sought to avoid — the lack of full disclosure, impaired the informed use of credit by borrowers. The result is history — a tsunami of foreclosure proceedings on loan products that from any objective standard could not possibly survive more than 3-5 years despite a stated “term” of 30 years.
Loans that adjusted to more than the entire household income were granted as though they complied with underwriting standards simply by reducing the “teaser” payment to something that was affordable for the first few months or years. Renters were enticed to take loans that could never be repaid. Homeowners were enticed to take new loans that could never be repaid thus inviting certain disaster — the loss of a home that had been family owned for generations.
Because of TILA, since 1968, caveat emptor does not legally apply to consumer loans; but judges sitting on the bench of state and federal courts are nonetheless regularly applying that standard in lieu of Federal and even state laws. The result has been and continues to be catastrophic loss to consumers while investment banks who created the current preferred scheme of securitization continue to make money on nonviable loan origination, acquisition, trading the offering of hedge and contract instruments based upon the existence of loans that don’t exist — legally or actually.
Starting around 2002, millions of consumers hired loan auditors who examined the disclosure statements and good faith estimates finding that the disclosures were deficient. Consumers en masse have been sending notices of rescission under 15 U.S.C. §1635. Nearly all of them were sent within the three-year time period prescribed by the TILA Rescission statute.
All of those legally rescinded loan agreements were replaced by a statutory scheme for collection of the unpaid debt by the creditor — i.e., the party who had value invested in the debt by reason of having paid for it. All right to repayment arose from the Federal Statute. The note and mortgage, if any, were cancelled. The note and mortgage were legally void, being legal nullities.
The issue addressed by this article deals with effect of orders, judgments, sales and evictions of property that is “foreclosed” post-rescission — i.e., after the mortgage and note ceased to exist. This subject has been assiduously avoided by nearly all writers on the subject for good reasons. Since the mortgage no longer existed, any subsequent order, judgment, sale or eviction was and still is void, not merely voidable.
That means that hundreds of thousands of foreclosures were done without any right, justification, jurisdiction, authority or excuse. And that means that tens of millions of subsequent events and transactions were void ab initio. And that means that the homeowners still own their property despite illegal evidence to the contrary. The only contrary argument is that what was done must be right because we did it. Or perhaps that we can’t undo it now because of all the trouble it would cause to put homeowners back in their rightful place.
Under the TILA Rescission statute, the named lenders have a twenty (20) day opportunity to comply with the duties set forth in the statute — or lose all hope of repayment of the unpaid debt. If they want to collect payment on the debt, they must first fulfill their duties under the statute. Congress provided zero room for stonewalling the effect of rescission.
In every case notices of TILA rescission are ignored by parties who assert authority to represent the creditor — i.e., the party who had paid for the debt. They continue to press forward with both judicial and nonjudicial foreclosures despite repeated advice from their attorneys that such actions could subject them to liability for monetary damages in addition to losing any right to claim repayment of the debt.
Despite the clear and unambiguous wording of the TILA Rescission statute trial judges arrogated to themselves the power to interpret the meaning of the statute and became creative in their interpretations designed to avoid the outcome required by the provisions of the statute and Federal regulations that were promulgated by the Federal Reserve Board and now the Consumer Financial Protection Board.
A unanimous Supreme Court of the United States, in Jesinoski v Countrywide, with Justice Scalia writing for the court in a terse opinion, struck down all attempts by all judges, justices and appellate reviewers to interpret the statute to mean anything other than what was expressly, clearly and unambiguously set forth in the statute.
No tender, lawsuit or claim or proof of nondisclosure or bad behavior of the creditor or anyone else is required before the rescission has the effect of cancelling the loan transaction. The notice of rescission has the same effect as any court order in that it is effective by operation of law.
The court did not address the impact of its decision on homes where legal title to the unencumbered home was treated as having been divested by use of state statutory schemes that only governed foreclosures based on the legal existence of mortgages or deeds of trust securing the performance of duties contained in a legally existing promissory note. Timely notices of TILA rescission had been sent and received in hundreds of thousands of cases. Such foreclosures and any interim orders based upon the pendency of the foreclosure proceedings were therefore entirely void lacking in jurisdiction, authority, or any subject matter upon which any court could rule. And yet they happened.
The obvious answer is that such homeowners still own their homes, the right to repayment of the debt from them has long since expired under applicable statutes of limitation, and right to possession and title is legally assured unless the homeowners have waited so long that statutes governing adverse possession were to apply. It is a draconian result, which is why judges don’t like it. But it is also what Congress intended as the law of the land in order to prevent wholesale violations of disclosure requirements.
Such forced “sales” and transactions did not legally occur based upon our system of laws. The instruments and records of such illusory transactions can and should legally be reversed to maintain the integrity of our land registry systems and to conform to Federal law. But considering the number of post rescission foreclosure sales and resales, the financing and refinancing — millions of transactions would be reversed at ground level and tens of millions of transactions would be reversed in the financial world, secondary market and shadow banking market.
The second obvious answer is that courts must stop allowing such post rescission foreclosures to proceed. There is no interpretation that allows for the void mortgage to be reinstated. Only an express agreement of the parties can do that, confirming with all laws, rules and regulations concerning the preparation, execution and recording of a new instrument for encumbering land or property.
At this point the Courts are building a bubble of void decisions that will and must be reversed unless the entire government abandons the rule of law. We clearly are at that tipping point.
The only remaining option that does not dispossess people who have long since occupied homes that they thought they had purchased, and to avoid the wholesale bankruptcy of title insurance companies and investment banks is to purchase waivers from homeowners who are still the legal owners of what had heretofore been considered foreclosed property. If investment banks want to buy their way out of the obvious problem of voiding trillions of dollars in transactions, they can do so if the homeowners agree. If not the investment banks will most likely collapse and millions of homes will change ownership and possession.
After publication of this article, there is little doubt that an increasing number of lawyers are going to see the efficacy and profitability of pursuing remedies for their clients, although some of those remedies for monetary damages might be initially barred by the applicable statute of limitations. But any thinking lawyer who litigates knows that is only part of the story. The fact remains that there is no statute of limitations on a deed.
Demanding possession of real property and cancelation of instruments purporting to change title do have a statute of limitation but only under adverse possession, which in Florida is 20 years. Thus any foreclosure sale in Florida after 1999 is and shall remain void with the right to title and possession still legally in the hands of the homeowner against whom the foreclosure lawsuit was filed.
The securitization infrastructure built upon the initial loan agreements and the subsequent infrastructure built upon the post rescission foreclosures resulted in fees, commissions and profits far in excess of the principal amount due on the original debt. The only rational business solution is to buy the property from the homeowner for whatever consideration the market will bear. The unwinding of the entire infrastructure will cost them many times what the property is worth.
As an investment banker and securities analyst, I have calculated the total compensation to be in excess of $12 for each dollar of debt – distributed to the investment bank, and its agents or affiliates. This explains stories of how people who were previously employed for delivery of pizzas were “earning” in excess of $500,000 per year.
That number ($12 or 12:1) comes from simple arithmetic — the amount of “nominal” value in the shadow banking market ($1 quadrillion) compared to the amount of real dollars in the real world in all currencies ($85 trillion) (in order to use the most conservative number possible). The real figure is probably closer to $15-$20.
That means that for an average $200,000 loan in the real world, the investment bank, the originators, the aggregator, the agents and affiliates all participated in a distribution of more than $2.4 million in fees, commissions, profits and bonuses. Despite 13 years of publishing articles incorporating these calculations that have been read by more than 15 million individual readers, nobody has ever challenged the conclusion set forth herein.
Investment banks and servicers seem well aware of this enormous risk. Their response has been multi-pronged to avoid the exposure. While there have been many settlements involving the payment of cash for waivers, the main tool has been the use of instruments that are entitled “modification.” Very few of such agreements are recorded in land registries. Even when they are recorded, their intended effect is to change the identity of the claimed creditor, and to change the terms of repayment of interest and principal. Even if the mortgage and note still legally existed it is difficult to see how the presumed modification would be anything other than a refinancing.
The final obvious issue is that it is not legally possible to modify something that doesn’t exist. As stated by one jurist who wishes to remain anonymous, “you can’t place a real roof on top of an invisible house.” Post rescission both the note and the mortgage do not legally exist even if they exist in the real world. In the face of a TILA rescission, not even the borrower can “reinstate” the mortgage without executing a new mortgage or deed of trust with the required formalities; and the claimed creditor may not offer such an instrument without compliance with applicable lending laws and regulations. Incorporating the terms of a void document leads to other bewildering issues beyond the scope of this article.
The inherent problem with that scenario is that the debt is either barred from collection or completely extinguished. And that means a failure of consideration might have occurred despite the thinking of the participants.
In most cases, the time for enforcement of the debt has long since expired under TILA. In states where such expiration eradicates the debt, there can be no consideration for the execution of such instruments, making them executory non-binding instruments.
In states where the expiration of the right to seek a remedy under TILA is treated as a statute of limitation it can be raised as an affirmative defense; but the execution of an instrument renewing the old mortgage and old note and old debt might be execution under duress or false pretenses as to the existence and identity of the creditor who legally owned or owns the debt.
The foregoing analysis is considered radical and even unpatriotic by many who are in close proximity to the levers of power. It remains correct and our system of laws requires that the laws be faithfully executed.
The fact that “process” occurred is not sufficient to establish that due process occurred; and the fact that “due process” occurred is not the same as due process of law. Due process of law requires that the laws be followed. In cases dealing with TILA Rescission the laws are not being followed. Institutionalizing judicial rebellion is a dangerous precedent that ultimately leads inevitably to chaos and anarchy. It puts the fate of men and women in the hands of other men and women who will decide on the outcome without regard to law or precedent.
Perhaps it is unavoidable for those who sit in judgment on the bench of some federal, or state court or at an administrative hearing; maybe the power that we grant as a society to such people must result in some internal sense of superiority and may be that sense is necessary to mete out justice. But all jurists must come to terms with the fact that even jurists must function within the bounds of the law as it is, not as they think it should be.
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Filed under: foreclosure | 10 Comments »
Quietly it is already occurring. More and more state legislatures have been passing title reset laws similar to the Murphy Act in Florida (from the 1930’s) when title was completely screwed up by similar unlawful schemes.