Foreclosure Defense: Stated Income Loans, Income Overstated and TILA Rescission

Remember that rescission doesn’t mean you give back the house. It doesn’t even mean you have to give back the money to the lender against whom you are rescinding — THAT obligation commences AFTER the lender admits to the rescission or it is otherwise decreed and then it is reduced by the refunds of points, interest, closing costs you paid plus damages and attorney fees you suffered as a result of the issues raised in this post.

Rescission might not even mean you owe any money at all to the lender. It could mean that the mortgage lien is extingunished and so is the note. And unless the party coming into court or the auction as a “representative” of the lender can prove that they have received their instructions and authorization from a party who is authorized to give those instructions, then they lack authorization, they lack legal standing and they are probably committing a fraud on you, the court and everyone else. 

Most lawyers have a knee jerk reaction in advising clients about challenging foreclosure when the stated income application contains mistatements or outright fraud. They tell their clients that they better not open this box because of all the criminal and civil liability issues that will arise from the deceptive information stating the income of the borrower. WRONG! Fear tactics and unimaginative and uninformed lawyers are allowing people to lose their homes when they should be keeping their homes and getting paid damages for what was done tot hem. This advice they are giving is in most cases completely incorrect.

The lender has an obligation to verify the income. As such, when it failed to verify the income it waived it’s right to complain that the income was wrong because the courts say that the lender did not reasonably rely on the stated income, as set forth in the mortgage application. And when they failed to verify the true value of the property, as they were supposed to do to protect your interest as their “client”, they knowingly assisted in defrauding you out of the benefit of the bargain you thought you were getting. In fact, you got a home worth less than the mortgage indebtedness you signed at closing and you didn’t know it because they didn’t want you to know it.

This might seem overly lenient or liberal” to some, but it isn’t. In all cases but a few, the application is filed out by someone other than borrower and the person filing out the application puts down the income necessary to justify the the amount of the loan sought without even asking what the real income is. If the subject comes up most borrowers tell the mortgage broker or representative that their income is not what is stated on the application, and they are told they must submit the application “as is” in order to get the loan.

The old “don’t worry, everybody is doing it” is true — that is exactly what was happening. And the responsibilities of the “lender” who was in actuality a mortgage broker which was not disclosed (as required by law) to the borrower is unchanged: they have a fiducuiary duty to the borrower to present the borrower with a loan program (with everybody’s role and compensation and risk fully disclosed) that will work given the economic, income and liability circumstances of the borrower. We have many stories where people were given mortgage loans in the millions based upon zero actual income or close to zero.

Investment speculation was promoted through encouragement of speculators to take ARM financing and then flip the homes in the ever growing housing market and explosion of housing prices. Advertising for refinancing, first home financing, HELOCs (which are now often dischargeable in bankruptcy and are fully within the right to rescind the transction stated in Truth in lending Act, encouraged every man, woman and child to become further and further in debt, diverting capital from the economy, the marketplace and main street to a select few on Wall Street, which is why some salaries now for the same job require greater qualifications at less pay than they were getting with fewer qualifications and far more pay 20-30 years ago.

See the following article from the Bakruptcy Law Network for more information. BLN is a very good source on a wide variety of issues but the old expression that “he works with a hammer tends to look at everything as a nail” comes to mind. Most people petitioning for bankruptcy are not protecting their interests in the best possible way, in my opinion, but of course your own attorney is supposed to know what is best.

First of all if you are going to file for bankruptcy, given the fact that the mortgage and note have been transferred many times more than once, there is a question about who the creditor is and WHETHER THE CREDITOR HAS BEEN PAID ALL OR PART OF THE “MISSING” PAYMENTS.

If some investor bought your loan and the investMent banking house paid some of the payments to the investor to whom was sold a CDO or CMO, then the loan servicing company that is posting notice of sale or suing you for foreclosure has no idea whether the payments have been made on YOUR note or not.

FRANKLY YOU DON’T EVEN KNOW IF A THIRD PARTY MADE YOUR PAYMENTS TO THE REAL CREDITOR ON YOUR MORTGAGE AND NOTE AND IN ALL PROBABILITY SOMEONE DID PAY SOME PORTION OF THE RETURN DUE TO THE OWNER OF THE CDO THAT HAS AN INTEREST IN THE MORTGAGE ON YOUR PROPERTY.

Thus the creditor you name IN A BANKRUPTCY PETITION OR LAWSUIT OR PETITION FOR EMERGENCY INJUNCTION TO STOP THE SALE OR EVICTION should be a contingent creditor, the amount due on the note should be a contingent liability, and the so-called security aspect is also contingent.

Remember that rescission doesn’t mean you give back the house. It doesn’t even mean you have togive back the money to the ldner aginst whom you are rescinding — THAT obllgation commences AFTER the lender admits tot he rescission or it is otherwise decreed and then it is reduced by the refunds of points, interest, closing costs you paid plus dmages you suffered as a result of the issues raised in this post.

Rescission might not even mean you owe any money at all to the lender. It could mean that the mortgage lien is extingunished and so is the note. And unless the party coming into court or the auction as a “representative” of the lender can prove that they have received their instructions and authorization from a party who is authorized to give those instructions, then they lack authorization, they lack legal standing and they are probably committing a fraud on you, the court and everyone else. 

 

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“Liar Loans”—Who’s the Real Liar?

A recent article in The Wall Street Journal, Are Borrowers Free to Lie?, talks about a recent Bankruptcy Court decision in the Northern District of California.In re Hill dealt with an attempt by National City Bank to hold the Hills’ mortgage loan non-dischargeable, meaning that, despite the loss of their home due to foreclosure  and their subsequent bankruptcy, they would have to pay it back. How did the Hills get in this situation? They did what many borrowers were urged to do over the past several years: take out a “stated income” loan.

Stated Income loans, also called “liar loans” or NINJA (No Income, No Job, No Assets) loans, were mortgage loans in which no proof of income, employment or assets was required. Rather, the borrower simply “states” on the loan application what his or her income is, and the bank does no checking. No pay stubs, no tax returns, nothing. Ask for a mortgage, in virtually any amount, and get it without any investigation of ability to pay, examination, or common sense. Common sense would have disclosed that something was very wrong in the Hills’ case.

The Hills were 54 years old, and worked as delivery drivers and employee for an auto-parts distributor. They signed a loan application falsely stating they earned about a combined $191,000 a year. They claimed that their independent broker and the bank put the income figures into the applications without their knowledge and that they didn’t read them before signing.

Based on the obviously false figures in the application, following the foreclosure on their home and the Hills  filing for bankruptcy, National City Bank, the lender on the loan, asked the Bankruptcy Court to find that their debt to the bank should not be discharged because they lied on their mortgage application. While agreeing that the income statement was false, the Bankruptcy Court disagreed that the Hills should lose their discharge.

The Court stated:

While the Court finds and concludes that the debtors made a material false representation concerning their financial condition to the Bank in October 2006, with knowledge of its falsity and the intent to deceive the Bank, the Court finds and concludes that the Bank’s nondischargeability claim under § 523(a)(2)(B) must fail. The Bank failed to prove that it reasonably relied on the Debtors’ false representation concerning their income, as set forth in the October Loan Application. As a result, the Bank’s claim has been discharged.  Judgment will be ordered accordingly.

In other words, because National City knew or should have known that the Hills misrepresented their income and didn’t check it out, it didn’t meet one of the criteria for nondischargeability: it didn’t rely on the Hills’ false statements in making the loan. The Hills’ loan was found to be dischargeable.

The Hill decision is an important one. It makes clear that banks cannot place sole responsibility for their poor lending practices and decisions on the shoulders of the borrowers. Mr. and Mrs. Hill aren’t without fault, but the fault was on both sides. The Hills lost their home of 20 years and had to file for bankruptcy. The bank lost its money.

Sounds to me as if the Court restored a bit of balance to the equation.

7 Responses

  1. over stated income for period 14th to 24 th december

  2. i did a loan with countrywide in 2007.the lender asked what my monthly gross income wasi told him i usallywrote myself a check for about 900.00 weekly i own my buisness he told me nothing will be varified,three times during our phone conversation,he said i hade lots of write downs that ad to my gross income, before long he had me up to 6500 monthly.my cash flow was about 25000.00 monthly so i asumed rent and many other pay outs was my gross.two years later i lost my house ang got a visit from pmi company wanted my tax returns for three years .my 2006 return showed 65000.00 but all other years show 40000.00.i guess in my buisness returns there probablly some what he calls write downs that add to my gross income.

  3. JP Morgan’s Mortgage Fraud in a blatant Memo called Zippy’s
    cheat and tricks:avenue-s.us/jpmchase.html

  4. nowadays, they are still being allowed if you go through a loan mod company. bank statements & you say what you make. Why are regulators so stupid !!

  5. JPMorganChase living the lie.http://avenues.us/jpmchase.html
    Encouraged false stated income loan fraud in a memo.

  6. Is there any Florida case law that can be used to illustrate the same as in California? I’m looking for the “knew or should have known” about inconsistancies within a loan application. Any help, as always, would be appreciated!

    John

  7. on july 5th 2007 i closed a refinance home loan following the brokers recommendation to due a stated income loan. unfortunately it was after i signed the closing documents and the 3day right to cancel expired i discovered Countrywide overstated my monthly income by $10,000 THEN TOLD ME I DO NOT QUALIFY FOR THE HOME LOAN I WAS PLACED IN. I was refused any remodification to due my insufficent income compared to the mortgage value the refinace placed the full loan amount at. Now after a year and the inability to contest this error my home is planned for a foreclosure auction july 23 2008. the legal advice ive been told repeatedly is since i signed the documents i endorsed the overstatement and am responsible to fullfill my loan obligation , my options appear hopeless with bankruptcy the unfortunate course im facing, i’ve lost $55oo on attorney and loan audit fees yet i still believe that the loan docs im so guilty of endorsing were a contract based on fraudulent misrepresentation and Countrywide should be held to some accountability. Or I might as well signed it in blood and surrender my home and soul to the evil empire of Countrywide. Have i truly lost any chance at a legal case against this mortgage giant, it appears so,unless …. ?

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