California: Bankruptcy Discharge of Mortgage Indebtedness: Bank did not rely on the Debtors representations concerning their income or that its reliance was not reasonable based on an objective standard.

From Comments:

Literally 2 years out of Bankruptcy we were granted an 80/20 loan on stated income. I found that our appraiser, has had his license revoked for multiple violations including inflation of a property within 20 blocks of our residence. Furthermore, it was determined that an appraisal review fee was paid to First Franklin in the amount of $100.00 to verify its accuracy, (appraiser’s license has since been revoked for knowingly inflating appraisals to push through approval of loans). Being that the home was 100% financed by FF, and did not (even after charging a fee for the service) demonstrate due diligence I think we may be in luck! Please see below a California ruling in regards to a loan financed by National City (parent company of FF) in which the loan was 100% financed (80/20 stated income loan such as ours), that relieved the debtor from financial responsibility:

“However, the Bank’s suit fails due to its failure to prove the sixth element of its claim: i.e., the reasonableness of its reliance.6 As stated above, the reasonableness of a creditor’s reliance is judged by an objective standard. In general, a lender’s reliance is reasonable if it followed its normal business practices. However, this may not be enough if those practices deviate from industry standards or if the creditor ignored a “red flag.” See Cohn, 54 F.3d at 1117. Here, it is highly questionable whether the industry standards–-as those standards are reflected by the Guidelines–-were objectively reasonable. However, even if they were, the Bank clearly deviated to some extent from those standards. In addition, the Bank ignored a “red flag” that should have called for more investigation concerning the accuracy of the income figures. . . .

Based on the foregoing, the Court concludes that either the Bank did not rely on the Debtors representations concerning their income or that its reliance was not reasonable based on an objective standard. In fact, the minimal verification required by an “income stated” loan, as established by the Guidelines, suggests that this type of loan is essentially an “asset based” loan. In other words, the Court surmises that the Bank made the loan principally in reliance on the value of the collateral: i.e., the House. If so, the Bank obtained the appraisal upon which it principally relied in making the loan. Subsequent events strongly suggest that the appraisal was inflated. However, under these circumstances, the Debtors cannot be blamed for the Bank’s loss, and the Bank’s claim should be discharged.” [ In Re Hill Decision, AP 07-4106 (Filed 5-23-2008)]

In our case events strongly suggest that the appraisal was knowingly inflated (or intentionally overlooked). Furthermore, since the transaction was stated income, and the decision above states that the transaction (financed 100%) is “asset based” even though it is a mortgage for a primary residence, would it not qualify for TILA rescission, similar to a refi? We are currently in foreclosure and have filed for bankruptcy.

One Response

  1. Would it be possible for you to tell me:
    – is this a federal or state case
    – is the lender seeking a deficiency against the borrower
    – was this a bankruptcy case


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