USURY REVIVED: 2d Circuit Rules Assignee Does Not Inherit the Preemption of National Banks

For further information please call 954-495-9867 or 520-405-1688.


see Assignees of Debt May Not Charge Usurious Rates in the State of the Borrower

This is a decision with extremely far reaching consequences. Practically all debt now is subject to claims of securitization. Thus most “loans” are assigned and/or sold or transferred to a third party. It has been assumed that the National Banking Act preempted any local laws on usury.

But it turns out that the ability of national banks (like Bank of America et al) to exclude themselves from laws setting the limit for the rate of interest they can charge is limited to that Bank. The hidden ruling here is that for all those loans that are originated by “lenders” that are NOT national banks, the local usury laws apply. The obvious ruling that any successor that is not a national bank must comply with local laws on usury regardless of what is stated in the loan documents.

This applies to every sort of debt that is created for consumers — mortgage loans, student loans, auto loans, credit card debt etc. The laws vary from state to state. Some will say only that the original interest rate must be reduced to the rate allowed locally. Other state really go after the usurious lenders and negate the entire debt and even allow treble damages, plus attorney fees and costs. You have to check with an attorney in your state who can research the usury laws in that state.

This probably means that those loans that allow interest rates to climb into the stratosphere are subject to numerous defenses including unclean hands, which would eliminate the ability of an assignee to partake of the equitable remedy of foreclosure. It also is an opportunity for borrowers to challenge the loan, the existence of a default (because the borrower paid above the usury rate, which should have been allocated to principal on the loan or returned) etc.

None of the REMIC Trusts are national banks. That means that there could be liability for any loans they have in which the borrower’s state does not allow the high interest rate charged by the loan documents. Of course none of the Trusts seem to have any ownership or possession of the debt, note or mortgage. So the identity of the real creditor (probably the investor) becomes especially important when usury is used as a defense. Once that defense is asserted the issue of discovery of the names of investors or the transactions by which the Trust “acquired” the loan becomes especially important and much more difficult for the Judge to deny.

Usury laws were passed as a matter of public policy. It has been determined by virtually all legislative bodies that even if a borrower consents to a ridiculously high interest rate, the transaction will not be enforced becasue the legislature decided that any interest rate above the limit for usury would effectively enslave the debtor, who would never be able to pay back the “loan.”

And there is another corollary to this ruling that needs to be tested on student loans originated by private banks. If they are a national bank then they are excluded from local usury laws. But if the loan was assigned to an entity that was not a national bank, then the high rates hitting some students or former students could not be enforced.

NOTE on STUDENT LOANS: There is another issue that this case might lend support on student loans and specifically their dischargeability in bankruptcy. It is automatically assumed that such loans are not dischargeable in bankruptcy. That is because credit is being extended in anticipation of the earning power of the student after graduation. In order to qualify for borrowing the money for education (which is free in many other countries) the U.S. government either guarantees the loan, buys the loan or provides in its laws that the loan may NOT be discharged in bankruptcy.

If the loan was guaranteed or issued by the US Government then it is not dischargeable in bankruptcy. But is the guarantee transferable to a successor? And the corollary is if the government guarantee does travel with the assignment, then the student loan would still be nondischargeable in bankruptcy. What if the successor is a REMIC Trust where all sorts of hedge products were used. If the student loan was assigned into a securitization scheme, the reasoning in this case MIGHT be used by analogy to say that the student debt then the ability to avoid discharge in bankruptcy would be eliminated; this because the originator elected its remedies to control risk.Just a thought, comments welcome.

By securitizing the debt they privately reduced their risk. But their risk had been zero when they had the government guarantee. If they made money and eliminated their risk by assignment to another party, securitized or not, it would seem to me that the rule governing dischargeability of student loans might be subject to interpretation — because of the originator’s election on how they would profit and how they would control the risk to themselves. And successors not approved for guarantee would by some of the reasoning expressed in the 2d Circuit NOT qualify for nondischargeable status.

49 Responses

  1. I am trying to help someone find their Pooling and Servicing Agreement. The information is below:

    M ERS #: 100091805003039211 SIS #: 1-888-679-6377
    Date of Assignment: March 6th, 2012

    Date of Mortgage: 12/10/2004 Recorded: 12/20/2004 as Instrument No.: 2004-255773 In the County of Honolulu, State of Hawaii.

    Property Address : 82-6291 MANIN! BEACH ROAD, KEALAKEKUA, HI 96750

    James Smith: or 443 677 2799. Thanks

  2. James correct re sol
    Theres tolling though, consider ( excuse pun) did it ever commence
    That gets everything back on the table and the wind is changing. Keep fighting folks.

  3. Everyone keeps jumping to conclusions on this TILA Rescission, but isn’t there a statute of limitations of 3 years on this?

  4. Toad opinion: mers is a “members only” club, similar to the credit bureaus, same deal, pay to play!

    MersCorp is the same shell game as: Americas Wholesale Lender (not even a registered corporation, named as a lender)/ Countrywide, Countrywide Home Loans, Inc, Countrywide Servicing….etc….BOA, NA, BOA servicing, BOA Home Loans, all the same game, divisions of the same players, hiding assets with “GAAP Rules, fuzzy accounting. Shoot, I call it fraud, but what do I know?

  5. the clouded titles link below..they do a good job explaining it.

  6. Beaufort County complaint quoting the 2011 Financial Crisis Inquiry Commission’s (“FCIC) Final Report on the causes of the financial collapse of 2008:

    “The prime example is the Federal Reserve’s pivotal failure
    to stem the flow of toxic mortgages, which it could have
    done by setting prudent mortgage-lending standards. The
    Federal Reserve was the one entity empowered to do so and
    it did not.”

    Whaaaat?! ‘Prudent mortgage-lending standards’ are new?? They wound my ears to speak! Predatory lending laws have been (and ignored) on states’ books for years. This allegation that only the FR might have done something is an outrage and a slap in the face to all here who were victimized once and then again when they sought help from their AGs and got exactly zilch. AG’s were if not are supposed to prosecute predatory lending.
    What might have helped is 1) them doing so and
    2) seeing to it that those engaged in lending weren’t continuing to make pred loans to anyone and 3) not allowing them to be sold (esp if unseasoned) to dupes to take the hits. Or seen to it that the bums didn’t benefit by the real parties’ losses.
    I guess part of that, but only part, is true: that the failure to stem the flow of those bs loans is responsible for the economy. FW it’s the hell worth today, the finger is more accurately pointed at rat-b’s who made the bs loans and those charged with auditing (fnma and all agencies come to mind) and those charged already as a matter of existing law with prosecuting predatory lending – and not with a slap on the hand. If we lost 11 trillion in our savings, investments, and equity, some rat-b’s ended up with it (or mostly). Grrrrr!! Actually, permettez moi: ES&D!!

  7. e.tolle et al – I see in the recorder’s complaint that boa is identified as a shareholder of MERSCorp and (but) a member of mers. Merscorp has the members, not mers. Any idea why boa is being called a mers’ member?

  8. deposition
    summary judgment
    other debt collection discussions

    my opinion:

    For as much as we know about what they have done, how are we expected to not see collusion between the judges and the purported debt collectors (remember foreclosures fall under FDCPA as well as RESPA and other federal statutes)

    Collusion, collusion, collusion – no immunity for collusion

    end my opinion

    Trespass Unwanted, Creator, Corporeal, Life.

  9. If the trust is expressed in the instrument creating the Estate of the trustee, ..
    Every sale..
    Every Conveyance…
    Or other Act of the trustee 8n contravention of the Trust is…….

  10. Both the borrower and the lender (Wink) agree to use MERS as their mutual nominee.

    How did a non borrower magically become a borrower? Debtor? Creditor?

    Magically Delicious Fraud.

  11. I C U

    Here I am…. Can you see me now?

  12. it is known, judicially you can’t prove a negative, yet the bank employees hire law firms who make claims that we either prove or disprove in order to keep our own property.

    And when we fail to prove a negative, and we do fail, because we don’t speak their language and the claim is not true nor fact nor legal nor lawful and it is an absolute certainty we will not prevail, and they enjoy placing us in this position to fight unseen things.

    But we have stepped back and can see what is in front of us, and we can ignore who they say they represent (that we can’t see) and we can go after the people we see for what they do, and let them prove the thing they claim they are doing for the ‘unseen’.

    Trespass Unwanted, Creator, Corporeal, Life.

  13. The Note..
    The Mortgage…
    The Mortgage Note…


  14. It is “my opinion” non-legal, that the district judges cannot rule on MERS, no authority.

    I can add only my opinion again: the judges need bonds to work, hence sue them personally, go after the bonding company. Loose their bond, ooooops too bad phony!

    Right from the beginning, the magistrates that officiate in the “initial” hearing, non-judicial states, have denied us, all of us, our right to be heard by a proper court, with jurisdiction to hear the complaint from the bank’s attorneys. The Fifth amendment is my thought here, we are being led down the garden path by this hearing with no representation, forced to respond to things that have not been proven as fact, hence guilty by intimidation. That Amendment is clear: we have a right to not respond and bear witness against ourselves, unless I am misunderstanding it? Those hearings are tantamount to a public lynching, IMHO

  15. Embrace MERS…..

    Tit for Tat …. for this Cat.

    Nice 1 TU!!!

  16. CLouded Titles Rock!

    Thank You TU!

  17. Co-Creating Our Future on Planet Earth

    has references to many blogs and various points of interest.
    A treasure trove of [in my words – game over] information

    In my opinion, a judge must be qualified to hear these cases and has no immunity for his/her stupidity of the case before them.
    The stupidity, in my opinion, is reason enough to claim the judge lacks subject matter jurisdiction.
    There has been a grand theft of property in the US and judges have help foreign interests attempt to claim ownership of our land through fraud and a judge’s order.

    If we were to sell a property that cannot be sold, we’d be jailed without immunity. Who offers unchallenged immunity to these people sitting in a judge’s chair, and by what authority do they offer unchallenged immunity.

    It is a maxim, no one can convey an authority/right they do not have.

    Unless Creator or God is conveying these unchallenged immunities, they are not worth the paper they are written on, and I have yet to see that paper displayed in a court room, like some people have to display a license, or an inspection sticker.

    There should be evidence and proof, in my opinion, that these fools for judges are qualified to adjudicate anything, or they are complicit in the crime and subject to claims of collusion. It has been proven the courts are not article III courts and the people sitting on the bench are not true judges from the legal sense, but are private contractors.

    It was great to hear that if a judge adjudicates a case where all parties are not present [and the real party in interest is never present], the judge can be sued, so they are not Gods, and their immunity can be stripped, so the purported authority granted has to have come from someone who did not have the authority to grant, to their purported immunity is not real.

    How the hell can we say, someone starts a fire, and everywhere someone goes, there is a fire, and someone gets in front of a judge and there is a fire, and the judge rules ‘they are not the firestarter’, with immunity.

    Trespass Unwanted, Creator, Corporeal, Life

  18. clouded titles blog gave a link to the South Carolina suit.

    Trespass Unwanted, Creator, Corporeal, Life

  19. You’re right E….did’t quite master that hyper-link, Oooooops.

    The judge gets it right! Hope it spreads like cancer, in a good way!

  20. Securitization laws and regs from OCC. FROM 1997 TILL 2012? ALL BANKS HAD TO FOLLOW THESE LAWS AND REG.

    Asset securitization is the structured process whereby interests in loans and other receivables are packaged, underwritten, and sold in the form of “asset-backed” securities. This process enables credit originators to
    Transfer some of the risks of ownership to parties more willing or able to manage them,
    Access broader funding sources at more favorable rates,
    Save some of the costs of on-balance-sheet financing, and
    Manage potential asset-liability mismatches and credit concentrations.
    See also Accounting
    Learn More
    Asset Securitization (Comptroller’s Handbook, November 1977)
    Covers a bank’s use of asset securitization as a way to generate funds, manage the balance sheet, and generate income
    Accounting and Reporting for Mortgage Loan Commitments (OCC 2005-18, May 2005); Interagency Advisory
    Covers accounting and reporting for mortgage loans held for resale or sold under mandatory delivery and best efforts contracts
    Asset Securitization Activities (OCC 1999-46, March 2010); Interagency Statement
    Addresses weaknesses in the asset securitization practices of some insured depository institutions including inadequate controls and liquidity risk
    Capital Treatment for FAS 166 and FAS 167 (ASC 860 & 810) (OCC 2010-5, February 2010); Final Rule
    Covers modification of the treatment of certain structured finance transactions involving a variable interest entity
    Capital Treatment of Recourse, Direct Credit Substitutes, and Residual Interests in Asset Securitization (OCC 2002-22, May 2002); Interagency Questions and Answers
    Addresses questions regarding capital treatment of recourse, direct credit substitutes, and residual interests in asset securitizations
    Complex Structured Finance Transactions (OCC 2007-1, January 2007); Interagency Statement
    Covers examples of complex structured financial transactions that often pose elevated risks to financial institutions
    Covenants Tied to Supervisory Actions in Securitization Documents (OCC 2002-21, May 2002); Interagency Advisory
    Addresses the safety and soundness implications of certain covenants included in securitization documents
    Implicit Recourse in Asset Securitization: Policy Implementation (OCC 2002-20, March 2010); Interagency Guidance
    Highlights several examples of post sale actions taken by institutions with respect to securitized assets
    Mortgage Banking: Interagency Advisory on Mortgage Banking (OCC 2003-9, February 2003); Interagency Advisory
    Provides guidance regarding mortgage-banking activities, primarily in the valuation and hedging of mortgage-servicing assets
    Risk-Based Capital Interpretations Credit Derivatives (OCC 1999-43, November 1999); Interagency Statement
    Addresses the risk-based capital treatment of certain synthetic securitization transactions involving credit derivatives

    Related News and Issuances

  21. Thanks Poppy, but I believe that code’s bad. This one works for me….

  22. South Carolina Judge, sorry typo

  23. See what this South Carolina thinks about MERS, love it! At least someone’s brain is working!

  24. 12 CFR 5.34 – Operating subsidiaries.

    There is 1 rule appearing in the Federal Register for 12 CFR Part 5. View below or at eCFR (GPOAccess)



    Authorities (U.S. Code)


    prev | next
    § 5.34 Operating subsidiaries.
    (a) Authority. 12 U.S.C. 24 (Seventh), 24a, 25b, 93a, 3101 et seq.

    (b) Licensing requirements. A national bank must file a notice or application as prescribed in this section to acquire or establish an operating subsidiary, or to commence a new activity in an existing operating subsidiary.

    (c) Scope. This section sets forth authorized activities and application or notice procedures for national banks engaging in activities through an operating subsidiary. The procedures in this section do not apply to financial subsidiaries authorized under § 5.39. Unless provided otherwise, this section applies to a Federal branch or agency that acquires, establishes, or maintains any subsidiary that a national bank is authorized to acquire or establish under this section in the same manner and to the same extent as if the Federal branch or agency were a national bank, except that the ownership interest required in paragraphs (e)(2) and (e)(5)(i)(B) of this section shall apply to the parent foreign bank of the Federal branch or agency and not to the Federal branch or agency.

  25. Who is MERS?
    Mirror Mirror on the Wall, …. Nevermind.

    All this time the MERS Was was named beneficiary in DOT…
    But In this Mortgage there is no benificary named.
    After the life of the estate….

    Unclaimed property escheats as abandoned. …
    Estate owes taxes upon dissolution…

  26. There’s a contract which theoretically compelled an assignment of a loan to a secn trust. How do we (or courts) know we’re not intended third party beneficiaries of these contracts when we haven’t seen them? Shouldn’t we be demanding them in order to determine this – our rights, if any?? And if one can’t spend, say, 10 minutes doing a little research, how does one even know the assignee exists? (I think the law says people may do things in fictitious names, but if there is nobody acting in a fictitious name (there’s a difference), the ‘nobody’ can’t do anything. Like john brown may contract as tom henry, but if there’s no john brown, there’s no deal. Just as one may not hold oneself out as a corporation when not, I doubt anyone may pretend to be ‘U.S. Bank as Trustee’ of a non-existant trust, and even if the trust exists, how do we know U.S. Bank is its trustee??)

  27. “third-party beneficiary

    n. a person who is not a party to a contract, but has legal rights to enforce the contract or share in proceeds because the contract was made for the third party’s benefit. Example: Grandma enters into a contract with Oldfield to purchase a Jaguar automobile to be given to grandchild as a graduation present. If Oldfield takes a down payment and then refuses to go through with the sale, grandchild may sue Oldfield for specific performance of the contract as a third-party beneficiary.”

  28. “A third-party beneficiary, in the law of contracts, is a person who may have the right to sue on a contract, despite not having originally been an active party to the contract…..

    Under traditional common law, the ius quaesitum tertio principle was not recognized, instead relying on the doctrine of privity of contract, which restricts rights, obligations, and liabilities arising from a contract to the contracting parties (said to be privy to the contract). However, the Contracts (Rights of Third Parties) Act 1999 introduced a number of allowances and exceptions for ius quaesitum tertio in English law……

    Ius quaesitum tertio

    While the law on this subject varies, there is nonetheless a commonly accepted construction of third-party rights in the laws of most countries. A right of action arises only where it appears the object of the contract was to benefit the third party’s interests (note that at least here, the benefit of the contract is not described as exclusive to the third party, i.e., the contract may also benefit the named parties – sic) and the third-party beneficiary has either RELIED ON or accepted the benefit…..”

    jg: MERS and securitization advocates, in judicially noticeable material from their advertizing campaign early in the game, averred that borrowers were to benefit with lower rates. In my book, then, by their own words, borrowers are intended third party beneficiaries of securitization and therefore the contracts relevant thereto.

    The full article is at scribd under

    “Third Party Beneficiary and Ius Quaesitum”

  29. If anyone is wondering why the states’ attorney generals signed off on the consent decrees against the banksters, this is the reason. “The United States Supreme Court has held that “a consent decree is not enforceable directly or in collateral proceedings by those who are not parties to it even though they were intended to be benefited by it.” Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 750, (1975).”

    So even though the states attorney generals represent the population of the state in legal matters, that representation does not transfer thru a litigation process.

    Kabuki theater, anyone?


    The roles of banks in mortgage asset securitization in recent years is the product of an
    evolution in recognition by agencies, courts and Congress of the authority and desirability of
    permitting asset securitization as a means of selling or borrowing against loan assets.1
    banks engaged in the first securitizations of residential mortgage loans as far back as the 1970s
    under the same laws that permit national banks to securitize their assets today. Since that time,
    there has been significant growth in the number and complexity of asset-backed securitizations.2

    Congress encouraged some of this growth in the 1980s and 1990s by expanding the authority of
    national banks and other financial institutions to purchase certain mortgage-related and small
    business-related securitized assets.
    But many other factors, beyond legal authority, have driven the tremendous growth of the
    securitization market by creating incentives for market participants to use securitizations. These
    factors, as described below, include reallocating risks such as credit and interest rate risk among
    originators and investors, providing new sources of funding and liquidity and achieving
    favorable accounting and capital treatment. Market events, along with recent changes in
    regulatory capital requirements and accounting rules have altered some of these incentives.
    Nevertheless, the securitization market is expected to continue to be an important source of
    credit for the economy in the future.3

  31. Consumer Protection Issues
    While nontraditional mortgage loans provide flexibility for consumers, the Agencies are concerned that consumers may enter into these transactions without fully understanding the product terms. Nontraditional mortgage products have been advertised and promoted based on their affordability in the near term; that is, their lower initial monthly payments compared with traditional types of mortgages.

    In addition to apprising consumers of the benefits of nontraditional mortgage products, institutions should take appropriate steps to alert consumers to the risk of these products, including the likelihood of increased future payment obligations.

    FDIC Law, Regulations, Related Acts

    [Table of Contents] [Previous Page] [Next Page] [Search]
    5000 – Statements of Policy

    Interagency Guidance on Nontraditional Mortgage Product Risks

    This information should be provided in a timely manner–before disclosures may be required under the Truth in Lending Act or other laws–to assist the consumer in the product selection process.

  32. everyone should read that

    Statement of
    Financial Accounting
    Standards No. 140
    FAS140 Status Page
    FAS140 Summary
    Accounting for Transfers and Servicing of Financial
    Assets and Extinguishments of Liabilities
    (a replacement of FASB Statement No. 125)
    September 2000

  33. Office of the Comptroller of the Currency
    Board of Governors of the Federal Reserve System
    Federal Deposit Insurance Corporation
    National Credit Union Administration
    Office of Thrift Supervision

  34. O
    Comptroller of the Currency
    Administrator of National Banks
    Washington, DC 20219
    Interpretive Letter #1035
    July 21, 2005 August 2005
    12 CFR 1
    Re: [ ] (“Bank”)
    Dear [ ]:
    This letter responds to your request on behalf of the Bank concerning the Bank’s proposed guaranteed mortgage securitization of certain home equity lines of credit (“HELOC Loans”) it currently owns. As described in your letters dated November 10, 2004, and January 25, 2005, the Bank plans to engage in a series of simultaneous transactions that will have the effect of the Bank transferring its own HELOC Loans through an affiliated special purpose entity to a newly created qualified special purpose entity designated as “Owner Trust.” The Bank then will take back the asset-backed ownership interests issued by Owner Trust through the securitization process. You represent that the Bank’s primary purpose for the securitization transactions is to create liquidity for the Bank. You have requested the views of OCC staff with respect to the application of certain National Bank Act provisions and OCC regulations to the proposed transactions.
    The Bank, an indirect wholly owned subsidiary of [ Corporation ], originates, services, and sells home equity loans, and performs loan-related activities with respect to interests in pools of those loans, as part of its banking business. According to the Bank’s documentation, the proposed securitization structure involves various entities to facilitate the sale by the Bank and the purchase by [ ] (“[ AInc. ]” or “SPE”) of certain home equity loans the Bank currently owns and the subsequent issuance of certain revolving home equity asset-backed notes (“HELOC notes”). [ AInc. ], a [ State ] corporation, is an affiliated special purpose entity of the Bank.1 [ AInc. ] then will transfer the loans into a qualified special
    1[ AInc. ] is a subsidiary of [ Corporation ], which maintains a current shelf registration filed under the federal securities laws and under which the HELOC notes will be issued. The Bank has requested
    – 2 –
    purpose entity (“QSPE”), [ ] 2004-H (also known as “Owner Trust”), which will issue two forms of interests: the HELOC notes and an Owners Trust Certificate (“OTC”) (representing a subordinated interest or a so-called “subordinated certificate”).2 The HELOC notes and OTC will be passed back through the SPE and returned to the Bank in consideration for its sale3 of the original loans to the SPE.4 The Bank also will own the mortgage servicing rights stemming from the loans in the securitized pool.
    As described by the Bank, the HELOC notes are expected to be floating rate securities with a coupon of approximately LIBOR plus 25 basis points. The underlying loans will generate the cash flows used to pay the HELOC notes and the subordinated certificate. The overcollateralization on the underlying loans combined with the subordination of the excess spread that the OTC holder is entitled to receive provide the HELOC notes with a BBB credit enhancement level. The Bank plans to engage a triple-A rated monoline insurance company to provide a deficiency guarantee or insurance “wrap” to take the notes from the BBB to the AAA level. In consideration of a fee, the monoline will guarantee to pay all principal and interest due on the notes. The Bank represents this guarantee will be sufficient to obtain AAA ratings on the HELOC notes from two nationally recognized statistical rating organizations, Moody’s and Standard & Poor’s. The Bank asserts it is undertaking the securitization primarily to create liquidity by facilitating its ability to engage in repurchase transactions with the AAA-rated HELOC notes.
    For accounting treatment, the Bank represents the transactions qualify as a “Guaranteed Mortgage Securitization” and that the Owner Trust qualifies as a “QSPE” as described in FASB Statement of Standards No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“FAS 140”). As defined, a guaranteed mortgage securitization includes a substantive guarantee by a third party. The Bank represents that the insurance wrap covers more than 90% of the securitized assets, which fulfills the substantive guarantee requirement. Also, the Bank represents that the Owner Trust meets the requirements of a QSPE
    confidential treatment pursuant to 5 U.S.C. § 552(b)(4) for its submissions related to the proposed securitization. The Bank represents that its letters and the appendices thereto contain confidential business information that if released would be detrimental to the Bank’s business.
    2 The Bank refers to this subordinated interest as a “residual” in certain places. However, this piece technically does not represent a residual interest because there is no “sale” for purposes of generally accepted accounting principles (“GAAP”). “Residual interest” is defined in 12 C.F.R. Part 3’s capital rules. See 12 C.F.R. Part 3, appendix A § 4(a)(12).
    3 The Bank represents the HELOC Loans will be accorded “sale” treatment for legal purposes, but not for accounting purposes.
    4 This is a simplified description of the complex securitization structure proposed in connection with the issuance by [ AInc. ] Revolving Home Equity Loan Trust, Series 2004-H (the “Trust”) of the Revolving Home Equity Loan Asset-backed Notes, Series 2004-H, pursuant to an Indenture between the Trust and [ Trustee Bank ]., as indenture trustee. The Trust will be created by a Trust Agreement between [ AInc. ] and [ Trust Co. ]. The Bank is obtaining several outside legal opinions addressing the legality and expected treatment of the securitization transactions for various purposes separate from the matters discussed in this letter. The Bank represents that the proposed structure of the securitization is in accordance with all applicable requirements.
    – 3 –
    as defined in FAS 140 which includes conditions to limit the permissible activities of the QSPE, what the QSPE can hold, and when the QSPE can sell or dispose of non cash financial assets. Accordingly, the accounting treatment would permit the Bank to record the resulting interests as securities even though none of the beneficial interests are being sold to a third party.5 However, the Bank would not be able to record a gain or a loss on the transfer of the assets.
    In addition, the Bank is creating two wholly-owned special purposes entities, [ SPE1 ] and [ SPE2 ], as bank operating subsidiaries. The OTC/subordinated interest resulting from the securitization will be held by [ SPE1 ], and [ SPE2 ] will hold 51% of the HELOC notes. The Bank itself will retain 49% of the notes. Combined with the operating subsidiaries’ ownership interests, however, the Bank will in effect hold 100% of the interests created from the securitization of its own loans.
    A. Legal Authority Applicable to Retaining the Securitized HELOC Notes
    under 12 U.S.C. § 24(Seventh)
    Citing broad authority granted by the national banking laws, the OCC has long held that national banks may use asset securitization as a means of selling or borrowing against their mortgage or other loan assets, and engage in securitization activities.6 Securitization provides banks an efficient tool for buying and selling loan assets and thereby increasing a bank’s liquidity, among other advantages. Securitizations carve up the risk of credit losses from the underlying assets. Thus, the “first dollar,” or most subordinate, loss position is first to absorb credit losses; the most “senior” investor position is last to absorb losses; and there may be one or more loss positions in between.7 Important accounting, capital, and tax implications often also arise with respect to securitization activities.
    The Bank’s proposed securitization of its HELOCs and use of an owner trust8 vehicle to facilitate those transactions is legally permissible for national banks under well-established
    5 The only consideration being received by the Bank in the transfer of the HELOC Loans are the HELOC notes and the OTC, representing the entire beneficial ownership interest in the HELOC Loans transferred to the QSPE.
    6 See, e.g., Interpretive Letter No. 540 (Dec. 12, 1990) (12 U.S.C. § 24(Seventh) grants express power to discount and negotiate evidences of debt, and engage in all such incidental powers as shall be necessary to carry on the business of banking); Interpretive Letter No. 378 (Mar. 24, 1987) (broad authority to borrow money and to pledge their assets as collateral for such borrowings); No Objection-Letter No. 87-9 (Dec. 16, 1987) (power to sell or transfer interests on one’s lawfully acquired assets is an incident of ownership); Interpretive Letter No. 92 (Apr. 20, 1979) (authorizing securitization of bank mortgage assets in a senior/subordinate structure).
    7 See 66 Fed. Reg. 59614, 59616 (Nov. 29, 2001) (capital treatment rule issued by the federal banking agencies). Each loss position functions as a credit enhancement for the more senior position in the structure. See generally OCC Bulletin 99-46, Interagency Guidance on Asset Securitization Activities (Dec. 1999); Comptroller’s Handbook for Asset Securitization (Nov. 1997).
    8 In an owner trust securitization structure, the assets are usually subject to a lien of indenture through which notes are issued. The beneficial ownership of the owner trust’s assets is represented by the certificates, which may be sold
    – 4 –
    authority.9 Retention of the Bank’s own securitized loan assets in the form of the HELOC notes also is legally permissible. In 12 C.F.R. Part 1, the OCC has recognized a national bank’s ability to purchase and hold securitized assets as securities.10 In 1996, the OCC specifically added “Type V” securities to its rule, to address separately investment grade securities representing interests in assets a bank may invest in directly.11 The rule defines a Type V security as a security rated investment grade, marketable, not a Type IV,12 and fully secured by interests in a pool of loans to numerous obligors and in which a national bank could invest in directly.13 The OCC explained that this definition reflects long-standing OCC interpretations providing that, in addition to the investments described in 12 U.S.C. § 24(Seventh), a national bank may hold securitized forms of assets in which it may invest directly.14
    Here the interests designated as the HELOC notes created through the Bank’s securitization process satisfy the requirements for Type V securities under 12 C.F.R. § 1.2(n). The HELOC notes are high quality investment grade securities with a AAA rating by two NRSROs, as required in section 1.2(d); the notes are marketable as set forth in section 1.2(f); they are not Type IV securities as defined in section 1.2(m); and they are composed of underlying loans
    or retained by the bank. See Securitization of Financial Assets § 4.02(E) (Jason H.P. Kravitt ed., 2d ed. 2003); Comptroller’s Handbook on Asset Securitization 15 (Nov. 1997). The OCC has approved the use of an owner trust structure. See, e.g., Interpretive Letter No. 514 (May 5, 1990).
    9 See, e.g.,12 C.F.R. § 1.3(g) (bank may securitize and sell assets); Interpretive Letter No. 540 (Dec. 12, 1990) (credit card securitization); Interpretive Letter No. 92 (Apr. 20, 1979) (securitized assets in a senior/subordinate structure). See also Securities Industry Ass’n v. Clarke, 885 F.2d 1034 (2d Cir. 1989), cert. denied, 493 U.S. 1070 (1990) (certificates representing undivided interests in pooled bank assets are legally transparent for purposes of the Glass-Steagall Act (upholding Interpretive Letter No. 388)). The OCC does not opine on the strict legality of the Bank’s securitization process itself, but finds under the general authorities that the activities are permissible for a national bank. The OCC assumes compliance by the Bank with all applicable legal requirements related to the securitization.
    10 Part 1 prescribes standards for national banks engaged in purchasing, selling, dealing in, underwriting, and holding securities, consistent with the authority contained in 12 U.S.C. § 24(Seventh) and safe and sound banking practices. See 12 C.F.R. § 1.1; 61 Fed. Reg. 63972 (Dec. 2, 1996) (the OCC’s so-called “investment securities” rule).
    11 See 61 Fed. Reg. at 63976. The rule defines the term “investment grade” to mean a security that is rated in one of the four highest rating categories by either (1) two or more nationally recognized statistical rating organization (“NRSROs”); or (2) one NRSRO if the security has been rated by only one NRSRO. 12 C.F.R. § 1.2(d). By definition, an “investment security” is a marketable debt obligation that is not predominantly speculative in nature. A security is not predominantly speculative in nature if it is rated investment grade. 12 C.F.R. § 1.2(e).
    12 The 1996 rule also created a new category of Type IV securities that national banks may purchase implementing amendments to 12 U.S.C. § 24(Seventh) in the Secondary Mortgage Market Enhancement Act of 1984 (“SMMEA) and the Riegle Community Development and Regulatory Improvement Act (“CDRI”) concerning certain mortgage-related and small business-related securities. See 12 C.F.R. §§ 1.2(m) and 1.3(e).
    13 12 C.F.R. § 1.2(n). In this context, “obligor” means the borrowers on the underlying loans backing the security.
    14 See 61 Fed. Reg. at 63976.
    – 5 –
    eligible for direct investment by a national bank. Accordingly, the Bank has the legal authority under part 1 to retain the HELOC notes as Type V securities.
    Twelve C.F.R. § 1.3(f) ordinarily limits a national bank’s purchase of Type V securities from any one issuer (or certain related issuers) to 25 percent of the bank’s capital and surplus.15 In adding Type V securities to its investment securities rule, the OCC explained that the 25 percent of capital limit was a prudential limit to provide sufficient protection against undue risk concentrations.16 Typically the purchasing bank places significant reliance on the entity that originates and services the pooled loans rather than evaluating the individual obligors in the loan pool and the limit curtails exposure to the entity to address safety and soundness concerns.17
    The Bank’s situation differs in that the economic substance of the resulting securitized interests simply represent a recharacterization of the Bank’s own loans.18 The continued holding of the HELOCs in a securitized form as Type V securities does not by itself raise the usual concerns of undue concentration. By originating all of the underlying loans and continuing to service the securitized loans and retaining the entire interest in the securitization, the Bank is uniquely able to evaluate its risk exposure and maintain compliance with all applicable safety and soundness requirements.19 Further, the Bank’s purchase of the insurance wrap guaranteeing all principal and interest on the HELOC notes provides an additional risk diversification mitigant and, significantly, is sufficient for the notes to receive a triple-A securities rating. Accordingly, in this specific situation the 25 percent prudential limit in section 1.3(f), usually applicable to purchases and holdings of Type V securities of one issuer, is not intended to apply. This determination applies only to the particular set of facts and the proposed securitization transactions described herein. Any change in the facts and circumstances could lead to a different conclusion.
    B. Continued Holding of the Subordinated Interest
    The Bank’s retention of a subordinated interest, here the OTC, in the securitization of its own HELOC Loans is simply part of, or incidental to, the bank’s general lending authority and its ability to securitize. The Bank originally made the loans and, likewise, may continue to hold the interests created from the loans in a different form under the same general power.20 Various
    15 See 12 C.F.R. § 1.3(f); see also 1.4(d).
    16 61 Fed. Reg. at 63977.
    17 See, e.g., 61 Fed. Reg. at 63979; Interpretive Letter No. 579, supra.
    18 However, from a general capital markets perspective, other investors will view the securitized assets in the form of the HELOC notes differently from the unsecuritized loan assets.
    19 This is in contrast to usual Type V scenarios involving the purchase of securitized interests from third party issuers.
    20 As oft recognized by the courts, legal classification for one purpose does not necessitate the same treatment for other purposes. See, e.g., Securities Industry Ass’n v. Clarke, 885 F.2d 1034, 1052 (2d Cir. 1989), cert. denied, 493
    – 6 –
    OCC letters and issuances relating to securitization activities recognize a bank’s authority to retain an interest in its securitized assets.21
    C. Safety and Soundness Requirements
    The Bank must adhere to the prudential requirements as specifically set forth in 12 C.F.R. § 1.5, and other supervisory guidance on safe and sound banking practices, as appropriate.22 For example, section 1.5 identifies certain risks the Bank should consider as part of safe and sound banking, including, among others, the interest rate, credit, liquidity, price, transaction, strategic, and reputation risk presented by the proposed securitization and related activities.
    In addition, the Bank must establish to the OCC’s satisfaction that the Bank has an adequate and effective risk measurement and management program for the described securitization transactions. Because the securitized HELOC holdings are not subject to the diversification limits in 12 C.F.R. § 1.3(f), the holdings require unique prudential oversight.23 Accordingly, in order for the OCC to conclude that the proposed activities are permissible for the Bank the Bank must demonstrate to the satisfaction of the OCC that the Bank has established an appropriate risk measurement and management process for this home equity lending and securitization activity. An effective risk measurement and management process includes board supervision, managerial
    U.S. 1070 (1990) (requirement that certificates be registered under the securities laws does not make them “securities” for purposes of the Glass Steagall Act prohibitions).
    21 See, e.g., 66 Fed. Reg. at 59616 (banks have long provided “recourse,” or retained some ownership interest, in connection with sales of whole loans or loan participations); OCC Bulletin 99-46, supra (seller typically retains one or more interests in the assets sold); Interpretive Letter No. 585 (June 8, 1992) (bank retains Class B certificates in a senior/subordinated structure); Interpretive Letter No. 514, supra (subsidiaries may sell residual interest); Interpretive Letter No. 378, supra (reversionary interest in assets likely to be substantial); Interpretive Letter No. 92, supra (bank to retain Class B certificates); Letter from Robert Bloom, First Deputy Comptroller for Policy (July 1, 1976) (“the creation of the Trust, the sale of loans to the Trust, and retention of a residual interest in the Trust are permissible under the general powers conferred on national banks”).
    22 See e.g., OCC Bulletin 2004-20, Risk Management of New, Expanded, or Modified Bank Products and Services (May 10, 2004); OCC Bulletin 2002-19, Unsafe and Unsound Investment Portfolio Practices (May 22, 2002); OCC Bulletin 99-46, Interagency Guidance on Asset Securitization Activities (Dec. 13, 1999); Comptroller’s Handbook for Asset Securitization (Nov. 1997). In addition, with respect to safe and sound banking practices related to the underlying HELOCs, see OCC Bulletin 2005-22, Home Equity Lending (May 16, 2005).
    23 The OCC has long considered safety and soundness as part of determining whether an activity is permissible under 12 U.S.C. § 24(Seventh). See e.g., Interpretive Letter No. 1018 (Feb. 10, 2005) (affiliate hedging activities must be conducted in safe and sound manner to be permissible); Interpretive Letter No. 949 (Sept. 19, 2002) (proposed activity cannot be part of the “business of banking” if the bank in question lacks the capacity to conduct the activity on a safe and sound basis); Interpretive Letter 892 (Sept. 13, 2000) (national bank may engage in equity hedging activities only if it has an appropriate risk management process in place); Interpretive Letter No. 684 (Aug. 4, 1995) (commodity hedging is a permissible banking activity provided the activity is conducted in accordance with safe and sound banking practices); Interpretive Letter No. 274 (Dec. 2, 1983) (a national bank’s authority to lease its office space provides the authority for it to establish appropriate lease terms if consistent with safe and sound banking practices).
    – 7 –
    and staff expertise, comprehensive policies and operating procedures, risk identification and measurement, and management information systems, as well as an effective risk control function that oversees and ensures the appropriateness of the risk management process.24
    In addition to the risk management program, the Bank’s process must include an on-going compliance monitoring program to ensure compliance with the specific commitments made by the Bank related to the described securitization, such as the transactions qualifying as a Guaranteed Mortgage Securitization and the Owner Trust qualifying as a QSPE. The Bank must have an adequate and effective compliance monitoring program that includes policies, training, independent surveillance and well-defined exception approval and reporting procedures.
    The OCC will make the determinations on risk measurement and management, and on-going compliance monitoring through the Bank’s Examiner-in-Charge (“EIC”), and the Bank may not commence the proposed securitization activities unless and until its EIC has determined that there is no supervisory objection to the securitization activities described in this letter. The Bank also must consult with and receive EIC approval prior to engaging in any subsequent securitizations of a similar nature to those described in this letter.
    D. Risk-Based Capital Treatment
    Section 4 of 12 C.F.R. Part 3, appendix A sets forth the risk-based capital treatment for exposures, both on- and off-balance sheet, related to securitizations. The rule contemplates the capital treatment of rated and unrated stratified risk positions acquired or retained by banks in transactions involving third-party market participants. In contrast, in this proposal, the Bank sells its own assets into a trust and retains all of the risk positions associated with those assets. This recharacterization of the Bank’s loans does not affect the risk-based capital requirements because the OCC’s capital rules do not recognize insurance companies as eligible guarantors. Thus, for purposes of the risk-based capital rules, there is no transfer of risk recognized in association with the insurance wrap.25 Accordingly, the OCC has determined that the proposed transaction falls outside the scope of risk-based capital treatment for securitizations. The risk-based capital charge for the AAA-rated securities and the OTC would be the full capital charge for the underlying HELOC Loans as if the loans were still on the Bank’s balance sheet.
    Based on the facts and circumstances presented, we conclude that the Bank may hold the securitized loan assets in the form of the HELOC notes as Type V securities under 12 C.F.R. Part 1. The usual 25% prudential limitation under part 1 applicable to Type V securities is not intended to apply in this particular situation based on the described facts. Further, the deficiency
    24 Further detailing the risk measurement and management process, see the Comptroller’s Handbook, Risk Management of Financial Derivatives (Jan. 1997) and BC-277, Risk Management of Financial Derivatives (Oct. 23, 1993).
    25 The current rules recognize credit enhancements provided by other Organization for Economic Cooperation and Development (“OECD”) banks, highly-rated securities companies, and OECD government and government-related guarantees. See 12 C.F.R. part 3, appendix A § 3(a)(2).
    – 8 –
    guarantee or insurance “wrap,” among other factors as described in the letter, provides sufficient risk mitigation for safety and soundness purposes. The Bank’s retention of a subordinated interest, here the OTC, in a securitization of its own loans is permissible under the bank’s general lending authority of 12 U.S.C. § 24(Seventh). These conclusions are subject to the condition that the Bank will have an appropriate risk measurement and management process, and on-going compliance monitoring program in place satisfactory to the Bank’s EIC. Accordingly, the Bank may not commence the proposed securitization transactions unless and until its EIC has determined that he has no supervisory objection to the Bank’s proposed securitization activities, as described herein. The appropriate risk-based capital treatment is the risk-based capital charge for the underlying HELOC Loans.
    The OCC views expressed in this letter are based specifically on the Bank’s representations and written submissions describing the facts and circumstances of the Bank’s proposed guaranteed mortgage securitization of its own HELOC Loans. Any change in the facts or circumstances could result in different conclusions. If you have any questions concerning this letter, please contact Suzette H. Greco, Special Counsel, Securities & Corporate Practices Division at 202/874-5210.
    Daniel P. Stipano
    Acting Chief Counsel

  35. I had a reply in a complaint to the busy-ness that stole my home, that there was no prepayment penalty.

    If that usury law is truly in effect, we may find from a lifetime accounting of the loan that many have already paid off the note even as it was bastardized at creation and those who kept getting assigned it wanted usury [with what consideration]?

    Trespass Unwanted, Creator, Corporeal

  36. Replace (dot) with .


    Some discussions ’bout MERs lawsuit –
    I haven’t listened to the audio. Can’t tell you how relevant it is to our discussions here.
    I don’t give legal advice, for entertainment purposes only.

    Trespass Unwanted, Creator, Corporeal, Life, Free, People, Independent, State, In Jure Proprio, Jure Divino

  37. OCC 2005-18
    Date: May 3, 2005 Page 1

    Office of the Comptroller of the Currency
    Board of Governors of the Federal Reserve System
    Federal Deposit Insurance Corporation
    National Credit Union Administration
    Office of Thrift Supervision

  38. Subject: Accounting and Reporting for Mortgage Loan Commitments
    Date: May 3, 2005 To: Chief Executive Officers of All National Banks, Department and Division Heads, and All Examining Personnel
    Description: Interagency Advisory on Accounting and Reporting for Commitments to Originate and Sell Mortgage Loans

    The guidance attached to this bulletin continues to apply to federal savings associations.
    The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) are issuing jointly the attached “Interagency Advisory on Accounting and Reporting for Commitments to Originate and Sell Mortgage Loans.” The purpose of the advisory is to provide additional guidance on the appropriate accounting and reporting for commitments to originate mortgage loans that will be held for resale and commitments to sell mortgage loans under mandatory delivery and best efforts contracts.
    Examiners have noted during examinations that some banks are not following the appropriate accounting and reporting for commitments to originate mortgage loans that will be held for resale and commitments to sell mortgage loans. Banks should review their accounting for such commitments to ensure that they have accounted for the commitments under generally accepted accounting principles. Additionally, banks should ensure that their commitments to originate mortgage loans that will be held for resale and commitments to sell mortgage loans have been properly reported in their Reports of Condition and Income (call reports).
    For further information, please contact your OCC district accountant or the OCC’s Chief Accountant’s office at (202) 649-6280.
    Emory W. Rushton
    Senior Deputy Comptroller and Chief National Bank Examiner
    Related Links
    Interagency Advisory

  39. OCC BULLETIN 2015-25
    Subject: Real Estate Settlement Procedures Act
    Date: April 14, 2015 To: Chief Executive Officers and Compliance Officers of All National Banks and Federal Savings Associations, Federal Branches and Agencies, Department and Division Heads, All Examining Personnel, and Other Interested Parties
    Description: Revised Comptroller’s Handbook Booklet and Rescissions

    The Office of the Comptroller of the Currency (OCC) issued today the “Real Estate Settlement Procedures Act” booklet of the Comptroller’s Handbook. This revised booklet replaces a similarly titled booklet issued in October 2011 and provides updated information resulting from recent changes made to Regulation X (12 CFR 1024) regarding mortgage servicing and loss mitigation.
    Note for Community Banks
    The “Real Estate Settlement Procedures Act” booklet applies to examinations of all national banks and federal savings associations (collectively, banks) that engage in residential mortgage lending. Specific changes to this booklet are applicable to banks that service mortgage loans and offer loss mitigation programs.
    The “Real Estate Settlement Procedures Act” booklet reflects the
    transfer of rulemaking authority for Regulation X from the U.S. Department of Housing and Urban Development (HUD) to the Consumer Financial Protection Bureau (CFPB).
    new requirements relating to mortgage servicing.
    new loss mitigation procedures.
    new prohibitions against certain acts and practices by servicers of federally related mortgage loans with regard to responding to borrower assertions of error and requests for information.
    new examination procedures for determining compliance with the new requirements relating to mortgage servicing.
    The Dodd-Frank Wall Street Reform and Consumer Protection Act granted rulemaking authority under the Real Estate Settlement Procedures Act (RESPA) to the CFPB. In December 2011, the CFPB restated HUD’s implementing regulation at 12 CFR 1024.
    On January 17, 2013, the CFPB issued a final rule to amend Regulation X. The final rule includes substantive and technical changes to the servicing transfer notice requirements and implements new procedures and notice requirements related to borrower’s error resolution and information requests. The final rule also includes new provisions related to escrow payments, force-placed insurance, and general servicing policies, procedures, and requirements.
    On July 10, 2013, and September 13, 2013, the CFPB issued final rules to further amend Regulation X. The new language includes changes to the provisions on the relation to state law for Regulation X’s servicing provisions, to the procedure requirements for loss mitigation, and to the requirements relating to notices of error and information requests. On October 15, 2013, the CFPB issued an interim final rule to further amend Regulation X to exempt servicers from the early-intervention requirements in certain circumstances. The Regulation X amendments became effective on January 10, 2014.
    In November 2013, the Federal Financial Institutions Examination Council’s Consumer Compliance Task Force approved the updated interagency examination procedures, which are contained in the revised “Real Estate Settlement Procedures Act” booklet.
    The issuance of this booklet rescinds the following documents:
    OCC Bulletin 2002-3, “Real Estate Settlement Procedures Act: Examiner Guidance—Mark-Up of Settlement Service Fees” (January 15, 2002)
    OCC Bulletin 2010-35, “Real Estate Settlement Procedures Act: Updated Examination Procedures” (September 9, 2010)
    OCC Bulletin 2014-7, “Consumer Compliance: Interagency Examination Procedures for Consumer Compliance” (March 14, 2014)
    The issuance of this booklet makes applicable to federal savings associations the following OCC document:
    Advisory Letter 1998-15, “Real Estate Settlement Procedures Act (RESPA), Escrow Accounts” (September 24, 1998)
    For further information, contact your supervisory office or the OCC’s Compliance Policy Division at (202) 649 5470.

    Grovetta N. Gardineer
    Deputy Comptroller for Compliance Operations and Policy
    Related Link
    “Real Estate Settlement Procedures Act” (PDF)



  41. Neidermeyer knows why they want that mod.
    He nailed it for you this week.
    I don’t suspect we will be seeing much of him anymore.
    Congrats Neidermeyer.

    Who else is missing here?
    Or at the very least here but very very quiet?

  42. When current homeowners send QWRs…
    The banks foresee a default…..

    True Story.

  43. So if they assert they foresee an iminant default in the future …..?
    They send you OFF to a special booking place.
    Where your payments are put into suspense and the account goes into default while they push a loan mod down your throat.

    Unconciable … They can act if they foresee the future! HA!

    Didn’t need a mod. Don’t want an mod. There is no Financial Hardship.
    The only hardship we had… Was the one they created …!!!

    Good Morning Sunshine!

  44. Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages
    The Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve
    System, Office of the Comptroller of the Currency, Office of Thrift Supervision, National Credit
    Union Administration, and Conference of State Bank Supervisors (CSBS) encourage federally
    regulated institutions1
    and state-supervised entities that service mortgage loans (collectively
    referred to as “servicers”) to pursue strategies to mitigate losses while preserving
    homeownership to the extent possible and appropriate.
    Previously, in April 2007, the federal financial agencies issued a Statement on Working
    with Mortgage Borrowers and followed this with the July 2007 Statement on Subprime
    Mortgage Lending. Both interagency statements encouraged federally regulated institutions to
    work constructively with residential borrowers at risk of default and to consider prudent workout
    arrangements that avoid unnecessary foreclosures. In these statements, the federal financial
    agencies stated that prudent workout arrangements that are consistent with safe and sound
    lending practices are generally in the long-term best interest of both the financial institution and
    the borrower. CSBS, the American Association of Residential Mortgage Regulators (AARMR),
    and the National Association of Consumer Credit Administrators developed a parallel Statement
    on Subprime Mortgage Lending that applies to state-supervised mortgage brokers and lenders.
    In June 2007, CSBS and AARMR issued a consumer alert and an industry letter to address
    resetting mortgage loans.
    These previous statements focused on residential loans retained by federally regulated
    institutions and state-supervised entities. However, many subprime and other mortgage loans
    have been transferred into securitization trusts. Servicing for these securitized loans is governed
    by the terms of contract documents, typically referred to as Pooling and Servicing Agreements.
    A significant number of adjustable-rate mortgages are scheduled to reset in the coming months.
    As indicated in the Statement on Subprime Mortgage Lending and the October 2006 Interagency
    Guidance on Nontraditional Mortgage Product Risks, these resets may result in a significant
    payment shock to the borrower, which can increase the likelihood of default.
    Servicers of securitized mortgages should review the governing documents for the
    securitization trusts to determine the full extent of their authority to restructure loans that are
    delinquent or in default or are in imminent risk of default. The governing documents may allow
    servicers to proactively contact borrowers at risk of default, assess whether default is reasonably
    foreseeable, and, if so, apply loss mitigation strategies designed to achieve sustainable mortgage
    obligations. The Securities and Exchange Commission (SEC) has provided clarification that
    entering into loan restructurings or modifications when default is reasonably foreseeable does not
    preclude an institution from continuing to treat serviced mortgages as off-balance sheet
    Also, the federal financial agencies and CSBS understand that the Department of

    For purposes of this Statement, the term “federally regulated institutions” refers to state- and nationally-chartered
    banks and their subsidiaries; bank holding companies and their nonbank subsidiaries; savings associations and their
    subsidiaries; savings and loan holding companies and their subsidiaries; and credit unions.
    In general, default could be considered “reasonably foreseeable” when a lender has made actual contact with the
    borrower, has assessed the borrower’s ability to pay, and has a reasonable basis to conclude that the borrower will be
    unable to continue to make mortgage payments in the foreseeable future. See the attachment to the July 24, 2007,
    letter from SEC Chairman Cox to Chairman Frank, House Committee on Financial Services.
    Treasury has indicated that servicers of loans in qualifying securitization vehicles may modify
    the terms of the loans before an actual delinquency or default when default is reasonably
    foreseeable, consistent with Real Estate Mortgage Investment Conduit tax rules.3

    Servicers are encouraged to use the authority that they have under the governing
    securitization documents to take appropriate steps when an increased risk of default is identified,
    • proactively identifying borrowers at heightened risk of delinquency or default, such as
    those with impending interest rate resets;
    • contacting borrowers to assess their ability to repay;
    • assessing whether there is a reasonable basis to conclude that default is “reasonably
    foreseeable”; and
    • exploring, where appropriate, a loss mitigation strategy that avoids foreclosure or other
    actions that result in a loss of homeownership.
    Loss mitigation techniques that preserve homeownership are generally less costly than
    foreclosure, particularly when applied before default. Prudent loss mitigation strategies may
    include loan modifications; deferral of payments; extension of loan maturities; conversion of
    adjustable-rate mortgages into fixed-rate or fully indexed, fully amortizing adjustable-rate
    mortgages; capitalization of delinquent amounts; or any combination of these. As one example,
    servicers have been converting hybrid adjustable-rate mortgages into fixed-rate loans. Where
    appropriate, servicers are encouraged to apply loss mitigation techniques that result in mortgage
    obligations that the borrower can meet in a sustained manner over the long term.
    In evaluating loss mitigation techniques, servicers should consider the borrower’s ability
    to repay the modified obligation to final maturity according to its terms, taking into account the
    borrower’s total monthly housing-related payments (including principal, interest, taxes, and
    insurance, commonly referred to as “PITI”) as a percentage of the borrower’s gross monthly
    income (referred to as the debt-to-income or “DTI” ratio). Attention should also be given to the
    borrower’s other obligations and resources, as well as additional factors that could affect the
    borrower’s capacity and propensity to repay. Servicers have indicated that a borrower with a
    high DTI ratio is more likely to encounter difficulties in meeting mortgage obligations.
    Some loan modifications or other strategies, such as a reduction or forgiveness of
    principal, may result in additional tax liabilities for the borrower that should be included in any
    assessment of the borrower’s ability to meet future obligations.
    When appropriate, servicers are encouraged to refer borrowers to qualified non-profit and
    other homeownership counseling services and/or to government programs, such as those
    administered by the Federal Housing Administration, which may be able to work with all parties
    to avoid unnecessary foreclosures. When considering and implementing loss mitigation
    strategies, servicers are expected to treat consumers fairly and to adhere to all applicable legal

    See 26 CFR 1.860G-2(b)(3)(i).

  45. Wells Fargo keeps saying Freddie Mac is the “investor”. Freddie Mac says they are not the investor. Round and round the fraud goes.

  46. even in 2007, the federal reserve was saying rescission , will be a mess. and to watch out.

    | Follow the Fed: FacebookLinkedInTwitterYouTubeE-mailRSS| Search: Go

    Research & Data
    Consumer Credit & Payments
    Bank Resources
    Community Development
    Friday, June 12, 2015

    [ – ] Text Size [ + ] | Print Page

    Financial & Regulatory Reporting
    Electronic Submission
    Reporting Resources
    Financial Institutions Relations
    Services for Financial Institutions
    Supervision & Regulation
    Regulatory Outreach
    Bank Resources Publications
    Discount Window
    Banking Applications
    Financial Institution Structure
    Contact Us
    Program in Consumer Credit & Payments
    Home > Bank Resources > Bank Resources Publications > Compliance Corner > 2007 > Fourth Quarter

    The Right of Rescission: Overview and Recent Legal Developments

    by Kenneth J. Benton, Consumer Regulations Specialist

    This article provides an overview of the right of rescission (rescission), a significant consumer protection provided under the Truth in Lending Act (TILA) and Regulation Z, TILA’s implementing regulation. For covered transactions, in which a creditor extends credit to a consumer primarily for personal, family, or household purposes and takes a security interest in the consumer’s primary residence (excluding purchase or construction loans), rescission provides a three-day cooling off period during which the consumer can cancel the loan without penalty. The rescission period is extended to three years if the creditor fails to provide the required rescission notice or fails to provide accurate, material disclosures. Rescission presents compliance risks for banks because a violation can be very costly. Not only does the bank have to return all finance charges and fees the customer has paid, but the bank is also liable for statutory damages, court costs, and attorney’s fees.1 In addition, rescission applies to assignees of the loan, so if a bank purchases a covered loan, it could be forced to rescind the loan if the disclosures have violations triggering rescission.

    An article in the fourth quarter 2006 issue of Compliance Corner discussed the damages and remedies available to a consumer when a creditor violates a section of TILA or Regulation Z subject to rescission protection. This article reviews the legislative history of rescission, its compliance requirements, and recent legal developments concerning rescission claims in class actions.

    TILA’s legislative history indicates that Congress included rescission to provide a cooling off period to borrowers who obtained credit secured by a lien against their primary residence. Congress heard a parade of horror stories from consumers about unscrupulous home improvement contractors who pressured them into financing expensive renovation projects (like aluminum siding) but failed to disclose that the loan was secured by a lien on the consumer’s dwelling. Consumers who defaulted on the financing lost their homes. Rescission is designed to protect consumers from making an impulsive decision by disclosing the lien and providing a three-day cooling off period after the loan closing. With the salesperson gone, the consumer can reconsider whether he wants to place his home at risk.2

    Covered Transactions
    Rescission applies to consumer credit transactions secured by a lien on the consumer’s principal dwelling.3 Congress did not believe loans to purchase or construct a home—which TILA and Regulation Z identify as a residential mortgage transaction—presented the risk of a consumer making a decision he would later regret, or would feel pressured into making, so it exempted those transactions from rescission. Rescission does apply to a home equity line of credit, a home improvement loan, the refinancing of an existing mortgage, or any other nonpurchase credit transaction secured by the consumer’s principal dwelling.

    Compliance Requirements
    The primary compliance requirements for the right of rescission are that the creditor must 1) provide two copies of the notice of rescission, to each owner of the property, and 2) provide a statement that accurately discloses, subject to a small tolerance for error, the material disclosures about the credit transaction.4 For open-end credit, the material disclosures are “the information that must be provided to satisfy the requirements in §226.6 with regard to the method of determining the finance charge and the balance upon which a finance charge will be imposed, the annual percentage rate, the amount or method of determining the amount of any membership or participation fee that may be imposed as part of the plan, and the payment information described in §226.5b(d)(5)(i) and (ii) that is required under §226.6(e)(2).5″ For closed-end credit, the material disclosures are the annual percentage rate, the finance charge, the amount financed, the total payments, the payment schedule, and the disclosures and limitations referred to in §226.32 (c) and (d).6” The material disclosures are typically grouped together at the top of the disclosure statement in a box known as the “Fed Box.”

    The rescission notice must disclose the following information: 1) that the creditor retains or acquires a security interest in the consumer’s principal dwelling; 2) the consumer’s right to rescind the transaction; 3) the procedure for exercising that right, with a form for that purpose that designates the address of the creditor’s place of business; 4) the effects of rescission;7 and 5) the date the rescission period expires. The notice must follow the language of the official rescission notice form or be substantially similar.

    Rescission applies to both open-end and closed-end credit. The primary difference in the rescission rule for open-end credit, which appears in section 15 of Regulation Z, and closed-end credit, which appears in section 23, is that each disbursement in an open-end plan is not subject to rescission if it is made in accordance with a previously established credit limit for the plan. In that case, only the initial credit transaction establishing the credit plan is subject to rescission. For example, if the creditor establishes a $100,000 home equity line of credit, and the consumer initially borrows $10,000, the entire transaction can be rescinded during the rescission period for the $100,000 line of credit. But once the initial rescission period passes, each subsequent draw on the credit line, up to $100,000, is not subject to rescission. If the creditor extends additional credit above the credit limit of the initial plan, only the credit in excess of the prior credit limit is subject to the right of rescission.

    The consumer’s right to exercise rescission expires three days after the closing of the loan. However, if the creditor fails to deliver the notice of the right of rescission to the consumer, fails to provide all of the material disclosures, or makes computational errors in the material disclosures in excess of the tolerance for such errors, the rescission period is extended to three years from the date of consummation of the loan.

    Assignee Liability
    Assignee liability is an important issue in rescission. The general rule for assignee liability, set forth in section 131 of TILA, 15 U.S.C. § 1641,8 is that the assignee of a credit transaction covered by TILA and Regulation Z is only liable for violations that are apparent on the face of the disclosure statement. However, section 131 specifically exempts rescission from this rule so a borrower could compel the assignee of a loan with violations triggering the right of rescission to rescind the loan, even though the violations are not apparent on the face of the disclosure statement.9 Thus, banks must be careful in purchasing loans subject to rescission.

    Recent Legal Developments
    The following sections outline recent developments from legal cases regarding rescission.

    Rescission class actions. In the last year, two federal trial courts made headlines when they issued rulings certifying class actions of lawsuits seeking rescission of mortgages for thousands of borrowers.10 Until these rulings, rescission class actions had been rejected in leading court cases. Because rescission of a mortgage is an expensive remedy, the prospect of rescission class actions, with hundreds or thousands of borrowers, created intense anxiety in the mortgage industry.

    In the first case, McKenna v. First Horizon Home Loan Corp., 429 F. Supp. 2d 291 (D. Mass. 2006), a federal trial court in Boston certified a class action of borrowers involving the right of rescission. However, the decision was later reversed by the United States Court of Appeals for the First Circuit [McKenna v. First Horizon Home Loan Corp., 475 F.3d 418 (1st Cir. 2007)].11 Prior to this decision, only one other federal appeals court had addressed this issue, ruling that rescission class action claims cannot be maintained under TILA [James v. Home Constr. Co. of Mobile, Inc., 621 F.2d 727, 731 (5th Cir. 1980)].

    In seeking reversal of the class certification, First Horizon noted that its potential liability could exceed $200 million. This point resonated with the First Circuit in light of TILA’s legislative history. Congress amended TILA in 1995 to establish a ceiling of $500,000 for statutory damages in class actions under section 130 of TILA, the civil liability provision, to protect creditors from catastrophic damage awards. Because rescission damages are governed by section 125 of TILA, the damage limitation in section 130 does not apply to rescission cases. However, the First Circuit noted that it was implausible for Congress to amend TILA to address creditors’ concerns that a technical TILA violation could result in catastrophic damage awards, while still allowing unlimited rescission damage awards, stating: “The notion that Congress would limit liability to $500,000 with respect to one remedy while allowing the sky to be the limit with respect to another remedy for the same violation strains credulity.”

    A few days later, the California Court of Appeal affirmed a lower court ruling that a borrower’s claim for rescission could not be certified as a class action in Laliberte v. Pacific Mercantile Bank, 147 Cal. App. 4th 1, 53 Cal.Rptr.3d 745 (Cal. App. 4th Dist. 2007).12 The California court was also persuaded by the legislative history of the 1995 TILA amendment limiting class-action statutory damage awards, stating: “We…find it difficult to believe that Congress would carefully balance the deterrent effect of class actions under TILA against the potential harm to businesses in the context of statutory damages, and yet allow class action rescission to proceed without any safeguard for the affected business…Here, 100 class members seeking rescission would mean [Pacific Mercantile Bank] could face the loss of over $37 million in security upon entry of an unfavorable declaratory judgment. In other words, a declaratory judgment authorizing all class members to rescind their loans could be ‘catastrophic.'” Lenders were relieved that the First Circuit and California state appeal court rejected rescission class actions in well-reasoned decisions.

    This rescission issue also arose in another recent case involving Chevy Chase Bank of Maryland (Chevy Chase). A Wisconsin couple filed a rescission class action against the bank because of ambiguities in the TILA disclosure statement for their option ARM loan. The disclosure statement contained the required prominent disclosure box for the APR, which was 4.047%. However, it also disclosed “note interest rate of 1.95%.” Significantly, the 1.95% rate was a discounted teaser rate that only applied to the first payment. The court held that this conflicting rate information violated TILA’s requirement that disclosures be made clearly and conspicuously [Andrews v. Chevy Chase Bank, FSB, 474 F.Supp.2d 1006, 1007 (E.D. Wis. 2007)].

    The disclosure statement also identified the bank’s name for the loan product (WS Cashflow 5-year Fixed). The borrowers alleged that this led them to believe that the interest rate was fixed for five years and became variable after that. However, while the payment was fixed for five years, the interest rate was not. The bank also stated in the promissory note that the rate may change in August 2004 when, in fact, it knew it would change, and provided a misleading definition of “APR” on the back of the disclosure statement. Based on these TILA violations, the trial court held that the loan could be rescinded and certified the case as a class action.13

    This case illustrates potential pitfalls for creditors with their TILA disclosures. In particular, a bank should only include information in the disclosure statement that is required by TILA or Regulation Z. Section 226.17(a) of Regulation Z, for closed-end credit, specifically prohibits a creditor from including information in the disclosure statement that is not directly related to the required disclosures. The bank’s decision to include the information noted above, none of which was required by TILA or Regulation Z, was flirting with danger, particularly in the context of an exotic mortgage product like an option ARM. TILA and Regulation Z identify the information that a creditor must disclose in a credit transaction. Creditors should fully comply with these laws, without including unnecessary information that could potentially violate TILA or Regulation Z, as happened in the Chevy Chase case.

    Chevy Chase appealed the class action ruling to the United States Court of Appeals for the Seventh Circuit, which recently heard oral arguments. The Seventh Circuit’s decision, which is expected in the near future, will provide further clarity on this important issue. But even if Chevy Chase wins the class action issue on appeal, it still faces liability to the original borrowers. In addition, the trial judge’s decision was reported in the Wall Street Journal, the Washington Post, and other publications, creating reputational risk. These risks underscore the importance of strict adherence to the rescission compliance requirements under Regulation Z and TILA.

    Spousal homestead laws do not trigger rescission rights. In 2006, a federal trial court in Illinois addressed a novel rescission argument: whether a creditor extending a loan subject to rescission to a husband, secured by property of which he is the sole owner, must provide the rescission notice to his spouse based solely on her state homestead rights in the property. Section 226.23 of Regulation Z requires that “in a credit transaction in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction.” The wife argued that she was entitled to the notice and to rescind because of homestead rights in the property. Some states have adopted homestead laws, under which when only one spouse owns a family home that both spouses have occupied during the marital relationship, the owning spouse cannot sell or encumber the property without the permission of the non-owning spouse. In this case, Bills v. BNC Mortgage, Inc., 2006 WL 3227887 (N.D. Illinois, Nov. 2006), the court rejected this argument because it concluded that a spouse’s homestead rights in a property do not legally constitute an “ownership interest.” The rescission notice and right to rescind only apply to a consumer with an ownership interest in a property in which a creditor is obtaining a security interest. Therefore, the spouse had no right to rescind.

    Amount consumer must repay when loan is rescinded. A number of court cases have wrestled with the issue of what amounts a consumer must return to a lender when he rescinds a loan. Section 125 of TILA specifies that when a loan is rescinded, “the consumer is not liable for any finance or other charge, and any security interest given by the obligor, including any such interest arising by operation of law, becomes void upon such a rescission.” In some loans, a consumer borrows not only a principal amount but also lender’s fees and finance charges. In a recent case, Moore v. Cycon Enterprises, Inc., 2007 WL 475202 (W.D. Michigan, Feb. 2007), a trial court in Michigan ruled that a husband and wife who rescinded a loan were not required to repay any amounts of a loan they borrowed to cover lender’s fees and finance charges because of the language in section 125 quoted above. The lender tried to argue that section 125 only applied to amounts that were finance charges under TILA. However, the court noted that section 125’s plain language states “the consumer is not liable for any finance or other charge.” The Court therefore ruled that the borrowers were not required to repay any of these fees and charges, which amounted to $25,237.85 out of the total loan for $215,500.

    1 More details about damages.
    2 The legislative history is discussed in Rudisell v. Fifth Third Bank, 622 F.2d 243 (6th Cir. 1980), and N.C. Freed Co., Inc. v. F.R.S., 473 F.2d 1210, 1215 (2d Cir. 1973).
    3 Regulation Z defines “consumer credit” as credit offered or extended to a consumer primarily for personal, family, or household purposes. Section 3(a) of the Official Staff Commentary for Regulation Z provides an extended discussion about the definition of “business credit” that helps illuminate the distinction between consumer and business credit. Business credit is exempt from the requirements of TILA and Regulation Z.
    4 The prior article on consumer remedies for violations of Regulation Z and TILA discussed the applicable tolerance for errors and is available online.
    5 See section 226.15(a)(3).External Link
    6 See section 226.23(a)(3).External Link
    7 The effects of rescission that must be described are: 1) rescission voids the security interest in the property securing the loan, and the consumer is not liable for any amount, including any finance charge; 2) within 20 days after receipt of the rescission request, the creditor will return any money or property and will terminate the security interest; 3) the consumer may retain possession of the money or property until the creditor has met its obligations.
    8 See Link
    9 See Murry v. America’s Mortgage Banc, Inc.External Link 2004 WL 1474584 (N.D.Ill.).
    10 McKenna v. First Horizon Home Loan Corp., 429 F. Supp. 2d 291 (D. Mass. 2006) and Andrews v. Chevy Chase Bank, FSB, 474 F.Supp.2d 1006 (E.D. Wis. 2007).
    11 First Circuit’s decision External Link
    12 The case is available online.External Link
    13 The court’s decision is available online.External Link
    The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.

    The Right of Rescission: Overview and Recent Legal Developments

    FRS Alert: Federal and State Banking Regulators’ Statement on Loss Mitigation Strategies for Servicers of Securitized Residential Mortgages

    Compliance Alert: New Federal Reserve Consumer Publication: 5 Tips for Protecting Your Checking Account

    Compliance Alert: Attachment and Setoff of a Bank Account Receiving Social Security Benefits

    Compliance Alert: Federal Reserve System Changes Address for Consumer Complaints

    Complete Issue
    PDF Icon (1.97 MB, 12 pages)

    Compliance Corner Main Page

    Federal Reserve Bank
    of Philadelphia
    Supervision, Regulation & Credit
    Ten Independence Mall
    Philadelphia, PA 19106-1574

    Research & Data | Education | Consumer Credit & Payments | Bank Resources | Community Development | Newsroom | Careers | Publications
    About the Fed | Contact | FAQs | Feeds RSS Feeds | Site Map | Terms of Use | Privacy Policy | Web Feedback E-mail | PDF Reader External Link | Home
    Copyright 2015. All rights reserved. Links with the orange box icon (External Link) go to pages outside of the Federal Reserve Bank of Philadelphia’s website.

  47. this is what lawyers are saying . to banks,sericers,trustee’s

    Impact on Business Operations

    The relaxation of TILA’s notification provision may produce unintended consequences for the banking industry. Mortgage servicers and others should review and revise their existing rescission procedures to ensure that they comply with this newly relaxed notification requirement.

    Any mortgage servicer receiving a written notice of rescission will now be forced to respond within twenty days and litigate the matter in court to prove compliance with TILA disclosure requirements.

    it say all. even they know they have only 20 days to respond.

  48. Reblogged this on California Freelance Paralegal and commented:
    The Second Circuit Court of Appeals ruled in the case of Madden v. Midland Funding, LLC that state usury law apply to assignees of debt and that preemption rules of the National Banking Act do not apply. I agree with Neil Garfield that this case could have far reaching implications, particularly if it is cited by other Circuit Courts of Appeal.

Contribute to the discussion!