FORECLOSURE DEFENSE AND OFFENSE DISCUSSED: APPRAISAL FRAUD

QUESTION/COMMENT: ANSWERS IN BOLD

A client in NorCal was referred to me.  She took out an 80/20 loan first and second for about $650,000 total in 2005.  She has paid over $150,000 towards interest, payments and fees. SEE APPRAISAL FRAUD, CNN ARTICLE FOR 2005, APPRAISAL FORUM SPEECH FROM 2006, RECENT POSTS. TITLE COMPANY/TRUSTEE, LENDER AND OTHERS MAY BE LIABLE FOR INTENTIONALLY MISLEADING BORROWER AND INVESTORS UPSTREAM AS TO VALUE OF PROPERTY, WITHHOLDING FEES THAT THEY HAD KNOWLEDGE OF, KICKBACKS AND REBATES.
Besides the typical servicing, standing, and fraudulent assignment issues, I found the following after reviewing the file. The original lender is infamous New Century.  NEW CENTURY TAKEN OVER BY CMS FOR SERVICING ONLY. WELLS FARGO IS TRUSTEE. NEW TRUSTEE MIGHT BE REPLACING TRUSTEE IN DEED OF TRUST EVEN IF THEY DIDN’T MEAN TO DO SO. ACTUAL BENEFICIARY AS A RESULT OF POOLING AGREEMENT DATED AROUND SEPTEMBER 1, 2006 SHOWS THAT REAL PARTIES IN INTEREST (HOLDERS IN DUE COURSE) ARE HOLDERS OF PASS THROUGH CERTIFICATES OF ASSET BACKED SECURITIES. IN papers, they claim New Century still was beneficiary of deed when foreclosure started a few months ago then they substituted parties and trustees. IMPOSSIBLE. NEW CENTURY SOLD SERVICING RIGHTS AND OTHER ASSETS UNDER BANKRUPTCY COURT ORDER IN DELAWARE IN 2007.
In any event, TILA and ALL disclosures including the 2nd note (they did not provide copy of first note) shows a 30 yr term. Good faith estimate, payment coupons, EVERY DOC EXCEPT ONE shows show 30 yr term and final balloon payment in December of 2035 (30 years after taking out in dec 2005).
However, there is ONE DOC given at closing that shows loan is a 40 year LIBOR ARM NEWS ARTICLES SHOW THAT LIBOR RATES WERE WRONG BECAUSE OF FRAUDULENT REPORTING FROM AMERICAN BANKS) 2 year lock and details THAT loan program that she signed up for. THIS ALONE IS PROBABLY GROUNDS FOR RESCISSION AND BRINGING UP REAL PARTIES IN INTEREST, REPLACING TRUSTEE, REQUIRING JUDICIAL FORECLOSURE RATHER THAN NON-JUDICIAL SALE ETC.
Next, a letter she received when rate changed shows “remaining” 456 months due on note (minus 24 months = 480 for 40 years!) IMPROPER DEMAND: BASIC BLACK LETTER LAW, THEY HAD NO RIGHT TO PROCEED UNDER NORMAL COLLECTION LAWS.
I also cannot find right to rescind notices. RESCISSION AVAILABLE THROUGH MANY MEANS AND IF THE APPRAISAL FRAUD WAS BIG ENOUGH IT MIGHT INCREASE THE APR TO USURY RATES, WHICH ENABLES THE NOTE TO BE DECLARED VOID AND THE MORTGAGE SATISFIED. IF NO RIGHT TO RESCIND WAS EVEN PRESENTED THEN THE TILA-BASED RESCISSION TIME LIMITS WERE TOLLED MEANING YOU COULD DO IT ANYTIME.
Here’s the $300,000 question!!!!
The house NOW is only worth $350,000 for a $300,000 loss and almost half its value (maybe some appraisal fraud, they wont giver her appraisal).
So, if she rescinds and demands all money paid back, she’d have to tender the $650,000!  I know there are recoupment options in foreclosure (btw, she is Plaintiff in her suit and they are defendants)  but, what options on rescission do we have when someone is so upside down and does it even make sense to rescind or should we rescind on common law fraud and just ask  for money back and give the house back?
What do we do for all the people upside down when it comes to rescissions? I AM FOR THE ALL OR NOTHING STRATEGY THAT AIMS TO GET RID OF THE NOTE AND MORTGAGE IN THEIR ENTIRETY AND I HAVE DEVELOPED NUMEROUS STRATEGIES SUPPORTING THAT POSITION. LEGALLY YOU ARE NOT SAYING YOU WANT THE HOUSE FOR NOTHING, YOU ARE SAYING THAT THE REAL HOLDER IN DUE COURSE IS THE INVESTOR AND THAT THEY ARE THE ONLY ONES WHO CAN FORECLOSE. BUT IN ANY EVENT, BECAUSE OF THE APPRAISAL FRAUD AND THE DAMAGES CAUSED BY THAT, THE MORTGAGE CAN BE VASTLY REDUCED BY EQUITABLE POWERS OF THE COURT. KEEP IN MIND THAT DEBT CONVERTS FROM SECURED TO UNSECURED. IT IS THEN POTENTIALLY DISCHARGEABLE IN BANKRUPTCY BUT BE CAREFUL WITH PEOPLE WHO HAVE OTHER ASSETS AND IN STATES WHERE HOMESTEAD EXEMPTION IS LIMITED. FILING BANKRUPTCY LIMITS HOMESTEAD EXEMPTION TO $125,000 EVEN IN FLORIDA WHERE IT IS THOUGHT TO BE UNLIMITED. NEW BANKRUPTCY BILL MADE IT RISKY TO GO INTO BKR COURT IN FLORIDA BECAUSE OF THAT.
Nye
PS if workable, will be sending you her file in PDF later for audit, but before we spend money on audit, need to figure if anything to be gained! GET THE AUDIT!!!!

Foreclosure Defense: Rescission Letter, Demand Letter

events-coming-up-for-garfield-continuum-and-garfield-handbooks

New comment on your post #214 “Glossary: Mortgage Meltdown and Foreclosure”

Comment: A question on TILA and Non-judicial Foreclosure for anyone who knows the answer; Does a rescission letter that is timely and certifiably mailed to all appropriate parties (lender, assignee, servicer, trustee) prevent/nullify a pending non-judicial foreclosure sale? Would appreciate any information that may help find that answer.

bootcamp-04_08_newsletter

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Complicated answer: technically speaking the purchase money first mortgage is exempted from TILA rescission but is still available under little FTC and common law fraud. This exemption was carved out after exhaustive lobbying by lenders.

The actual answer to your question is MAYBE. It depends upon the auctioneer’s assessment, but if you let everyone know at the auction that they are buying into a lawsuit our experience shows that generally speaking nobody bids — not even the lender.

Now if you accompany your letetr with the TILA audit and an attorney’s demand letter, you are in a stronger position.

The TILA/Mortgage audit is the key and most people don’t know how to do it even though they are advertising otherwise on fancy websites etc. We have two on our site that we are currently referring to and we are looking for others that are actually competent and not fly by night take your money and run places.

And if you are willing to file suit against the lender, there are a number of ways to prevent the sale and turn the tables on the lender. There are even strategies that are outlined in this blog that show how in certain cases the borrower walked away with the house free and clear of the mortgage and note.

Here is some verbiage that has been used, but frankly without an attorney to deal with the lender, your position is not going to be taken as seriously as it would with a competent attorney who understands the complex issues:

Dear Sir or Madam: Please accept this letter on behalf of the above-named property owner and borrower. While this letter is written in part for purposes of settlement and compromise it is already a demand letter which can and will be used as necessary. It is therefore not a confidential communication protected under the rules of settlement disclosures and correspondence.

You have previously been presented with proper notices of deceptive lending practices in the closing on the above-referenced loans. Said notices were accompanied by Proposed Resolutions under the Federal Truth in Lending Act and the Real Estate Settlement Procedures Act.

Notwithstanding the above, your agents have threatened foreclosure, sale and eviction of the homeowner/borrower, despite the facts that the borrower is not in default, the lender and trustee are ignorant of any facts to state affirmatively that the borrower is or is not in default, the lender is in default of its obligations under applicable Federal and State laws, the lender at the closing the servicing agent are not the real parties in interest (i.e., they lack standing to proceed to judicial or non-judicial sale), the trustee and lender lack authority to proceed but have intentionally and fraudulently filed papers and posted notices as though the authority was present.

WE HEREWITH DEMAND THE NAMES AND CONTACT INFORMATION ALONG WITH A DESCRIPTION OF THE SECURITY SOLD, THE ASSIGNMENT MADE, AGREEMENTS SIGNED, BETWEEN ALL OF THE MORTGAGE BROKERS, REAL ESTATE BROKERS, DEVELOPERS, APPRAISERS, MORTGAGE AGGREGATORS, INVESTMENT BANKERS, RETAIL OR OTHER SELLER OF SECURITIES AND THE INVESTORS WHO PURCHASED THE SECURITIES.

Based upon information received from the experts in this case and based upon our own factual and legal investigation there appear to be claims in addition to the claims stated in prior correspondence, which claims based upon the following summary, are in most cases not exclusive and therefore the demands stated in this letter and prior correspondence you have received, which is incorporated herein as specifically as if set forth at length hereat, should all be considered cumulative.

Usury: As a result of the artificially inflated “fair market values” utilized by LENDER et al, its agents, servants and/or employees, to induce the borrower to sign the mortgage documents and purchase the property, the effective yield now vastly exceeds the legal lending limit in the State of Florida, if the borrower pays in accordance with the mortgage and note indentures. A quick review of the usury law in Florida will reveal that while it has been relaxed somewhat to accommodate predatory lending through credit cards and payday loans, it remains somewhat stringent in connection with other loans and allows the borrower to to cancel the loan and collect damages. Hence, just for the record, in the unlikely event we do not settle this case, demand is herewith made for full satisfaction of the mortgage and note plus three times the value of the note in damages, plus attorney fees and costs of 10% of the value of the of the claim which is the principal of the note plus three times the principal of the note.

Security Violation: The subject mortgage was part of a purchase transaction in which the property was sold with promises and assurances that the value would go up, the rental value would assure a return on investment, and that the investor need not perform any work, since the maintenance and other factors would be done by third parties — the Condominium Association, the real estate broker, the management office etc. This constitutes, despite the appearance of other “uses” the sale of a security under the Securities Act of 1933 and other applicable Federal and state Securities laws. The sale of this security was improper, lacking disclosure, rights to rescind under the securities laws, and lacking in disclosure as to the true nature of the transaction and the true position of the parties, including but not limited to the fact that the “lender” was in actuality acting as a conduit, removing the essential aspect of risk-sharing in the normal lender-borrower relationship, that the risk of loss was not only real but unavoidable because of the artificially inflated values, and that the Buyer should consider the purchase to be a high-risk investment with the possibility of total loss. Since the sale of THIS security was part of larger plan to sell securities to “qualified” investors using false ratings and false assurances of insurance, together with a promised rate of return in excess of the revenue produced by the underlying efforts, the sale of THIS security was part of larger Ponzi scheme wherein securities were sold at both ends of the spectrum of the supplier of capital (the investor) and the consumer of the capital (the borrower and the seller of the property). Since compensation arising from the transaction with this borrower was not disclosed to the borrower, the transaction lacked proper disclosure and is subject to rescission, compensatory and punitive damages. Hence, just for the record, in the unlikely event we do not settle this case, demand is herewith made for full satisfaction of the mortgage and note plus three times the value of the note in damages, plus attorney fees of 10% of the value of the of the claim which is the principal of the note plus three times the principal of the note.

Common Law Fraud in the Inducement and Fraud in the execution of the closing documents including but not limited to the settlement statement, the mortgage and note. Hence, just for the record, in the unlikely event we do not settle this case, demand is herewith made for full satisfaction of the mortgage and note plus three times the value of the note in damages, plus punitive and/or exemplary damages plus attorney fees of 10% of the value of the of the claim which is the principal of the note plus three times the principal of the note.

Little FTC Act (Florida): while the transaction clearly involves interstate commerce, Florida law provides for much the same remedies as described above for unfair and deceptive lending or business practices. Hence, just for the record, in the unlikely event we do not settle this case, demand is herewith made for full satisfaction of the mortgage and note plus three times the value of the note in damages, plus punitive and/or exemplary damages plus attorney fees of 10% of the value of the of the claim which is the principal of the note plus three times the principal of the note.

TILA claims have been summarized in prior correspondence. Because the transaction is not a pure first mortgage residential transaction, the TILA exception for rescission does not apply and we therefore demand rescission in addition to the above-stated claims. Hence, just for the record, in the unlikely event we do not settle this case, demand is herewith made for full satisfaction of the mortgage and note plus three times the value of the note in damages, plus punitive and/or exemplary damages plus attorney fees of 10% of the value of the of the claim which is the principal of the note plus three times the principal of the note.

RESPA: You have failed to properly respond to the claims under the act are are currently in violation. Hence, just for the record, in the unlikely event we do not settle this case, demand is herewith made for full satisfaction of the mortgage and note plus three times the value of the note in damages, plus punitive and/or exemplary damages plus attorney fees of 10% of the value of the of the claim which is the principal of the note plus three times the principal of the note.

RICO: As stated above there were multiple parties in multiple states in a scheme spanning virtually all continents in which false, misleading and non-conforming statements were made to investors and borrowers alike, wherein LENDER et al acted in concert with other ”lenders” and investment bankers to artificially create the appearance of higher market values for property and the false appearance of trends that did not in actuality exist, but for the “free money” (secured under false pretenses) pumped into a financial system and real estate market consisting of false and deceptive high pressure sales tactics whose objectives were to get the borrower’s signature without regard for the consequences to either the borrower or the investor. Hence, just for the record, in the unlikely event we do not settle this case, demand is herewith made for full satisfaction of the mortgage and note plus three times the value of the note in damages, plus punitive and/or exemplary damages plus attorney fees of 10% of the value of the of the claim which is the principal of the note plus three times the principal of the note.

Under Federal Law, you are a provider of financial services and/or products to a borrower whom you or your agents, predecessors, or successors intentionally deceived at the closing of the loan, conspired to misrepresent the proper appraised value of the property, and have now ignored your basic responsibilities of presenting a response to the notices and correspondence already on file with you and regulatory agencies, who have been informed of your illegal and improper conduct.

Notwithstanding the above, the borrowers are now faced with the apparent prospect of losing their house, their credit rating, and have been required to seek the services of legal counsel to forestall the loss, for which services demand is herewith made under the terms of the mortgage and all applicable Federal (TILA, RESPA, RICO) and State Law..

YOUR CONDUCT, IF YOU PROCEED, CONSTITUTES CRIMINAL THEFT AND CIVIL THEFT OF THE REAL PROPERTY SUBJECT TO THE MORTGAGE, NOTE AND PROCEEDINGS YOU HAVE POSTED AND FILED. Accordingly your position, in the absence of any authority to do so under law is invalid and illegal. ON BEHALF OF THE BORROWER/HOMEOWNER DEMAND IS HEREWITH MADE THAT ALL EFFORTS AT SALE, EVICTION OR FORECLOSURE BE STOPPED IMMEDIATELY AS THE PROPERTY IS SCHEDULED FOR EVICTION/SALE WITHIN A FEW DAYS.

Any further attempts at collection will result in further action taken on behalf of the borrowers for all remedies available in law and equity in both administrative proceedings, and judicial forums possessing competent jurisdiction, which will seek damages for unfair trade trade practices, treble damages under applicable law for RICO, FTC and little FTC violations, consequential damages and refunds, attorney fees, court costs, and all other available remedies in law or equity.

PLEASE GOVERN YOURSELVES ACCORDINGLY!!!

respa_request_-_mike1-rev-1-neil

The Federal Truth in Lending Act: What You Don’t Know Can Hurt You

The Federal Truth in Lending Act: What You Don’t Know Can Hurt You

Pamela D. Simmons

Introduction

Ten years ago, I represented the borrower in a case that stemmed from a title company’s failure to secure a loan on all of the borrower’s land. (The title company had listed only one of several parcels of land and the lender was unable to non-judicially foreclose on the property as a result.) The complaint had already been filed, and listed among the many causes of action was one entitled “Violation of Reg Z.” One day an attorney for one of the defendants asked me: “What is this Reg Z? I’ve never even heard of it.” So began my love affair with the Federal Truth in Lending Act.

Most attorneys know the Federal Truth in Lending Act (TILA) as the group of laws requiring certain disclosures about the cost of borrowing money. You have seen the disclosures every time you have received a new credit card. Many readers may also be aware that consumers who are borrowing against their homes have a three-day right to cancel the transaction—another feature of TILA. However, few real estate attorneys know that TILA’s right to cancel can last for as long as three years after the loan is made. Moreover, under certain circumstances, TILA can govern individual lenders making a first loan secured by residential property. And even fewer practitio ners know that the cost of rescission to the lender is all of the interest, fees, costs, and any other charges not directly for the benefit of the borrower. I have personally seen the loss to the lender exceed $280,000. In this article I will discuss the history of TILA, describe rescission (its most important provision), and offer some tips on avoiding its pitfalls and attorney malpractice.

I. TILA’s History and Predatory Lending

In 1968, Congress enacted TILA (15 USC §§1601–1693r). Section 105 of TILA requires the Federal Reserve Board to promulgate implementing regulations, which are collectively known as Regulation Z (12 CFR pt 226). Regulation Z provides for Official Staff Interpretations (known as the Commentary), which give guidance to the attorney, effectively putting meat on the bones that is TILA; reliance on the Commentary protects the creditor from any civil or criminal liability under TILA.

Initially, TILA was only a disclosure statute; by requiring that consumers be informed of the true cost of their borrowing, it was hoped that consumers could not only make informed decisions, but also make comparisons between similar lending products. In 1980, however, TILA was substantially changed to provide greater simplicity and new consumer protections.

In 1994, TILA was again amended to add the Homeowner’s Equity Protection Act (HOEPA), which was implemented through Reg Z §32 and is known as “HOEPA” to those who work with borrowers and “Section 32” to those who work with lenders. HOEPA was an attempt to control predatory lending practices that were perceived to be a problem in the “sub-prime” lending arena. Sub-prime loans are those made to borrowers who do not meet conventional loan criteria—i.e., who have depressed credit scores, high income-to-debt ratios, unconfirmable income sources, and so forth. Sub-prime lenders charge higher interest rates and fees to borrowers because the loans are considered higher risk.

Since interest rates, over time, can vary significantly, HOEPA establishes triggers indexed to the Treasury Bill rate. If the Annual Percentage Rate (APR) of a home loan exceeds 8 percent plus the comparable T-Bill rate on a first deed of trust (10 percent on a second deed of trust), it is a HOEPA loan. Alternatively, if the costs and fees of the loan exceed eight points, it is a HOEPA loan. It was through HOEPA that federal law began to prohibit certain loan terms and lender behavior.

II. How to Find the Law

As mentioned above, the law regarding TILA is comprised of three parts:

  •          TILA, found at 15 USC §§1601–1693r;
  •          Reg Z (the implementing regulations), found at 12 CFR pt 226; and
  •          Official Staff Commentary, found at Supp I of Reg Z.

In many areas, Reg Z fleshes out the meaning of TILA, and the Commentary fleshes out the meaning of Reg Z. If you are doing research in this area of law, you must look to all three components. An example of the interrelation ship is as follows:

Title 15 USC §1602(h) defines “consumer”:

The adjective “consumer,” used with reference to a credit transaction, characterizes the transaction as one in which the party to whom the credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes. Regulation Z §226.2(a)(11) defines “consumers”:[A] cardholder or a natural person to whom consumer credit is offered or extended. However, for purposes of rescission under §§226.15 and 226.23, the term also includes a natural person in whose principal dwelling a security interest is or will be retained or acquired, if that person’s ownership interest in the dwelling is or will be subject to the security interest.

Official Staff Commentary §226.2(a)(11) states:

1. Scope. Guarantors, endorsers, and sureties are not generally consumers for purposes of the regulation, but they may be entitled to rescind under certain circumstances and they may have certain rights if they are obligated on credit card plans.

2. Rescission Rules. For purposes of rescission under §§226.15 and 226.23, a “consumer” includes any natural person whose ownership interest in his or her principal dwelling is subject to risk of loss. Thus, if a security interest is taken in A’s ownership interest in a house which is A’s principal dwelling, A is a consumer for purposes of rescission, even if A is not liable, either primarily or secondarily, on the underlying consumer credit transaction. An ownership interest does not include, for example, leaseholds or inchoate rights, such as dower.

3. Land Trusts. Credit extended to land trusts, as described in the commentary to §226.3(a), is considered to be credit extended to a natural person for purposes of the definition of consumer.

As always, case law adds additional clarification, or sometimes more confusion.

III. What Every Real Estate Attorney Should Know About TILA

A. Who Is a Lender Under TILA?

Jim came into my office quite concerned. He had lent money to someone he knew and the balloon payment was due, but had not been paid. He showed me the loan documents, which consisted of a promissory note and short-form deed of trust, which had been recorded by the escrow company. Jim explained that the borrower was someone he was familiar with who had approached Jim for a loan on a house, and had come up with the loan amount, interest rate, and payment terms. Jim had lent $50,000, secured by a third deed of trust, at 12-percent interest; interest-only payments were to be made monthly, with a balloon payment due at the end of a year. Jim arranged the loan through a real estate broker friend of his and the borrower was charged an additional $4000 in “points” paid to the broker. Jim knew that the borrower was behind on his other mortgages and was borrowing the money to “catch up.” The borrower had fallen behind on the loan due to illness, but he was going to list the house for sale—and it had plenty of equity. The deal had origi nally sounded great to Jim, but now the balloon was due and the money was not forthcoming. Jim was a plumber and had never made a loan secured by property to anyone before.

Poor Jim. The bad news was that Jim was a lender, as defined by TILA, and had failed to make the disclosures required under TILA and had used prohibited terms. The loan was therefore rescindable by the borrower. If that happened, Jim would lose not only all interest due on the note, but also the broker fee and all other closing costs. Moreover, he would be liable for statutory penalties and the borrower’s reasonable attorney fees. The good news was that so few real estate attorneys know anything about this law that the issue would be missed by virtually any attorney whom the borrower might consult.

How is it possible that plumber Jim, a first time lender, ran afoul of federal law? TILA governs loans made by a lender to consumers for primarily household purposes. A lender is a lender for TILA purposes if the lender has made more than five loans secured by residential property last year or more than five loans this year. However, under HOEPA, a lender is defined as a lender who makes two HOEPA loans, in any 12-month period, secured by the borrower’s residence; and if a lender uses a mortgage broker to make a HOEPA loan, that lender is a lender for all TILA purposes on the first HOEPA loan made. 15 USC §1602(f)Reg Z §226.2 n3.

B. Assignee Liability

Inherent in the business of making loans secured by residential property is a continuing need for capital to lend. As such, many home loans are sold to raise additional capital. Liability for violating TILA runs to the lender. Once the loan is sold, the liability, as related to rescission, extends to the assignee as well. 15 USC §1641(c).

 

When Does a Borrower Have a Right to Rescind?

The general rule is that a borrower whose loan is secured by his or her principal dwelling has the right to rescind, unless the loan is not intended primarily for personal family purposes or the loan is a purchase money loan. 15 USC §1635(f). There are, effectively, two separate rights to rescind. The first is the three-day right to cancel, which can be exercised by the borrower during the three business days after the loan documents are signed. During this three-day period, the lender should not release loan proceeds or record the security interest. This three-day right to cancel ends at midnight on the third business day after the loan documents were signed. A business day is Monday through Saturday, with certain holidays excluded.

The second right to rescind is the extended right to cancel. The statute of limitations on this extended right is three years; however, it can be tolled for certain reasons, and more importantly, a borrower can always rescind, if the loan is rescindable, if the lender starts foreclosure proceedings.

Under TILA, the extended right to rescind is created when the borrower is not properly notified of the three-day right to cancel or the TILA disclosures are not accurate within certain statutorily defined tolerances. Additional rights to rescind are also afforded under HOEPA, more fully discussed later in this article.

1. The Right to Cancel

Borrowers must be clearly informed when the right to cancel expires and where to cancel. Additionally, each borrower must be given two copies of the form that explains the right to cancel. One is for the borrower to give to the lender if he or she wishes to cancel the loan; the other is for the borrower to keep. Thus, if the person filling out the form miscounts the days, or leaves the form blank, or fails to give each borrower two copies of the right to cancel form, the borrower effectively has never received notice of the right to cancel and the right to cancel continues until either the borrower is given a properly filled out form (with a new current three-day cancellation period) or the statute of limitations expires.

2. The TILA Disclosure Form

Further, borrowers must be given an accurate disclosure of the terms of the loan (the TILA Disclosure). If no disclosure is made or if certain terms are not accurately disclosed within certain tolerances, the borrowers have an extended right to cancel. The TILA Disclosure is a form that has four boxes at the top of the page (undoubtedly you have seen them before) that disclose the APR, Finance Charge, Amount Financed, and the Total Pay ments. Some of the other necessary disclosures in the body of the form include the number of payments to be made over the term of the loan and the regular payment amount.

The Total Payments amount is equal to the monthly payment multiplied by the number of payments to be made during the term of the loan. When the loan is a fully amortized fixed-rate mortgage, this calculation is easy. The same holds when it is an interest-only loan with a balloon at the end. However, when the loan is a variable-rate mortgage, the calculation is more complicated. As an example, we will use the loan Jim made, an interest-only mortgage, with a balloon:

Our borrower has borrowed $50,000 with a fixed rate of 10-percent interest, interest-only payments payable in equal amounts over a one-year term. The first 11 monthly payments are $416.67, with a balloon payment due on the twelfth month of $50,416.63. Accordingly, the amount listed in the Total Payments box should be $55,000. Since the loan principal amount is $50,000, we can easily de termine that $5000 is interest being paid on the $50,000 loan. However, our borrower also paid $4000 in broker fees, which were determined to be finance charges. Thus, the total finance charges that must be disclosed are $9000.

The APR is considered the true interest rate that will be paid by the borrower over the life of the loan. The Finance Charge is broadly defined as any charge, payable directly or indirectly by the borrower, that is imposed directly or indirectly by the lender as an incident to or a condition of the extension of credit. 15 USC §1605(a)Reg Z §226.4(a). Even for those familiar with the myriad charges incurred by borrowers for a loan secured by their home, the determination of which charges are or are not finance charges can be daunting. It is beyond the scope of this article to address those issues; however, it is important to know that many charges are included in the definition of finance charge and, for purposes of determining the APR, these fees are lumped together with the interest charges.

The Amount Financed is generally the amount of credit provided to the borrower. Essentially, it is the remainder after the Finance Charge has been subtracted from the Total Payments. So, by subtracting the Finance Charge from the Total Payments, the Amount Financed by our borrower is $41,000. TILA allows several methods of de termining the APR. For this article, I used the APR calcu lator program offered by the Office of the Comptroller of the Currency, located at www.occ.treas.gov/aprwin.htm. Using that system, the APR on our loan is 31.18 percent, which is considerably higher than the stated interest rate, due to the high fees charged.

 

3. TILA Disclosure Accuracy Tolerances

The amount disclosed as Finance Charge in the TILA Disclosure must be accurate, up to certain tolerances. The tolerance depends on what action or right the borrower is enforcing. If the borrower is seeking to rescind the loan transaction and the lender has not started foreclosure proceedings, the tolerance is one-half of one percent (.005). If the lender overstates the Finance Charge, there is no extended right to rescind. However, if the lender has started foreclosure proceedings, either judicial or nonjudicial, the tolerance is $35. Again, if the APR is overstated, there is no extended right to cancel.

The APR must be accurate as well. The tolerance for the APR rate disclosed in the TILA Disclosure is one-eighth of one percent (.00125). TILA states that the APR is inaccurate if it exceeds or is lower than the accurate APR by .00125; however, there is some disagreement about this. See Official Staff Commentary §226.22(a)(2)–115 USC §1602(z)Ramsey v Vista Mortgage Corp. (In re Ramsey) (BAP 9th Cir 1994) 176 BR 183Barber v Knox County School Employees Credit Union (In re Cox) (Bankr CD Ill 1990) 114 BR 165.

The accuracy tolerances listed above apply to “regular” transactions. An “irregular” transaction is one that has either multiple advances, irregular payment periods, or ir regular payment amounts (other than an irregular first or final payment). Reg Z §226.22(a)(2) n46Official Staff Commentary §226.22(a)(2)–1. The tolerance for an irreg ular transaction is one-fourth of one percent (.0025).

4. HOEPA

As discussed earlier, HOEPA is a section of TILA enacted to protect consumers from predatory lending practices. Loans governed by HOEPA not only have additional disclosures required, HOEPA also governs certain loan terms and practices. Violation of the disclosure rules or use of a prohibited loan term gives the borrower an extended right to rescind the loan.

Most commercial lenders are no longer making HOEPA loans because, generally,HOEPA loans are no longer accepted in the resale marketplace. As a result, HOEPA loans are becoming rare, although some small “hard money” lenders are still making these loans. Additionally, unsophisticated individuals, such as our “Jim,” are also making these loans without ever realizing that they are governed by and have run afoul of HOEPA. I have encountered both very recently. My experience has been that, as interest rates drop to low levels, many retirees have looked for a safe place to make a higher rate of return (relative to, say, government bonds). Some of them have begun to lend money secured by residences, but they have no idea how regulated this area has become.

a. APR and Points and Fees Triggers. For loans in first position, made after October 1, 2002, HOEPA will be triggered if the APR exceeds by more than 8 percent the yield on Treasury securities having comparable maturities on the fifteenth day of the month immediately preceding the time the loan was made. For junior loans the spread must be more than 10 percent. 15 USC §1602(aa)(1)(A)Reg Z §226.32(a)(i).

The other trigger that activates HOEPA is the points and fees trigger. If the lender charges points and fees totaling more than 8 percent of the total loan amount, it is governed by HOEPA.15 USC §1602(aa)(1)(B)Reg Z §226.32(a)(1)(ii). In actual practice, a determination of the exact percentage rate of the points and fees, with respect to the total loan amount, is rather complicated and beyond the scope of this article.

b. HOEPA Disclosures. Borrowers obtaining a HOEPA loan are required to receive additional disclosures. These disclosures augment and do not replace the disclosures required underTILA generally. HOEPA disclosures must be given to the borrower three business days before the consummation of the loan. The disclosures require the following statements:

You are not required to complete this agreement merely because you received these disclosures or have signed a loan application.

If you obtain this loan, the lender will have a mortgage on your home. You could lose your home and any money you have put into it, if you do not meet your obligation under the loan.

Additionally, the lender must disclose the accurate APR and monthly payment amount, if the loan is a fixed-rate loan. If the loan is a variable interest rate loan, the disclosure must also inform the borrower that the monthly payment may increase and must state the amount of the maximum potential monthly payment. The monthly pay ment amount must also include disclosure of any balloon payment. The disclosure also must show the total face amount of the loan and state whether optional credit insur ance or debt cancellation coverage is being sold to the borrower. 15 USC §1639Reg Z §§226.31–226.32.

c. Prohibited Contract Terms. As discussed earlier, HOEPA prohibits certain loan contract terms. Inclusion of a prohibited term constitutes a failure to deliver the proper disclosures and creates an extended right to rescind the loan. The prohibited contract terms are:

 

(1) Prepayment Penalties (15 USC §1639(c)Reg Z §226.32(d)(6), (7)). Allowed under the following conditions: Loan must not cause borrower to pay more than 50 percent of gross monthly income towards “monthly indebtedness payments”; income and expenses must be verified by a financial statement signed by borrower, a credit report, and payment records for any employment income; penalty must not apply when borrower refinances one of its or an affiliate’s loans; repayment penalty can only be imposed for the first five years of loan term; and, must be valid under state law.

(2) Default Interest Rate Increases (15 USC §1639(d)Reg Z §226.32(d)(4)).

(3) Balloon Payments (15 USC §1639(e)Reg Z §226.32(d)(1)). Allowed if loan has term of five years or longer.

(4) Negative Amortization (15 USC §1639(f)Reg Z §226.32(d)(2)).

(5) Prepaid Interest Payments (15 USC §1639(g)Reg Z §226.32(d)(3)). Allowed if up to two months of payments are escrowed.

(6) Due-On-Demand Clauses (Reg Z §226.32(d)(8)Official Staff Commentary §226.32(d)(8)(ii)–(iii)). Al lowed if there is fraud or material misrepresentation by the consumer in connection with obtaining the loan, the consumer fails to meet its financial obligations under the terms of the loan, or there is any action or inaction by the consumer that adversely affects the lender’s security interest in the home.

IV. The Rescission Process:
The Law and Reality

A. The Law

The rescission process was intended to be self-enforc ing and able to be completed without the necessity of going to court. If the homeowner does not sell the home, the extended right of rescission can last up to three years after the loan consummation—and longer if the lender initiates foreclosure proceedings. 15 USC §1635(f)Reg Z §§226.15(a)(3), 226.23(a)(3). The regulations set up a three-step process to rescind a loan.

First, the borrower must notify the lender, in writing, of the cancellation of the loan. While the notice must be in writing, it can be transmitted by mail, telegram, or other means. Reg Z §§226.15(a)(2), 226.23(a)(2). It should be sent to the lender’s designated place of business. A rescission notice sent by the borrower’s attorney is also effective. Official Staff Commentary §226.2(a)(22)–2. While signing the right to cancel and sending it to the lender is effective, my practice is to draft a letter notifying the lender of the rescission and the reasons for it. I usually send the letter to the address provided on the right to cancel form, if there is such a form, as well as any other address that the borrower may have for the lender.

A note on loan servicers: Currently, rescission letters sent to loan servicers are not effective notice to the lender. Many borrowers do not understand the difference between the owner of the loan and a loan servicer. Even savvy attorneys have trouble determining who owns the loan, because assignments are no longer routinely re corded. It is important to review the loan file to determine who was the lender at the time the loan was consum mated. Additionally, I always check the chain of title to see if the loan has been assigned. If so, I send a copy of the rescission letter to the new lender as well. A call to the servicer can reveal who the owner is, al though they generally do not like to give that informa tion. Additionally, a proper written request under RESPA should work, if you have the time. A new Commentary states that, when the creditor fails to provide an address for a designated agent to whom rescission notice may be sent, delivery to the entity that the borrower makes the pay ments to will be effective notice to the lender or the lender’s assignee. Official Staff Commentary §226.23(a)(2)–1.

Once the loan is rescinded, the security interest or lien becomes automatically void, by operation of law. 15 USC §1635(b)Reg Z §§226.15(d)(1), 226.23(d)(1). The note also is voided. The lender’s interest in the property is “automatically negated, regardless of its status and whether or not it was recorded or perfected.” Official Staff Commentary §§226.15(d)(1)–1, 226.23(d)(1)–1.

Within 20 days of receipt of the notice of cancellation, the lender must return to the borrower any money or property that has been given to anyone in connection with the loan. 15 USC §1635(b)Reg Z §§226.15(d)(2), 226.23(d)(2). The lender must also take steps to reflect that the security interest has terminated.

Once the lender has terminated the security interest and returned any money or property it received, the borrower is then required to tender any property or money received from the lender. 15 USC §1635(b)Reg Z §§226.15(d)(3), 226.23(d)(3)Official Staff Commentary §§226.15(d)(3)–1, 226.23(d)(3)–1. This step is the reverse of most states’ rescission law. The statute does not prescribe a time period in which tender must be accomplished.

As a result of the rescission, the lender retroactively loses the right to charge interest, fees, and costs on the loan, even costs paid to outside third parties such as the title insurer. The amount, therefore, of tender is calculated by first determining what funds the borrower actually received for his or her direct benefit. (Cash out to the borrower and funds released to pay the borrower’s debts are examples of uses for the borrower’s direct benefit.) Once that amount is determined, it is reduced by the total payments the borrower has made on the loan. Attorney fees are available against a violating lender, as well as actual and statutory damages. 15 USC §1640(a). The remaining balance is the amount due on tender. Once tender is delivered, the rescission process is complete.

B. How Rescissions Work in Practice

TILA grants the courts power to modify certain aspects of the statutory rescission scheme. In particular, Reg Z enables the courts to modify the second and third steps of the rescission process. Reg Z §§226.15(d), 226.23(d). However, some courts have been uncomfortable with enforcing the statutes’ first step as well—the voiding of the security interest. For that reason, I have never forced a lender to remove their security interest prior to tender. I generally require the lender to indicate an acceptance of the rescission within the required 20-day period. Once the rescission has been accepted, I work with the lender to determine the amount of tender. Generally, clients refinance or sell their property to fund the tender. Sometimes lenders agree to rewrite the loan at the new loan balance. Either way, the lender submits a payoff demand, equal to the tender amount, into escrow and title insurance is obtained.

A note on attorney fees: I always require the lenders to pay the reasonable attorney fees in rescission matters. Because it is the lender who is paying the attorney fees, I generally submit my own demand directly into escrow, indicating that the bill should be paid out of the lender’s proceeds. Of course, the lender must agree to this in advance.

V. Conclusion

TILA is an extremely powerful tool for borrowers and should be considered every time anyone makes or obtains a loan secured by residential property. At least one court has held that it may be malpractice for an attorney not to review a borrower’s rescission rights when representing them in a foreclosure proceeding. This article just scratches the surface of this area of law. Even though there are classes given to consumer law attorneys on this area of practice, it is my experience that most consumer attorneys do not have the background to understand the loan process when it comes to securing the loan against real property. To put it starkly, most of them look like deer caught in headlights when they leave such a class. Real property attorneys, however, already have the preliminary expertise. They understand the escrow pro cess, can read and understand a HUD-1 RESPA Settle ment Statement, and know and understand the relation ship between a note and deed of trust. While this article will not make you an expert on TILA, it hopefully will allow you to have an informed view of the issue the next time you are consulted on a loan or lender-related issue.

 

Mortgage Meltdown: Don’t wait for the Cavalry

It isn’t coming. Practicality is being trumped by ideology and politics. Help will not arrive in time to help you. You must help yourself. Whether you have a lawyer to help or not, you need to aggressively defend, refuse to cooperate and demand judicial fairness. If you all pile into the court system, the court system will not have the personnel or infrastructure to accommodate you. You force the hand of the judges, clerks and other members of the judicial system to come up with procedures that give you your day in court. You are entitled to be heard in a court of law and they cannot and will not take that away from you. 

It doesn’t matter whether you have a sub-prime mortgage, a standard mortgage, purchased a new home or purchased an existing home. Prices, terms and mortgages were unfairly and fraudulently inflated.  

Even if the nay-sayers were right that it was your own fault for not being educated enough, not being sophisticated enough, being too trustful, and that you should have known better, you will be doing a disservice to yourself, your family, your neighborhood, state and your country by rolling over and letting them take your house. 

The simple fact is that more than 20 million homeowners are going to be subject to severe consequences as a result of the stagflation, recession and depression that is already underway. That means more than 60 million people are going to be negatively impacted by an economy that was torpedoed by industries that were supposed to be properly regulated and were not. 

Write a letter, file a motion and go down to the courthouse and ask the clerk for any file that has a contested foreclosure in it. Copy the motions, copy the discovery requests, and add to them as you see fit. Get copies of discovery from other case files. get friendly with the clerks and enlist their aid.

Find out the rules about serving discovery requests and motions and follow them. When the lender stonewalls the discovery, file Motions to Compel and motions for Contempt.  Make this your second job if you have another one. 

In discovery make sure you get copies of all internal emails, documents, and presentations made to third parties who were prospectively going to purchase or re-market the risk element of the loan. 

Get a hold of the business plan outlined internally on how this plan would work. Find references or emails to appraisers, mortgage brokers, real estate brokers, developers, etc. and include them in your suit if you can. 

Have someone competent audit your mortgage to see if there are differences between disclosures and the actual amounts they charged you. There are usually differences that will put the lender on the defensive. 

Find out the names and contact information of those who were decision-makers (file interrogatories asking for this information) and get every document they have and take their deposition to see what they knew about your deal and others like your deal. Ask them what their instructions were on approving loans. Ask them if they had any personal doubts about the rapidly rising prices of housing. 

File a counterclaim for fraud. Google it up and you’ll find many examples. File a counterclaim for rescission. File a claim for breach of fiduciary duty (lenders have that duty to borrowers). Make it expensive and embarrassing for the lender to foreclose. It is never too late. File an appeal if you can. 

File an emergency petition in Federal Court alleging denial of due process, violation of your civil rights through improper application of state action. Foreclosure may be an appropriate remedy in normal circumstances but not where you were knowingly and intentionally tricked into a deal where you reasonably relied upon the misrepresentations of a group of conspirators giving you the misleading impression, upon which you relied, that the property was worth what you were paying for it and that the mortgage had been reviewed by experts who concluded that your financial circumstances were such that you could pay for it. 

You tried and failed because of factors well-known to the lenders who were selling off the risk to unsuspecting investors and therefore did not care whether you defaulted or not. 

The lenders were motivated strictly by greed without any sense of or actual accountability. They enlisted the tacit and overt agreements in conspiracy with appraisers, mortgage brokers, developers, closing agents and others who all contributed their part in misleading you into a deal that was false, misleading, damaging to your finances, damaging to your health, and damaging to your financial reputation, FICO score etc. 

Their behavior fulfills the requirements of racketeering, fraud, and crimes against local, state and federal government. You are entitled to damages and you are entitled to equitable relief. You not only lost everything you put into that house at closing, you lost the value of the improvements, furnishings, landscaping and appliances you added after closing. 

You are entitled to the benefit of the bargain, to wit: you were promised a house that you could afford and that was worth what you paid for it. The proper remedy is NOT for you to move out and the lender to take over the investment. The proper remedy is for the lender to adjust the mortgage, pay you damages and give you the payment schedule that you could afford. 

Go to your local property appraiser’s office and file forms to get your house deceased in appraised value. It will reduce your taxes and serve as proof of the true value of your house. Fight for the lowest level you can get. Use auction values in your neighborhood and short sales.  

If you want to settle the claim with the lender, get help. But here are some talking points for you. There are others, but this will get you started.

1. Reduction of mortgage note to 80% of current fair market value. Use an arbitrary formula we have come up with in the GTC|Honors program: Take the original purchase price and reduce it 25%.

2. Adjustment of payment to Fed Funds rate plus 1% fixed 30 year amortization

3. Allow lender to participate in increased fair market value at the time of refinance or sale to recover the downward adjustment of the principal on the mortgage note. I would suggest that they get 25% of the increase in value starting with the date of your settlement and ending with 30 days prior to the refinance or sale. If the value increases to an amount higher than the original purchase price, then let the lender participate at a rate of 75% of the increase over the original purchase price up to the amount of the adjustment they agreed to in the settlement without interest accruing on the adjustment. 

4. Get a moratorium on payments for 3-6 months so you can get on your feet again. But you’ll still have to pay for taxes and insurance. 

5. Delete the PMI provision if you have one and if you want to. Don’t delete it if you can afford it.

6. Insert a 60 day grace period for payments under the new plan.

7. Both parties agree to general release of all other claims.

8. No additional financial disclosure required. This is not anew loan. This is the loan you should have received when they first agreed to give you financing. 

9. If you can’t stay in the house because of inability to make even minimum payments, get some payment for damages.

10. In all cases get a letter from the lender that says you are are not and never were in default that you can send into the credit reporting agencies. 

And make sure you keep track of your attorney fees, costs and expenses and get a payment for that from the lender even if you compromise and add it to the back end of the mortgage (tacked on without interest accruing).

Bankruptcy IS an option but it should be avoided if possible. A lot of the rules are stacked against you now after the recent changes. But in bankruptcy you can file an adversary proceeding that will bring up the same issues and you could get favorable treatment. bankruptcy judges are usually quite sophisticated and very sympathetic to those seeking relief. Litigation in federal Court is more complex than state court litigation. Make sure you get help.

 

%d bloggers like this: