Predatory Lending Claims Available to Borrowers in Foreclosure

In handling mortgage foreclosure cases around the country, attorneys and paralegals should be aware that in addition to your state mortgage foreclosure laws, which is the main statute that is relied on by attorneys defending a foreclosure suit, a variety of defenses exist at both at federal and state levels. These statutes, however, focus more on the lending practice of the lender rather than on the ability of the client to pay. Volunteers should therefore pay attention to the nuances between laws listed below and figure out whether the mortgage company has engaged in illegal lending practices.

The available federal and state statutes are:

TILA

HOEPA

ECOA

BREACH OF FUDICIARY DUTY

BREACH OF CONTRACT

Consumer Fraud Deceptive Business Practices Act (DBPA)

Prohibits commercial deceptive and unfair business practice. Where a conduct is within the definition of Uniform Deceptive Trade Practice Act(UTP), it is unlawful whether a person has, in fact, been misled, deceived, or damaged.


Truth in Lending Act (TILA)

Purpose:

"It is the purpose of this subchapter to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices."

Clear, conspicuous, and accurate disclosures of loan terms set forth in

Every loan charge must be properly disclosed as either part of the "amount financed," which represents "the amount of credit provided to you or on your behalf,"

The finance charge is computed according to the rules set forth in

Some real-estate related fees are excluded from the finance charge "if the fees are bona fide and reasonable in amount" (e.g., title, document preparation, credit report, appraisal, and escrow fees).

Credit insurance premiums are excluded from the finance charge if they are voluntary, if this fact and other specified information is disclosed to the borrower, and if the borrower signs that, having been given these disclosures, s/he still wants the insurance.

The creditor must deliver TILA disclosures to each person whose ownership interest in a dwelling is subject to the security interest, and each such person has the right to rescind.

Failure to deliver a proper 3-day notice of right to rescind triggers an extended right of rescission.

Failure to make clear, conspicuous, and accurate material disclosures also triggers an extended right of rescission.

There are statutory "tolerances" for the APR and the amount financed and finance charge. Violations are deemed non-material if they fall within these tolerances.

The APR tolerance is .125% for regular loans and .25% for irregular (variable-rate) loans.

The finance charge tolerance for defendants in foreclosure actions is $35 (for rescission),

The extended right of rescission lasts 3 years from the date of the closing of the loan.

The rescission remedy runs against any assignee: "Any consumer who has the right to rescind a transaction under section 1635 of this title may rescind the transaction as against any assignee of the obligation."

Upon rescission, "the security interest giving rise to the right of rescission becomes void and the consumer shall not be liable for any amount, including any finance charge" (step one).

Creditors are also liable for actual damages, statutory damages in the amount of twice the finance charge, up to $2,000, and attorney’s fees and costs.

Liability for TILA claims for monetary damages runs against assignees where the violation is apparent on the face of the loan documents.

1 year for affirmative claims.

Unlimited as a defense to foreclosure in the nature of a recoupment or setoff.

"HOEPA, an amendment to TILA, was a congressional response to the substantive abuses of creditors offering alternative, typically high interest rate, home loans to residents in certain geographic areas. The statute was enacted to ensure that consumers most vulnerable to abuse would be afforded a safety net without impeding the flow of credit altogether. H.R. Rep. No. 103 652, at 159 (1994)." Fluehmann v. Associates Financial Services, 2002 U.S. Dist. LEXIS 5755 (D. Mass. March 29, 2002).

15 U.S.C. §§

The Federal Reserve Board’s Official Staff Commentary on Regulation Z.

APR more than 10% above comparable Treasury security rate (8% on first-lien loans closing on or after October 1, 2002) on the 15th day of the month before the lender received the loan application.

"Points and fees" exceeding 8% of the "total loan amount."  Hoepa Trigger could be lower in some states. In Maryland it is 7%."

All compensation paid to mortgage brokers.

All items paid to the lender or to a lender affiliate.

"Total loan amount" is defined as the amount financed (principal minus prepaid finance charges) minus any additional HOEPA fees not already included in the finance charge, e.g., a bona fide and reasonable appraisal fee paid to the lender. Official Staff Commentary

A special HOEPA disclosure notice must be delivered to the consumer at least three business days prior to the closing of the loan.

The notice must inform the consumer that he need not enter into the loan, and that if he does enter the loan, he could lose his home and any money he has put in it.

The notice must also include an accurate statement of APR, monthly payment and balloon payment amount, and maximum payment amount on a variable-rate loan.

As of October 1, 2002, the notice must also state the total amount borrowed. 66 Fed. Reg. 65,618 (2001).

The following terms are prohibited (or limited) by the statute and Regulation Z: prepayment penalties, default interest rate, balloon payments, negative amortization, prepaid payments, improvident lending, direct payments to home improvement contractors.

Failure to deliver the required HOEPA notice or inclusion of a prohibited term triggers an extended (three-year) right of rescission (described above).

In addition to regular TILA monetary damage remedies (see above), HOEPA violations give rise to "enhanced" monetary damages under

As with any TILA violation (see above), the rescission remedy runs against any assignee of the loan.

1 year for affirmative claims.

3 years for rescission.

Unlimited as a defense to foreclosure in the nature of a recoupment or setoff.

To "effect certain changes in the settlement process for residential real estate that will result: 1) in more effective advance disclosure to home buyers and sellers of settlement costs; 2) in the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services; 3) in a reduction in the amounts home buyers are required to place in escrow accounts established to insure the payment of real estate taxes and insurance; and 4) in significant reform and modernization of local recordkeeping of land title information."

RESPA covers all federally related mortgages, including loans (both purchase-money mortgages and others) secured by the family home. 1

HUD (the agency charged with interpretative, investigative and enforcement powers under RESPA) recommends a two-step inquiry to determine whether a yield spread premium is illegal. First, one determines whether the payment of the yield spread premium was for services actually performed; if it is not, then the payment is an illegal kickback. If the payment was for services actually performed, then one looks at whether the total compensation paid to the broker reasonably related to the value of the services; if the compensation does not reasonably relate to the value of the services, the payment is a violation of this section. 64 Fed. Reg. 10080 (1999).

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Recently the Seventh Circuit issued a decision holding that a fee for which no service was performed does not violate section 2607(b) unless the unearned fee is shared with a third party. Echevarria v. Chicago Title & Trust Co., 256 F. 3d 623 (7th Cir. 2001). However, following the Echevarria decision, HUD issued a policy statement clarifying its interpretation of Section 2607(b) in which it stated, "HUD believes that Section 8(b) [12 U.S.C. § 2607(b)] of the statute and the legislative history make clear that no person is allowed to receive any portion of charges for settlement services, except for services actually performed." 66 Fed. Reg. 53052, 53058.

Private right of action for violation of § 2607 (Illegal referral fee or kickback and fee splitting). Statutory damages: person charged for the settlement service can recover an amount equal to "three times the amount of any charge paid for such settlement service," plus attorney’s fees and costs. 1

Private right of action for violation of § 2605 (Servicing requirements and administration of escrow accounts). Actual damages for each failure to comply, additional damages for a pattern and practice of noncompliance, plus attorney’s fees and costs.

1 year for affirmative (kickback and fee-splitting) claims.

Unlimited as a defense to foreclosure in the nature of a recoupment or setoff.

Created to prohibit discriminatory treatment by lenders. ECOA’s credit notification provision requires lenders to notify consumers, within 30 days of receiving a completed application for credit, of what action is being taken on that application. This provision is intended to protect consumers from bait-and-switch tactics: "The [credit notification provision] was designed to avoid bait by a small loan for home improvements and switch to a large loan clearing title for a first mortgage. The practice of the lender was not to give notice of the counteroffer when it had a de facto completed application for the smaller loan and knew it was impracticable. Instead, the lender created the fiction that it was accepting an offer which the lender itself had created for the larger loan." Newton v. United Cos. Fin. Corp., 24 F. Supp. 2d 444, 462 (E.D. Pa. 1998).

1

Creditors sometimes offer a consumer certain credit terms only to change them later, usually at closing, perhaps by claiming that they were unable to obtain the promised terms and then offering new terms. To prevent lenders from taking advantage of consumers in this way, ECOA requires notification of the creditor’s action within 30 days of receipt of the application. The idea behind the notice requirement is that "if creditors know they must explain their decisions will they effectively be discouraged from discriminatory practices." Jochum v. Pico Credit Corp. 730 F.2d 1041, 1043 (5th Cir.1984).

Specifically, the ECOA regulations provide that "[a] creditor shall notify an applicant of action taken within 30 days after receiving a completed application concerning the creditor’s approval of, counteroffer to, or adverse action on the application." Reg. B,

An application for credit is considered "complete" when the creditor receives, through its exercise of due diligence, the last piece of information regularly obtained in the loan application process." Dufay v. Bank of Am. N.T. & S.A., 94 F.3d 561, 564 (9th Cir. 1996) (citing12 C.F.R. § 202.2(f).) In other words, an application is complete when a creditor has enough information to determine whether or not the consumer qualifies for a loan. Newton v. United Cos. Fin. Corp., 24 F. Supp. 2d 444, 461 (E.D. Pa. 1998).

If the action taken by the creditor is an "adverse action," then the notification must be in writing.

Actual damages, punitive damages up to $10,000, equitable relief, attorney’s fees and costs.

2 years for affirmative claims.

Unlimited as a defense to foreclosure in the nature of a recoupment or setoff.

"Unfair methods of competition and unfair or deceptive acts or practices, including but not limited to the use or employment of any deception fraud, false pretense, false promise, misrepresentation or the concealment, suppression or omission of any material fact, with intent that others rely upon the concealment, suppression or omission of such material fact, or the use or employment of any practice described in Section 2 of the ‘Uniform Deceptive Trade Practices Act’, approved August 5, 1965, in the conduct of any trade or commerce are hereby declared unlawful whether any person has in fact been misled, deceived or damaged thereby."

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In construing ICFA § 2, "consideration shall be given Section 5(a) of the Federal Trade Commission Act [15 U.S.C. § 45] and the federal courts relating to Section 5(a) of the Federal Trade Commission Act."

Prohibits commercial deception, requiring proof of: (1) a deceptive act or practice; (2) an intent by the defendant that plaintiff rely on the deception; and (3) that the deception occurred in the course of conduct involving trade or commerce. Martin v. Heinold Commodities, Inc., 163 Ill. 2d 33, 75, 643 N.E.2d 734 (1994). Plaintiff must also allege that he suffered some harm which was proximately caused by the deception. Id.

Prohibits commercial unfairness, requiring proof that: (1) the challenged practice offends public policy; (2) is immoral, unethical, oppressive, or unscrupulous; or (3) causes substantial injury to consumers. Robinson v. Toyota Motor Credit Corp., 201 Ill. 2d. 403, 417-18 (2002).

ICFA can be used to challenge a wide range of predatory lending practices, including improvident lending, see, e.g., Fidelity Financial Services v. Hicks, 214 Ill. App. 3d 398 (1st Dist. 1991), and "bait-and switch" practices, see, e.g., Chandler v. American General Finance, 329 Ill. App. 3d 729 (1st Dist. 2002).

Knowing violations of a number of other consumer protection statutes constitute automatic violations of ICFA.

Making loans which violate state anti-predatory lending regulations may also violate ICFA’s prohibition against unfair or deceptive acts. Specifically, the Illinois Office of Banks and Real Estate (OBRE) issued anti-predatory lending regulations covering loans closing as of May 17, 2001. These regulations are based on HOEPA (see above), but use lower triggers and impose greater restrictions. Refinance and home equity loans are defined as high-risk if fees exceed 5% or if the APR exceeds 6% above the comparable Treasury rate (8% for junior liens). Borrowers must be given pre-closing notice of loan counseling; prepayment penalties and balloon payments are limited; financed fees are capped at 6%; and various other loan terms are prohibited or limited. 38 Ill. Adm. Code 345.

Actual damages, punitive damages, equitable relief, attorney’s fees and costs.

3 years for affirmative claims.

Unlimited as a defense to foreclosure in the nature of a recoupment or setoff.

Unlike ICFA, common law fraud requires proof of reliance. Specifically, to prove common law fraud, you must show: (1) a false statement of material fact; (2) the party making the statement knew or believed it to be untrue; (3) the party to whom the statement was made had a right to rely on the statement; (4) the party to whom the statement was made did rely on the statement; (5) the statement was made for the purpose of inducing the other party to act; and (6) the reliance by the person to whom the statement was made led to that person's injury. Siegel v. Levy Organization Development Co., 153 Ill. 2d 534, 542 43, 180 Ill. Dec. 300, 607 N.E.2d 194 (1992).

In many predatory lending cases, borrowers can allege common law fraud against the party with whom they dealt directly (the contractor, broker, or loan officer). In the foreclosure context, this is usually done via a third-party claim.

In addition, liability for common law fraud can be extended, e.g., from the broker to the lender, if the lender knowingly accepted the "fruits of the fraud." Moore v. Pinkert, 28 Ill. App. 2d 320, 333, 171 N.E. 73 (1960); Pulphus v. Sullivan, No. 02 C 5794, 2003 U.S. Dist. LEXIS 7080, at **61-62 (N.D. Ill. April 25, 2003). This distinguishes common law fraud from an ICFA claim, which cannot be brought against a third party merely because that third party knowingly accepts the benefits of another’s fraud. Zekman v. Direct American Marketers, Inc. 182 Ill. 2d 359 (1998).

Actual damages, punitive damages, equitable relief. Lucas v. Downtown Greenville Investors Limited Partnership, 284 Ill. App. 3d 37 (2nd Dist. 1996).

Unlimited as a defense to foreclosure in the nature of a recoupment or setoff.

The specific elements here are: (1) a fiduciary duty was created; (2) the fiduciary duty was breached; and (3) the breach proximately caused the injury of which the plaintiff complains. Martin v. Heinold Commodities, Inc., 163 Ill. 2d 33, 53, 205 Ill. Dec. 443, 643 N.E.2d 734 (1994). Did the broker establish a position of trust to act in the best interest of the borrower (even if it tried to disclaim its duty through a standard-form document)? Did the broker subsequently violate that duty? For example, brokers often secure a loan at a higher-than-par rate and pocket a yield-spread premium (essentially a commission on the higher rate) from the lender. Though the borrower may see the term "yield-spread premium" on the loan documents, the borrower has no idea what this means. Such facts may give rise to a claim of breach of fiduciary duty.

Actual damages, equitable relief.

5 years for affirmative claims.

Unlimited as a defense to foreclosure in the nature of a recoupment or setoff.

The parties to a contract have a duty to honor their obligations thereunder, and they also have an implied duty of good faith and fair dealing. Saunders v. Michigan Avenue National Bank, 278 Ill. App. 3d 307, 315, 662 N.E.2d 602 (1st Dist. 1996). Did the broker or lender fail to live up to its contractual duty? Did it frustrate the borrower’s ability to perform on (or reinstate) the contract? If so, it may have breached the contract or its duty of good faith and fair dealing, which is implied in every contract. Hill v. Harris Bank, 329 Ill. App.3d 705, 710 (1st Dist. 2002).

Actual damages, specific performance.

10 years for affirmative claims.

Unlimited as a defense to foreclosure in the nature of a recoupment or setoff.

"The percentage of the principal amount of the loan represented by all of such charges shall first be computed, which in the case of a loan with an interest rate in excess of 8% per annum secured by residential real estate, other than loans described in paragraphs (e) and (f) of Section 4, shall not exceed 3% of such principal amount."

Statutory damages in "an amount equal to twice the total of all interest, discount and charges determined by the loan contract or paid by the obligor, whichever is greater," plus attorney’s fees and costs.

For affirmative actions, 2 years after the earlier of the last scheduled payment date or the date the loan is fully paid off. Unlimited as a defense to foreclosure.