What happens if a lender fails to comply with the TILA rules?
The borrowers are allowed to RESCIND THE LOANS AND THIS WOULD VOID THE MORTGAGES ON THEIR HOMES. OF COURSE, THIS IS THE EXCELLENT REMEDY. BUT IT HAS A SHORTER STATUTORY TIME PERIOD. The mortgage lender becomes just another unsecured creditor, who must get in line behind everyone else who may have filed a lien on the property. Who ever files first (Credit card, auto finance, doctors, etc.) has first priority.
That makes the mortgage loan itself unsecuritized — and worth a lot less — due to the increased risk of loss of collateral:
A growing number are suing lenders over inaccurate disclosure papers, and if they win they get to rescind the loans. Rescission is a powerful remedy provided under the federal laws. While that’s good news for individuals, it’s a potential problem for investors exposed to subprime mortgages.
The subprime market has been known for its lax standards in documentation and the proliferation of these loans in recent years is now fueling significantly more complaints. The subprime share of first mortgages rose to 13.4% in the first quarter of 2007 from 10.9% in the first quarter of 2004.”
Let us see how the various federal laws helps stopping predatory lending and cures many of its ills. Of course, it is never too late to hire an attorney. The Law Office of Malik Ahmad is very knowledgeable in helping homeowerns against such predatory lending practices:
The Act Requires:
(1) SPECIFIC DISCLOSURES.–In addition to other disclosures required under this title, for each mortgage referred to in section 103(aa), the creditor shall provide the following disclosures in conspicuous type size:
(2) ANNUAL PERCENTAGE RATE.–In addition to the disclosures required under paragraph (1), the creditor shall disclose
(A) in the case of a credit transaction with a fixed rate of interest, the annual percentage rate and the amount of the regular monthly payment; or
(B) in the case of any other credit transaction, the annual percentage rate of the loan, the amount of the regular monthly payment, a statement that the interest rate and monthly payment may increase, and the amount of the maximum monthly payment, based on the maximum interest rate allowed pursuant to section 1204 of the Competitive Equality Banking Act of 1987.
This seems to be where many of the subprime 2/28 ARMs ran afoul: They failed to meet the disclosure laws regarding actual interest amounts and payments.
Who has gotten tagged with these cases so far? Subprime lender NovaStar Financial Inc. (NFI) in Kansas City settled a class action suit for $5.1 million. And, consumers in Wisconsin recently won a class-action TILA suit (its under appeal). Between 1998 and 2006, approximately 2.2 million (nominal) home owners with subprime loans are expected to lose their homes, according to the Center for Responsible Lending. The consumers in this group who a) could not afford those loans and b) did not receive the proper disclosures are “talking with lawyers in an effort to prevent foreclosures.”
Overview of Truth in Lending Act (TILA)
The purpose of the Truth In Lending Act is to require a meaningful disclosure of credit terms so that the borrower will be able to compare the terms of different loans available to him and to protect the consumer against unfair lending practices.
Sources of Law
• 15 U.S.C. § 1601, et seq.
• Regulation Z (12 C.F.R. 226).
• The Federal Reserve Board’s Official Staff Commentary on Regulation Z (12 C.F.R. 226.36, Supplement I). Ford Motor Credit v. Milhollin, 444 U.S. 555, 565 (1980) (“Unless demonstrably irrational, Federal Reserve Board staff opinions construing the Act or Regulation should be dispositive”).
There must be clear, conspicuous, and accurate disclosures of loan terms as set forth in 12 C.F.R. 226.18 (“Content of Disclosures”).
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,” 12 C.F.R. 226.18(b), or as part of the “finance charge,” which represents “the dollar amount the credit will cost you,” 12 C.F.R. 226.18(d). The “annual percentage rate” (APR) combines the interest rate and additional up-front (prepaid) finance charges to yield the total “cost of your credit as a yearly rate.” 12 C.F.R. 226.18(e).
The finance charge is computed according to the rules set forth in 12 C.F.R. 226.4 (“Finance Charge”). The finance charge includes “any charge payable directly or indirectly by the creditor as an incident to or a condition of the extension of credit,” 12 C.F.R. 226.4(a), unless a charge is specifically excluded. The most pertinent exclusions in the context of real-estate loan transactions are as follows:
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). 12 C.F.R 226.4(c)(7).
Tip: This is where most TILA violations occur. If there is a misdisclosure, it is usually because of an understated finance charge, i.e., there was a charge which should have counted as a prepaid finance charge and was not (most common: an arbitrarily inflated appraisal fee [e.g., over $500] or a title insurance charge [e.g., over $600] which was therefore not “bona fide and reasonable.”)
• In deciding whether a title insurance charge is reasonable, the court should look to the fair market rate, and a refi rate should be cheaper than a purchase-money mortgage rate. Johnson v. Know Fin. Group, 2004 WL 1170335 (E.D. Pa. May 26, 2004);
• Where information as to reasonability of the rate is more likely to be in the control of the lender, the lender has the burden of proof on that issue.
• Where a fee is not bona fide or reasonable, the portion which is not bona fide or reasonable (i.e., the “upcharge”) is a finance charge, 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. 12 C.F.R. 226.4(d). In re Duffy, 32 B.R. 497 (D.R.I. 1983);
• Taxes and fees “prescribed by law that are or will be paid to public officials,” such as for a release of lien. 12 C.F.R. 226.4(e).
There must be delivery to each borrower of two copies of a 3-day notice of right to rescind the loan transaction (non-purchase money mortgages only). The notice must meet all the requirements specified in 12 C.F.R. 226.23(b)(1), including setting forth the date the rescission period expires, how to exercise the right, how to contact the creditor, and the effects of rescission. The three-day right to rescind is absolute; unless the borrower waives the right as set forth in 12 C.F.R. 226.23(e), the creditor cannot take any action to undermine that right. 12 C.F.R. 226.23(c). Rodash v. AIB Mort. Co., 16 F.3d 1142 (11th Cir. 1994); Jenkins v. Landmark Mortgage Co., 696 F. Supp. 1089 (W.D.Va. 1988).
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. 12 C.F.R. 226.2(a)(11), 226.15(a) and (b), 226.17(d), 226.23(a)(1). Westbank v. Maurer, 658 N.E.2d 1381 (Ill.App. 2nd Dist. 1995).
–Failure to deliver a proper 3-day notice of right to rescind triggers an extended right of rescission. 12 C.F.R. 226.23(a)(3). Westbank v. Maurer, 658 N.E.2d 1381 (Ill.App. 2nd Dist. 1995).
–Failure to make clear, conspicuous, and accurate material disclosures also triggers an extended right of rescission. 12 C.F.R. 226.23(a)(3). Material disclosures include the: (1) annual percentage rate, (2) finance charge, (3) amount financed, (4) total payments, (5) or payment schedule. 12 C.F.R. 226.23(a)(3) n.48.
–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. 12 C.F.R. 226.22(a);
–The finance charge tolerance for defendants in foreclosure actions is $35 (for rescission), 12 C.F.R. 226.23(h), and $100 (for monetary damages), 12 C.F.R. 226.18(d)(1)
–The extended right of rescission lasts 3 years from the date of the closing of the loan. 12 C.F.R. 226.23(a)(3). Semar v. Platte Valley Fed. S&L. Assn., 791 F.2d 699 (9th Cir. 1986)
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 subsequent holder of the mortgage.
–Tip: It is crucial to comply with the technical TILA rescission procedures in full. First, the notice of rescission must be sent within 3 years of the loan closing–no exceptions. Second, you should send the notice of rescission all parties.
–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). 12 C.F.R. 226.23(d)(1). Within 20 days the creditor must take any action required to cancel the security interest and must return any money paid on the loan (step two). 12 C.F.R. 226.23(d)(2). If and when the creditor does so, the consumer must tender to the creditor the value of the money or property received (step three). 12 C.F.R. 226.23(d)(3). The tender amount is reduced by any amount paid on the loan (unless previously returned). White v. WMC Mortgage, 2001 U.S. Dist. LEXIS 15907, at * 5 (E.D. Pa. July 31, 2001); Williams v. Gelt, 237 B.R. 590, 598-99 (E.D. Pa. 1999). Courts can modify steps two and three of the above rescission process. 12 C.F.R. 226.23(d)(4).
–Tip: Once the right to rescind is affirmed by the court and amount owed (the “tender”) is determined, borrower must pay tender within time frame set by court. All loan payments previously made by the borrower will reduce the tender amount–so, the more payments made, the better the case. Because tender is inevitable (the borrower doesn’t just get to “walk away from the loan”), you have to start working on your proposed tender strategy from the very beginning of the case. This may be a good use of “Hard Money” lenders. The principle of the mortgage will be much less then the original mortgage and may make up for the increased rate. This is used as a bridge to a “real” loan after the credit is cleared from the offending bank.
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. 15 U.S.C. § 1640(a). Failure to respond to the rescission notice as spelled out above results in another violation and an addition award of statutory damages. White v. WMC Mortgage, 2001 U.S. Dist. LEXIS 15907, at * 5 (E.D. Pa. July 31, 2001); Mayfield v. Vanguard Savings & Loan, 710 F. Supp. 143, 145 (E.D. Pa. 1989).
–Liability for TILA claims for monetary damages runs against assignees where the violation is apparent on the face of the loan documents. 15 U.S.C. § 1641(a).
To fulfill the congressional purpose of TILA, material violations, as set forth above, are to be “strictly construed”: there is no such thing as a mere “technical” violation which does not give rise to liability: “[T]he Seventh Circuit, like most courts interpreting TILA, maintains that disclosures made pursuant to the statute should be viewed from the vantage point of an ordinary consumer as opposed to that of a skilled or informed business person. TILA is aimed at deceptive practices by lenders, not the subjective beliefs or actions of borrowers. Moreover, a plaintiff need not show actual harm to recover from technical violations of TILA, as they are strict liability offenses.” Adams v. Nationscredit Financial Services Corp., 351 F. Supp.2d 829 (N.D. Ill. 2004) (citations omitted).
Statute of Limitations
• 1 year for affirmative claims. 15 U.S.C. § 1640(e);
• 3 years for rescission. Beach v. Ocwen, 523 U.S. 410 (1998);
Unlimited as a defense to foreclosure in the nature of a recoupment or setoff.
Mortgage Litigation Under the Federal Truth In Lending Act
In many cases, it is possible for a borrower in foreclosure to keep possession of their property without making mortgage payments for a period of time due to violations of Federal Law by the mortgage company.
The Truth In Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”) are violated daily by lenders and mortgage companies. These loss mitigation laws are in place to protect you, the homeowner, but they are often completely disregarded. Your loan is probably unlawful, and you may be entitled to substantial damages whether or not you’re currently in foreclosure.
Not only can the Truth In Lending Act be used to immediately stop the foreclosure process (if you currently are in foreclosure), but it also lets you avoid bankruptcy and it puts money in your pocket. Once TILA and/or RESPA violations are discovered in your loan documents, your lender will be eager to discontinue the unlawful foreclosure process and settle the dispute.
The Federal Truth in Lending Act is a very specialized area of law, and only a few attorneys in the country are able to take on mortgage companies in this regard.
Most loans (especially those in foreclosure) will qualify for our program, but time is critical. We need time to fully analyze and evaluate your mortgage documents and then prepare the lawsuit. Here is an overview of how our program works:
The Law Office of Malik Ahmad likes to see your mortgage documents you received upon the closing of your loans(s) and look for TILA, RESPA and/or HOEPA violations by your lender. Nearly every loan has at least some violations.
We immediately file a Federal lawsuit on your behalf, and place a Lis Pendens on the property to stop foreclosure (if applicable) and begin litigating your causes of action against the lender(s).
We reach a settlement agreement with the lender (most cases) or continue on to trial (rare situations) and demonstrate to a judge or jury how the lender has willfully failed to comply with Federal Law.
It is NOT necessary for you to make mortgage payments while the lawsuit is pending.
It is also unlawful for the lender to report negative information about you to the Credit Reporting Agencies while the lawsuit is pending under the Fair Credit Reporting Act.
Our program is also affordable, we represent you on a hybrid contingency arrangement to keep out-of-pocket costs low.