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1 PREDATORY MORTGAGE LENDING FORECLOSURE DEFENSE Attorney Catherine M. Doyle Legal Aid Society of Milwaukee 521 N. 8 th Street Milwaukee, WI (414) I. MORTGAGE FORECLOSURE DEFENSE A. Introduction 1. Foreclosure filings skyrocketing. Nationally - In 2007, the number of households losing their homes to foreclosure was up 51% from For the first three quarters of 2008, foreclosures are up 71% from the same period last year. Wisconsin - In 2007 there were over 20,000 foreclosure actions filed in Wisconsin, an increase of 28% over For the first three quarters of 2008, foreclosures filed in Wisconsin are up 20% from the same period last year. Milwaukee - In 2007 there were 5,600 foreclosure actions filed in Milwaukee County, an increase of 53% over For the first three quarters of 2008, foreclosures filed in Milwaukee County are up 17% from the same period last year. 2. Causes of the spike in foreclosures: predatory mortgage practices. slowing of economy; sluggish real estate market; wage losses; unexpected debt; divorce; and medical crisis. In many cases little can be done to defend against a foreclosure action, except to provide accurate information about the foreclosure process and time lines and to provide a buffer against loan collectors. In some cases, defenses can be raised to successfully defend against the foreclosure action. B. Intake and Defenses 1. Only 20 days to file answer or other responsive pleading to summons and complaint in foreclosure action. 2. Getting information prior to foreclosure action being filed: 1

2 Authorization to release information Qualified Written Request (Real Estate Settlement Practices Act) 3. After foreclosure action filed - Use Interrogatories, Request to Admit and Request for Production of Documents. 4. Additional intake information a. Educational background and financial sophistication. b. Pre-closing circumstances of the mortgage transaction. Question borrower regarding representations made by mortgage broker or lender, for example, representing that the borrower will be able to refinance into a better loan after 6 months. c. Post closing circumstances and collection activities. 5. Review all documents connected with the original mortgage transaction: the mortgage, note, good faith estimate, truth-in-lending disclosure form, settlement statement, deed and all documents signed by or given to client at or before closing; post-closing: payment history, records of payment kept by client; all communications from lender and/or servicer post-closing. 6. Procedural Defenses a. Real party in interest and standing. b. Proof of assignment of mortgage. Check with the Register of Deeds for the county in which the property is located to see if assignment of mortgage has been recorded. c. Proof of proper transfer of note. Dust off you UCC books. d. Notice requirements under note and mortgage 7. Substantive defenses (also see predatory lending discussion below) a. Borrower is not in default. b. The amount of the claimed default is not correct. Examples of items which may be added into default amount to carefully scrutinize: 2

3 (1) debt balances should be carefully scrutinized; check for unauthorized fees or overcharges; escrow overcharges and abuses e.g. (2) interest charges - especially with adjustable rate mortgage (3) unnecessary forced place insurance premiums. c. Loan Servicing Problems - Issue Spotting (1) Failing to timely post monthly payments received from consumers, resulting in the charging of late fees and collection of additional interest; (2) Losing payments, especially money orders. (3) Charging fax, copying fees and a variety of other fees without notice to the homeowner or apparent authority to do so under the mortgage and note; (4) Imposing unnecessary charges against consumer, e.g fees for drive-by property inspections and force-placed insurance at higher rates. (5) what entity is doing the collection work. Evaluate for potential violations by the loan servicer which could be defenses to the foreclosure action and/or third-party claims. (6) breach of contract - for example: contractual obligation to properly apply payments and manage escrow accounts. (7) are loan servicers licensed in Wisconsin? (8) implied covenant of good faith and fair dealing. (9) negligence. d. Require client to pay regular monthly payments into client trust account and require client to go to post-purchase credit counselor C. Alternatives Resolutions in Foreclosure Proceedings 1. Cure Default 2. Workout/loan modification 3. Chapter 13 Bankruptcy 4. Deed in Lieu of Foreclosure 5. Sale of Property or Short Sale 6. Redemption of Property 3

4 II. WHAT IS PREDATORY LENDING? A. Subprime vs. Prime Mortgage Market - 1. Consumers with A and A- credit (those with good credit) are prime borrowers who have easy access to prime or low rate loans through conventional lenders. 2. Consumers with B of C credit (those with no credit history or with poor credit history) are considered subprime are steered to the subprime mortgage market. Low-income and minority homeowners borrow in disproportionate numbers from subprime lenders, even when they have good credit. 3. Subprime lenders offer loans with interest rates higher than prime interest rates. Often the interest rates offered far exceed the additional risk to the lender. B. Characteristics of Predatory Loans - Issue Spotting 1. High interest rate loans. 2. High mortgage broker fees and yield spread premiums. 3. High fees and closing costs, padded costs, duplicative charges and the financing of such fees and costs. 4. Paying off low-rate or no interest mortgages. 5. Shifting unsecured debt into mortgage debt. 6. Loans in excess of 100% loan-to-value, making loans based on the value of the property, rather than income, and inflated appraisals. 7. Door-to-door solicitation of home improvement with financing arranged by the contractor and the work is not done or poorly done. 8. Falsifying loan applications and forging signatures on loan documents. 9. Balloon payments. 10. Adjustable rate mortgages. 4

5 11. Prepayment penalties. 12. Mandatory arbitration clauses. 13. Loans with no apparent benefit to consumer. 14. Multiple flipping of mortgage loans. 15. Flipping in the sale and resale of property. 16. Aggressive solicitations of targeted neighborhoods. 17. Steering to high rate lenders. 18. Single premium life or disability insurance. 19. Mortgage broker and title company affiliated with one another. III. LEGAL CLAIMS AND DEFENSES TO PREDATORY LENDING A. Federal Claims and Defenses 1. The Truth In Lending Act 15 U.S.C et seq. ( TILA ) a. TILA is primarily a disclosure statute requiring that consumers be provided with accurate information concerning the cost of credit. Disclosures must be provided in a timely manner and disclosed using a special format to ensure the disclosures are clear and conspicuous. b. The disclosures required include: (1) amount financed (the amount of money that the borrower gets for his or her own benefit, as opposed to costs associated with obtaining the credit). (2) total finance charge (any charge payable directly or indirectly by the borrower and imposed directly or indirectly by the creditor as an incident to or condition of the extension of credit, e.g. interest, service charges, points or origination fees, and mortgage broker fees). (3) annual percentage rate (cost of credit as a yearly rate). 5

6 (4) total of payments (total of amount financed and finance charges) (5) security interest taken 1605(f). (6) tolerances (a) tolerance for rescission in foreclosure defense is $35.00 (b) tolerance for damage remedies is $100 ( c) tolerance for rescission remedies is $100 or one-half of one percent whichever is greater. (d) there are some exceptions, so refer to 15 U.S.C. c. Damages for failure to make required disclosures under TILA (1) Statutory damages: up to twice the finance charge. For covered mortgage loans the damages are a minimum of $200 and a maximum of $2,000. Only one statutory damages award can be made regardless of the number of violations. (2) Actual damages: for any violation of a TILA disclosure requirement. (3) Attorneys fees and costs are allowed. (4) Rescission - Non-purchase security interest on principal dwelling d. Statute of Limitations. (a) Voids security interest (thus complete defense to foreclosure) (b) Voids all finance charges and closing costs and fees. (1) 1 year statute of limitations for affirmative damage claims. (2) A consumer may assert TILA claims defensively in an action to collect on a debt filed more than one year after the occurrence of the violation as a defense raised by way of recoupment or set-off. (3) Rescission. (a) The consumer has 3 days from the latest of consummation of the transaction; delivery of proper notice 6

7 of right to rescind or delivery of all material disclosures properly made. (b) Consumers have a continuing right of rescission for up to 3 years from the consummation of the loan if required notices and material disclosures are not properly given. 2. Home Ownership and Protection Act of 1994, 15 U.S.C ( HOEPA ) And Regulation Z, 12 C.F.R. 226 et seq. a. In 1994, Congress passed HOEPA designed to prevent some predatory lending practices. HOEPA loans are subject to special disclosure requirements and restrictions on substantive terms which are commonly used by predatory lenders. HOEPA does not apply to purchase mortgages. b. Application of HOEPA: HOEPA applies if one of two triggers is met. (1) The annual percentage rate for the loan exceeds by more than 8% (10% for loans prior to October 1, 2002) the yield on treasury securities having comparable maturities; or (2) the total points and fees exceeds 8% of the total loan amount. c. Additional Disclosure Requirements. Before entering into a HOEPA loan, the borrower must receive a special advance notice at least three business days prior to the closing. See 15 U.S.C. 1639(b) and Reg. Z Sec for the requirements of the notice. d. Substantive Prohibitions. HOEPA prohibits or limits certain contract terms: prepayment penalties (unless a five-part test is met); interest rate increases upon default; negative amortization; balloon payments (allowed if loan has a term of 5 years or more); prepaid payment of escrow (allowed if up to only two monthly payments are escrowed) and due-on-demand clauses (unless default caused by borrower). e. Prohibited lender conduct: Payments from loan proceeds only to a home improvement contractor; making a loan without regard to ability to repay (with exceptions); refinancing by the same creditor or assignee within one year (except if refinancing is in the borrower s best interests); making an open-end loan to evade HOEPA. f. Expanded Assignee Liability. Assignees of HOEPA loans are liable for all claims and defenses with respect to the assigned mortgage that the borrower could assert against the original lender. The only exception to assignee liability is if the assignee shows that a reasonable person exercising ordinary due diligence could not have determined the loan was a HOEPA 7

8 loan. g. Remedies. (1) TILA monetary damages and where material violations, enhanced damages of the sum of all finance charges and fees paid by the borrower. Damage claims are subject to a 1 year statute of limitations for affirmative suits, but can be raised anytime defensively. (2) Violations of HOEPA are deemed to be material violations under TILA and, therefore, are subject to the right of rescission under TILA. 3. Real Estate Settlement Procedures Act, 12 U.S.C. Sec et seq. ( RESPA ) a. RESPA was enacted to protect consumers from unnecessarily high settlement charges and certain abusive practices. RESPA applies to most loans secured by residential property. b. RESPA requires that a good faith estimate of settlement costs be given to the consumer not more than three days after the application for credit. There is no remedy for a violation of this provision. c. RESPA prohibits kickbacks and unearned fees for referral of a settlement service. A private remedy for violation of the kickback and unearned fee provision is treble damages and attorneys fees. d. RESPA contains provisions which mandate that servicers of covered loans tell consumers about that the mortgage loans may be transferred to other servicers; respond to consumer inquiries; pay property taxes, insurance premiums and other escrowed moneys appropriately. A consumer can bring a private cause of action for actual and statutory damages, costs and attorneys fees. 4. Fair Debt Collections Act, 15 U.S.C. 1692a et seq. 5. Fair Housing Act, 42 U.S.C. Sec B. State Claims 8

9 1. Unfair and Deceptive Acts and Practices - Sec Wis. Stats.. 2. Door-to-Door Solicitation Acts 3. Common Law Fraud and Misrepresentation 4. Common law Unconscionability 5. Breach of Fiduciary Duty and Aiding and Abetting Breach of Fiduciary Duty 6. Contract Claims, including the Duty of Good Faith and Fair Dealing 7. Negligent Supervision of Employees 8. Sec , Discipline of Mortgage Bankers, Loan Originators and Mortgage Brokers - private cause of action under Sec Wisconsin Consumer Act 10. Violations of Agriculture Trade Consumer Protection Rules, Agriculture, Trade Consumer Protection Chapter (1) (ATCP). Plaintiffs have the right to assert claims against holders of the loan because the holders take subject to all claims and defenses of the buyer. See Wis. Admin. Code Sec. ATCP Loss by Theft, Sec and Sec , Wis. Stats IV. MORTGAGE FORECLOSURE RESCUE SCAMS A. Growing Problem Scam artists have identified one more area where they can get away with the equity in people s homes. If a person s home goes into foreclosure, often that person becomes paralyzed and unable to take steps necessary, such as sale of his/her home, in order to save equity in the home. Now, many predators are contacting people in this position, offering to help them save their homes. There are a variety of methods by which these predators help themselves to a person s equity - through use of powers of attorney, sale with lease back, even forgery. Often these victims do not know they have transferred their homes until they are facing eviction. B. Legislation Needed 9

10 Legal Aid Society is representing many victims of this scam. A bill to regulate this industry failed to pass the Wisconsin legislature last session but will be introduced again early in the next legislative session. 10

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