Defense of Mortgage Foreclosures
Many lawyers and judges have long assumed that if a mortgage company seeks to foreclose, the defendant probably owes the money and has no defense. In fact, as recent publicity concerning the widespread problem of predatory lending has made clear, many mortgage lenders overreach. In a substantial portion of residential mortgage foreclosures, the homeowner has a valid defense to at least part of the claim. Either they are not in default at all, or the extent of the default is significantly less than claimed, or the mortgage is subject to attack, most likely under the Truth in Lending Act, 15 U.S.C. §1601 et seq. ("TILA"), as amended by the Home Ownership & Equity Protection Act of 1994, 15 U.S.C. §§1602(aa) and 1639 ("HOEPA"), and implementing Federal Reserve Board Regulation Z, 12 C.F.R. part 226.
The extent of the problem posed by wrongful and predatory foreclosures is illustrated by the following numbers:
Mortgage foreclosures in Illinois Number by subprime lenders
1993 5,899 131
1999 14,282 4,958
A 1999 study by the National Training and Information Center, "Preying on Neighborhoods, Subprime Mortgage Lending and Chicagoland Foreclosures," states that completed foreclosures, where the home was actually sold at auction, increased from 2,074 in 1993 to 3,964 in 1998, of which subprime lenders accounted for 30 and 1,417, respectively.
Unfortunately, most foreclosures end in default or bankruptcy. Few result in a lawyer looking through the loan documents to see if the homeowner has any claims or defenses. In part, this is because "minorities, women, and the elderly bear the brunt of abusive mortgage lending practices, particularly in predominantly minority or low-income neighborhoods that do not have access to mainstream sources of credit." "Curbing Predatory Home Mortgage Lending," joint report of the Department of Housing and Urban Development and the Department of the Treasury, HUD Document No. 00-142, issued June 20, 2000.
This chapter will discuss the types of mortgage lending and servicing practices generally regarded as predatory and the legal challenges available to the homeowner.
THE ILLINOIS MORTGAGE FORECLOSURE LAW
Transactions to which applicable
Illinois Mortgage Foreclosure Law ("IMFL") §15-1106 provides that the IMFL applies to certain security instruments in addition to those openly labelled "mortgage":
1. "any real estate installment contract for residential real estate entered into on or after the effective date of this amendatory Act of 1986 and under which (i) the purchase price is to be paid in installments over a period in excess of five years and (ii) the amount unpaid under the terms of the contract at the time of the filing of the foreclosure complaint, including principal and due and unpaid interest, at the rate prior to default, is less than 80% of the original purchase price of the real estate as stated in the contract;"
2. "any collateral assignment of beneficial interest made on or after the effective date of this amendatory Act of 1986 (i) which is made with respect to a land trust which was created contemporaneously with the collateral assignment of beneficial interest, (ii) which is made pursuant to a requirement of the holder of the obligation to secure the payment of money or performance of other obligations and (iii) as to which the security agreement or other writing creating the collateral assignment permits the real estate which is the subject of the land trust to be sold to satisfy the obligations."
IMFL §15-1106(b) provides that the IMFL may, but need not, be used to enforce:
3. "(i) a collateral assignment of beneficial interest in a land trust or (ii) an assignment for security of a buyer's interest in a real estate installment contract."
4. "any real estate installment contract entered into on or after the effective date of this Amendatory Act of 1986 and not required to be foreclosed under this Article."
In addition, IMFL §15-1207 defines "mortgage" to include a "deed conveying real estate, although an absolute conveyance in its terms, which shall have been intended only as a security in the nature of a mortgage" and equitable mortgages.
A deed absolute on its face, but intended as security, will be construed as a mortgage. Facts relevant to the determination include (a) the existence of an indebtedness, (b) a fiduciary or other close relationship between the parties, (c) prior unsuccessful attempts to obtain loans, (d) whether the consideration is sufficiently large to be consistent with a bona fide sale of the property, (e) lack of legal advice, (f) an agreement or option to repurchase, and (g) the continued exercise of ownership privileges and responsibilities by the purported seller (such as occupancy of the premises and payment of real estate taxes). Robinson v. Builders Supply & Lumber Co., 223 Ill.App.3d 1007, 586 N.E.2d 316, 320 (1st Dist. 1992); McGill v. Biggs, 105 Ill.App.3d 706, 434 N. E.2d 772, 774 (3d Dist. 1982). The amount of consideration is perhaps the most important factor. Robinson, supra. Any question should be resolved in favor of holding that the deed is intended as security.
Persons facing foreclosure are often contacted by helpful individuals who will "refinance" them by paying off the defaulted loan, taking title to the property, giving an option to repurchase to the homeowner, and leasing the property to the homeowner. Such deeds should probably be held to constitute mortgages. Furthermore, if obtained by someone who is in the business of "refinancing" real estate in this manner, they will often be subject to attack for noncompliance with the Truth in Lending Act and other consumer protection laws. See Redic v. Gary H. Watts Realty Co., 762 F.2d 1181 (4th Cir. 1985).
We have also seen the "deed as security" device used by auto title lenders which occasionally lend on the security of real estate.
The IMFL provides a statutory right to cure a default and reinstate a loan. IMFL §15-1602 provides:
Sec. 15-1602. Reinstatement. In any foreclosure of a mortgage executed after July 21, 1959, which has become due prior to the maturity date fixed in the mortgage, or in any instrument or obligation secured by the mortgage, through acceleration because of a default under the mortgage, a mortgagor may reinstate the mortgage as provided herein. Reinstatement is effected by curing all defaults then existing, other than payment of such portion of the principal which would not have been due had no acceleration occurred, and by paying all costs and expenses required by the mortgage to be paid in the event of such defaults, provided that such cure and payment are made prior to the expiration of 90 days from the date the mortgagor or, if more than one, all the mortgagors (i) have been served with summons or by publication or (ii) have otherwise submitted to the jurisdiction of the court. When service is made by publication, the first date of publication shall be used for the calculation. Upon such reinstatement of the mortgage, the foreclosure and any other proceedings for the collection or enforcement of the obligation secured by the mortgage shall be dismissed and the mortgage documents shall remain in full force and effect as if no acceleration or default had occurred. The relief granted by this Section shall not be exhausted by a single use thereof, but if the court has made an express written finding that the mortgagor has exercised its right to reinstate pursuant to this Section, such relief shall not be again available to the mortgagor under the same mortgage for a period of five years from the date of the dismissal of such foreclosure. The provisions of Section 9-110 of the Code of Civil Procedure [735 ILCS 5/9-110] shall be inapplicable with respect to any instrument which is deemed a mortgage under this Article. The court may enter a judgment of foreclosure prior to the expiration of the reinstatement period, subject to the right of the mortgagor to reinstate the mortgage under this Section.
IMFL §15-1601 prohibits waiver of reinstatement and redemption rights in the case of residential real estate, except that waiver after a foreclosure action is filed is permitted by means of a document filed with the Clerk, if the mortgagee waives a deficiency.
Entry of a judgment of foreclosure does not terminate the right to reinstatement. Under prior law reinstatement rights expired at the earlier of (a) 90 days from the date the court obtained jurisdiction over the mortgagor or (b) the date of judgment.
The IMFL provides that the five-year limitation on a subsequent right of reinstatement will exist "if the court has made an express written finding that the mortgagor has exercised its right to reinstate." Id. If the lender does not put the express written finding in the order, it cannot receive the five-year limitation. Under prior law, once the cure provision was invoked, it could not be exercised for five years.
The express written finding pursuant to § 15-1602 is discretionary.
It is often very difficult to obtain reinstatement figures from the lender. In order to reinstate the mortgage, the mortgagor should make a demand on the lender for the reinstatement figures and if necessary should file a motion within the reinstatement period asking the Court to order the lender to provide a reinstatement figure and an explanation of how it was arrived at. The mortgagor must be prepared to tender the necessary amount within the reinstatement period. However, the mortgagor may also want to contest the reasonableness of the attorneys' fees claimed by the mortgagee or of other charges.
If the reinstatement amount is disputed, the 90 days may not begin running until the dispute is resolved. Lomas & Nettleton Co. v. Humphries, 703 F.Supp. 757 (N.D.Ill. 1989); Invex Finance, B.V. v. LaSalle National Bank, etc., 90 C 1066, 1992 WL 79052, *3 n. 7 (N.D.Ill. 1992).
Finally, an independent right to reinstate is provided for in most of the standard notes and mortgages, including the FNMA/ FHLMC (conventional) and FHA forms.
Any tender of funds to reinstate or redeem should be accompanied by a letter specifying that the funds are to be used only to reinstate or redeem. Otherwise, they can be applied to other debts, or to the deficiency. Citicorp Mortgage, Inc. v. Leonard, 166 B.R. 645 (N.D.Ill. 1994); Farm Credit Bank v. Biethman, 262 Ill.App.3d 614, 634 N.E.2d 1312 (5th Dist. 1994).
Redemption rights are conferred by IMFL §15-1603. In the case of residential real estate, the redemption period shall end on the later of (i) the date 7 months from the date all of the all the mortgagors (A) have been served with summons or by publication or (B) have otherwise submitted to the jurisdiction of the court, or (ii) the date 3 months from the date of entry of a judgment of foreclosure. The period may be shortened if a personal deficiency is waived. The redemption amount is "(1) The amount specified in the judgment of foreclosure, which shall consist of (i) all principal and accrued interest secured by the mortgage and due as of the date of the judgment, (ii) all costs allowed by law, (iii) costs and expenses approved by the court, (iv) to the extent provided for in the mortgage and approved by the court, additional costs, expenses and reasonable attorneys' fees incurred by the mortgagee, (v) all amounts paid pursuant to Section 15-1505 [735 ILCS 5/15-1505] and (vi) per diem interest from the date of judgment to the date of redemption calculated at the mortgage rate of interest applicable as if no default had occurred; and
(2) The amount of other expenses authorized by the court which the mortgagee reasonably incurs between the date of judgment and the date of redemption, which shall be the amount certified by the mortgagee in accordance with subsection (e) of Section 15-1603." IMFL §15-1603(f). Prior notice of intent to redeem is required.
A special right to redeem exists (TITLE 15-§1604) with respect to residential real estate if "(i) the purchaser at the sale was a mortgagee who was a party to the foreclosure or its nominee and (ii) the sale price was less than the amount specified in subsection (d) of Section 15-1603." In that event, the mortgagor or other person entitled to redeem may do so by tendering, for a period ending 30 days after the date the sale is confirmed, "(i) the sale price, (ii) all additional costs and expenses incurred by the mortgagee set forth in the report of sale and confirmed by the court, and (iii) interest at the statutory judgment rate from the date the purchase price was paid or credited as an offset."
Deed in lieu of foreclosure and consent foreclosure
The IMFL also provides for acquisition of the borrower’s interest through (a) a deed in lieu of foreclosure and (b) consent foreclosure. A deed in lieu of foreclosure is authorized by IMFL §15-1401 and normally extinguishes the personal liability of the borrower:
Sec. 15-1401. Deed in Lieu of Foreclosure. The mortgagor and mortgagee may agree on a termination of the mortgagor's interest in the mortgaged real estate after a default by a mortgagor. Any mortgagee or mortgagee's nominee may accept a deed from the mortgagor in lieu of foreclosure subject to any other claims or liens affecting the real estate. Acceptance of a deed in lieu of foreclosure shall relieve from personal liability all persons who may owe payment or the performance of other obligations secured by the mortgage, including guarantors of such indebtedness or obligations, except to the extent a person agrees not to be relieved in an instrument executed contemporaneously. A deed in lieu of foreclosure, whether to the mortgagee or mortgagee's nominee, shall not effect a merger of the mortgagee's interest as mortgagee and the mortgagee's interest derived from the deed in lieu of foreclosure. The mere tender of an executed deed by the mortgagor or the recording of a deed by the mortgagor to the mortgagee shall not constitute acceptance by the mortgagee of a deed in lieu of foreclosure.
Often, when the borrower has some defense, it is possible to obtain cash as part of a settlement in which the borrower gives a deed in lieu of foreclosure.
Consent foreclosure is authorized by §15-1402 and also extinguishes the borrower’s personal liability:
Sec. 15-1402. Consent Foreclosure. (a) No Objection. In a foreclosure, the court shall enter a judgment satisfying the mortgage indebtedness by vesting absolute title to the mortgaged real estate in the mortgagee free and clear of all claims, liens (except liens of the United States of America which cannot be foreclosed without judicial sale) and interest of the mortgagor, including all rights of reinstatement and redemption, and of all rights of all other persons made parties in the foreclosure whose interests are subordinate to that of the mortgagee and all nonrecord claimants given notice in accordance with paragraph (2) of subsection (c) of Section 15-1502 [735 ILCS 5/15-1502] if at any time before sale:
(1) the mortgagee offers, in connection with such a judgment, to waive any and all rights to a personal judgment for deficiency against the mortgagor and against all other persons liable for the indebtedness or other obligations secured by the mortgage;
(2) such offer is made either in the foreclosure complaint or by motion upon notice to all parties not in default;
(3) all mortgagors who then have an interest in the mortgaged real estate, by answer to the complaint, response to the motion or stipulation filed with the court expressly consent to the entry of such judgment;
(4) no other party, by answer or by response to the motion or stipulation, within the time allowed for such answer or response, objects to the entry of such judgment; and
(5) upon notice to all parties who have not previously been found in default for failure to appear, answer or otherwise plead.
(b) Objection. If any party other than a mortgagor who then has an interest in the mortgaged real estate objects to the entry of such judgment by consent, the court, after hearing, shall enter an order providing either:
(1) that for good cause shown, the judgment by consent shall not be allowed; or
(2) that, good cause not having been shown by the objecting party and the objecting party not having agreed to pay the amount required to redeem in accordance with subsection (d) of Section 15-1603 [735 ILCS 5/15-1603], title to the mortgaged real estate be vested in the mortgagee as requested by the mortgagee and consented to by the mortgagor; or
(3) determining the amount required to redeem in accordance with subsection (d) of Section 15-1603 [735 ILCS 5/15-1603], finding that the objecting party (or, if more than one party so objects, the objecting party who has the least priority) has agreed to pay such amount and additional interest under the mortgage accrued to the date of payment within 30 days after entry of the order, and declaring that upon payment of such amount within 30 days title to the mortgaged real estate shall be vested in such objecting party. Title so vested shall be free and clear of all claims, liens (except liens of the United States of America which cannot be foreclosed without judicial sale) and interest of the mortgagor and of all rights of other persons made parties in the foreclosure whose interests are subordinate to the interest of the mortgagee and all nonrecord claimants given notice in accordance with paragraph (2) of subsection (c) of Section 15-1502 [735 ILCS 5/15-1502]. If any objecting party subject to such an order has not paid the amount required to redeem in accordance with that order within the 30-day period, the court (i) shall order that such title to the mortgaged real estate shall vest in the objecting party next higher in priority (and successively with respect to each other objecting party in increasing order of such party's priority), if any, upon that party's agreeing to pay within 30 days after the entry of such further order, such amount as specified in the original order plus additional interest under the terms of the mortgage accrued to the date of payment, provided that such party pays such amount within the 30-day period, and (ii) may order that the non-paying objecting party pay costs, interest accrued between the start of the preceding 30-day period and the later of the date another objecting party makes the payment, if applicable, or the date such period expired, and the reasonable attorneys' fees incurred by all other parties on account of that party's objection.
(c) Judgment. Any judgment entered pursuant to Section 15-1402 [735 ILCS 5/15-1402] shall recite the mortgagee's waiver of rights to a personal judgment for deficiency and shall bar the mortgagee from obtaining such a deficiency judgment against the mortgagor or any other person liable for the indebtedness or other obligations secured by the mortgage.
Care in drafting agreements relating to deeds in lieu of foreclosure and consent foreclosures is required. In Flora Bank & Trust Co. v. Czyzewski, 222 Ill.App.3d 382, 583 N.E.2d 720 (5th Dist. 1991), the mortgagee and the mortgagors entered into a stipulation by which the mortgagors would deed the property to the mortgagee, who then would sell the property at auction. The auction resulted in a deficiency, for which the mortgagee sought judgment. The mortgagors sought to bar the deficiency judgment, arguing that the mortgagors had executed a deed in lieu of foreclosure and that the agreement did not clearly impose liability for a deficiency. The court found that the agreement did impose such liability, rejecting the trial court’s finding that there would have been no reason for the mortgagors to execute quitclaim deeds except to be relieved from a deficiency.
Finally, §15-1403 preserves common law strict foreclosure to the extent it still exists. A common law strict foreclosure is available where the mortgagor is insolvent and the value of the property is less than the debt and outstanding property taxes, and the mortgagee gives up the right to a deficiency. Great Lakes Mtge. Corp. v. Collymore, 14 Ill.App.3d 68, 302 N.E.2d 248 (1st Dist. 1973).
All other foreclosures in Illinois must be through judicial proceedings. Illinois, unlike some other states, does not allow non-judicial foreclosures. However, federal law authorizes non-judicial foreclosure of Government guaranteed loans. Single Family Mortgage Foreclosure Act of 1994, 12 U.S.C. §3751 et seq.; 24 C.F.R. part 27. In fact, this procedure is not frequently used.
Allegations deemed included in complaint
A mortgage foreclosure complaint is "deemed" to include certain allegations, set forth in IMFL §15-1504. When responding to such a complaint, the attorney representing the defendant must admit or deny the "deemed" allegations.
Upon entry of a judgment of foreclosure and expiration of the reinstatement period and the redemption period in accordance with subsection (b) or (c) of §15-1603, the real estate shall be sold at a sale after public notice published at least once per week for 3 consecutive calendar weeks, the first such notice to be published not more than 45 days prior to the sale, the last such notice to be published not less than 7 days prior to the sale. IMFL §15-1507.
Under IMFL § 15-1508 the court has discretion to not confirm a sale if "(ii) the terms of sale were unconscionable, (iii) the sale was conducted fraudulently or (iv) . . . justice was otherwise not done". Cragin Fed. Bank for Sav. v. American Nat'l Bank & Trust Co., 262 Ill. App.3d 115, 633 N.E.2d 1011 (2d Dist. 1994); Lyons Sav. & Loan Ass'n v. Gash Assocs., 189 Ill. App.3d 684, 545 N.E.2d 412 (1st Dist. 1989); Illini Fed. Sav. & Loan Ass'n v. Doering, 162 Ill. App.3d 768, 516 N.E.2d 609 (5th Dist. 1987). Some cases state that trial courts have broad discretion in approving or disapproving sales made at their direction. Citicorp Sav. v. First Chicago Trust Co., 269 Ill. App.3d 293, 645 N.E.2d 1038 (1st Dist. 1995). For example, a sale at 1/6 of the value of the property has been held inappropriate. Commercial Credit Loans, Inc. v. Espinoza, 293 Ill. App.3d 923, 689 N.E.2d 282 (1st Dist. 1997). Courts have held that the extent of inquiry is less stringent than imposed by the Uniform Commercial Code (810 ILCS 5/1-101 et seq.), which requires that all sales "must be commercially reasonable" or in the Bankruptcy Act which requires aggressive advertising of the proposed sale and a foreclosure sale price of "a reasonably equivalent value" for the property. Resolution Trust Corp. v. Holtzman, 248 Ill. App.3d 105, 618 N.E.2d 418 (1st Dist. 1993).
If the sale is confirmed and produces a deficiency, a judgment for that amount is entered as part of the same order. IMFL §15-1508(e).
The sale is merely an irrevocable offer that is accepted by the court order confirming the sale. BCGS, LLC v. Jaster, 299 Ill.App.3d 208, 212, 700 N.E.2d 1075, 1079 (2d Dist. 1998); Citicorp Savings v. First Chicago Trust Co., 269 Ill.App.3d 293, 645 N.E.2d 1038 (1st Dist. 1995); Commercial Credit Loans, Inc. v. Espinoza, 293 Ill.App.3d 915, 689 N.E.2d 282 (1st Dist. 1997); World Savings v. Amerus Bank, 317 Ill.App.3d 772, 740 N.E.2d 466 (1st Dist. 2000). This is important for bankruptcy purposes – most but not all bankruptcy judges hold that a Chapter 13 plan proposing reinstatement of the loan can be filed before confirmation. McEwen v. Federal National Mortgage Association, 194 B.R. 594 (Bankr. N.D.Ill. 1996); In re Jones, 219 B.R. 1013 (Bankr. N.D.Ill. 1998); but see In re Christian, 199 B.R. 382 (Bankr. N.D.Ill. 1996), rev'd sub nom. Christian v. Citibank, F.S.B., 214 B.R. 352 (N.D.Ill. 1997). It is also important if the borrower redeems or reinstates after the sale but prior to the confirmation order. Citicorp Savings v. First Chicago Trust Co., supra, 269 Ill.App.3d 293, 645 N.E.2d 1038 (1st Dist. 1995).
To be safe a Chapter 13 should be filed before the sale.
IMFL §15-1510 provides that " Attorneys' fees and other costs incurred in connection with the preparation, filing or prosecution of the foreclosure suit shall be recoverable in a foreclosure only to the extent specifically set forth in the mortgage or other written agreement between the mortgagor and the mortgagee or as otherwise provided in this Article." Illinois law makes the award of attorney’s fees and expenses under a mortgage a matter within the court’s discretion based upon satisfactory proof. Mercado v. Calumet Fed. S.& L. Ass’n, 196 Ill.App.3d 483, 554 N.E.2d 305 (1st Dist. 1990); Chicago Title & Trust Co. v. Chicago Title & Trust Co., 248 Ill.App.3d 1065, 618 N.E.2d 949 (1st Dist. 1993). . For example, an Illinois court will not award fees to a creditor who is unsuccessful or makes litigation necessary by claiming an excessive amount, regardless of what a note or mortgage purport to allow. Helland v. Helland, 214 Ill.App.3d 275, 277-78, 573 N.E.2d 357, 359 (2d Dist. 1991). This would appear to render inappropriate the practice of certain lenders of adding attorney’s fees and related expenses to the mortgage balance, even though not provided for in a judgment or other court order or stipulation executed in connection with a judicial proceeding.
The attorney who undertakes the defense of a mortgage foreclosure should be mindful of a number of points:
It is always desirable to act before default. Although appellate decisions urge liberal vacation of default judgments in mortgage foreclosure actions upon a motion made within 30 days, Bank & Trust Co. v. Line Pilot Bungee, Inc., 323 Ill.App.3d 412, 752 N.E.2d 650 (5th Dist. 2001), it is the author’s experience that courts are more reluctant to vacate defaults in foreclosures than in virtually any other type of case.
It is usually beneficial to file suit against the lender before the lender institutes a foreclosure lawsuit.
The borrower will rarely recognize or understand what constitutes a valid defense. The author has seen numerous pro se answers which do nothing more than admit that a default exists.
Do not have the borrower appear or file anything pro se. Do not rely on the borrower to identify "what is wrong" with a mortgage transaction. Review the documents yourself.
Get a complete set of closing documents, a complete loan history, and all available correspondence from the borrower. Informal requests should be sent to the current and prior servicer and the closing agent. A mortgage servicer is legally obligated under federal law (Cranston Gonzales Amendment to Real Estate Settlement Procedures Act, 12 U.S.C. §2605, discussed below) to respond to certain requests while it is servicing the loan and for one year thereafter. Requests should be sent out at once. If a lawsuit is already on file, discovery asking for these items should be issued immediately.
The most common documents giving rise to defenses and counterclaims are (a) the Truth in Lending disclosures, including the basic financial disclosure statement, any itemization of amount financed, any advance disclosures under the Home Ownership & Equity Protection Act, and any notice of right to cancel, (b) the note and mortgage itself (including all riders and attachments), (c) the HUD-1 Settlement Statement, and (d) the account history. Also obtain all correspondence with the mortgage company and demand letters. A small delinquency can be offset by a few Cranston Gonzales or FDCPA violations.
Ascertain the state of title to the home, either by obtaining a title search or conducting one yourself. The sloppiness of lenders is often little short of incredible. For example, we have seen multiple instances of lenders obtaining a mortgage from less than all joint tenants. The non-signing joint tenants almost certainly did not receive Truth in Lending disclosures or notices of their right to cancel the loan. If they qualify as parties entitled to exercise rescission rights (if they live in the property), the mortgage is subject to rescission under federal law (although it may be effective as to the joint tenant’s interest under state law). In this regard, the title of many inner-city properties is often "messy," as a result of persons who cannot afford lawyers informally determining the ownership of property without compliance with probate and recording laws.
If the loan is less than 3 years old (the Truth in Lending Act rescission period), always get evidence of every disbursement listed on the HUD-1, including such items as governmental fees and charges and credit reports. In Cook County, the charge for recording an instrument is endorsed on the instrument. In other counties, there are standard fee schedules from which the cost can be readily computed. The cost of a credit report is often listed on the report itself.
The importance of doing this cannot be overemphasized. Many predatory lenders cannot resist "marking up" such items as recording fees, credit reports, and the like. The "markup" is a finance charge, invariably not disclosed as such. (Indeed, it can be argued that the entire charge for the "marked up" item is a finance charge, not just the amount of the "markup.") As discussed below, the "tolerance" of error permitted under Truth in Lending before a borrower can rescind in response to a mortgage foreclosure is only $35. Therefore, if you can establish $35 worth of "markups", you have a defense to foreclosure.
Many predatory lenders also are in the habit of making loans that bump right up against the "triggers" for special disclosure and other requirements, such as the 8% HOEPA "trigger" (discussed below). There is no margin of error in this situation. If as a result of padding recording charges or credit report fees the "points and fees" on a loan are at 8.01% instead of 7.99% as the lender intended, the mortgage is subject to rescission.
If the HUD-1 shows a disbursement to the borrower, do not assume that the borrower actually got the money. Find out. Have the borrower bring in bank statements for the relevant period if there is any question. The author has had a number of cases where the money went into the pocket of a broker or lender. All such undisbursed amounts are finance charges, and they are almost never disclosed as such.
Ascertain the number of dwelling units in the property and who occupies them. Many applicable statutes, such as TILA and RESPA, apply only if the "principal" purpose of a transaction was "personal, family or household." The IMFL gives certain rights only if the property is "residential." Finally, the Illinois Credit Agreements Act, 815 ILCS 160/1 et seq., creates a special statute of frauds in favor of institutional lenders that bars parol evidence of an agreement to "lend money or extend credit or delay or forbear repayment of money not primarily for personal, family or household purposes . . . ."
Financing the acquisition of a 1 or 2 unit property in which the borrower resides is for "personal, family or household" purposes. Financing the acquisition of a six-flat in which one unit is occupied by the borrower and the others are rented to unrelated persons may not be. If you have an appraisal it will confirm the number of dwelling units and usually provide separate valuations for the building and underlying land.
Make sure that there is nothing inaccurate on the loan application, or that there is a good explanation if there is any inaccuracy.
Many mortgage foreclosure cases appear to be brought by nominal parties who do not qualify as the "real party in interest" in federal court and may not have standing under state law.
It is often difficult for mortgage servicers, particularly if they are not the original lender, to prove the true status of an account. Affidavits are often submitted to prove default that are conclusory and insufficient. Manufacturers & Traders Trust Co. v. Medina, 01 C 768, 2001 WL 1558278 (N.D.Ill., Dec. 5, 2001); Cole Taylor Bank v. Corrigan, 230 Ill.App.3d 122, 595 N.E.2d 177, 181 (2d Dist. 1992). Computer-generated bank records or testimony based thereon are often offered without proper foundation, or are summarized without being introduced. Manufacturers & Traders Trust Co. v. Medina, supra, 01 C 768, 2001 WL 1558278 (N.D.Ill., Dec. 5, 2001); FDIC v. Carabetta, 55 Conn.App. 369, 739 A.2d 301 (1999).
Testimony, whether live or in the form of an affidavit, to the effect that the witness has reviewed a loan file and that the loan file shows that the debtor is in default is hearsay and incompetent; rather, the records must be introduced after a proper foundation is provided. New England Savings Bank v. Bedford Realty Corp., 238 Conn. 745, 680 A.2d 301, 308-09 (1996), later opinion, 246 Conn. 594, 717 A.2d 713 (1998); Cole Taylor Bank v. Corrigan, supra, 230 Ill.App.3d 122, 595 N.E.2d 177, 181 (2d Dist. 1992). It is the business records that constitute the evidence, not the testimony of the witness referring to them. In re A.B., 308 Ill.App. 3d 227, 719 N.E.2d 348 (2d Dist. 1999).
Nor is such an affidavit made sufficient by omitting the fact that it is based on a review of loan records, if it appears that the affiant did not personally receive or observe the reception of all of the borrower’s payments. Hawaii Community Federal Credit Union v. Keka, 94 Haw. 213, 11 P.3d 1, 10 (2000). If the underlying records are voluminous, a person who has extracted the necessary information may testify to that fact, but the underlying records must be made available to the court and opposing party. In re deLarco, 313 Ill.App.3d 107, 728 N.E.2d 1278 (2d Dist. 2000).
Counsel should challenge any such testimony or affidavits. Counsel should not simply assume that the mortgage company must be right in claiming a default; there are reported decisions in which it turned out that the lender’s right hand did not know what the left hand was doing and that there was really no basis for a claimed default. In re Hart, 246 B.R. 709 (Bankr. D.Mass. 2000); In re McCormack, 96-81-SD, 1996 WL 753938 (D.N.H. 1996). See also, FNMA v. Bryant, 62 Ill.App.3d 25, 378 N.E.2d 333 (5th Dist. 1978), where the court found that the lender had foreclosed too quickly and that the default had been cured. Frequently, mortgage servicers attempt to service loans without consulting the loan documents, with the result that they depart from the their terms. In other cases, mortgage companies have been unable to prove that they actually own the loan and gave notice of acceleration as required by the loan documents. In re Kitts, 2002 WL 416912 (Bankr. E.D.Tenn. Feb. 28, 2002).
There is a common assumption that mortgage companies desire performing loans, not to foreclose and acquire real estate. This assumption is no longer well founded. There are an increasing number of "scavengers" that buy bad debts, including mortgages, for a fraction of face value and attempt to enforce them. Such entities profit by foreclosure. "Mortgage sources confide that some unscrupulous lenders are purposely allowing certain borrowers to fall deeper into a financial hole from which they can’t escape. Why? Because it pushes these consumers into foreclosure, whereupon the lender grabs the house and sells it at a profit." Robert I. Heady, The People’s Money, "Foreclosure, You Must Avoid It," South Florida Sun-Sentinel, Feb. 25, 2002, 2002 WL 2949282. In addition, particularly if the loan is guaranteed (by private mortgage insurance or the government), a mortgage company may find it more profitable to foreclose and make a claim on the guarantee rather than work with a "difficult" borrower.
Furthermore, production of original records often reveals unauthorized charges and other improprieties that may give rise to a claim against the mortgage company.
The order directing a foreclosure sale is an order capable of being made final through a Rule 304(a) finding, but not appealable in the absence of such a finding. The order confirming the sale is a final order appealable without a Rule 304(a) finding. "A judgment ordering the foreclosure of a mortgage is not final and appealable until the court enters orders approving the sale and directing the distribution. Unless the court makes a finding pursuant to Supreme Court Rule 304(a) . . . that there is no just reason for delaying enforcement or appeal, the judgment of foreclosure is not appealable." In re Marriage of Verdung, 126 Ill.2d 542, 556, 535 N.E.2d 818, 824 (1989); accord, Marion Metal & Roofing Co. v. Mark Twain Marine Indus., 114 Ill.App.3d 33, 448 N.E.2d 219 (1st Dist. 1983); Bell Federal S. & L. Ass’n v. Bank of Ravenswood, 203 Ill.App.3d 219, 560 N.E.2d 1156 (1st Dist. 1990).
Most lawyers representing lenders in foreclosures include 304(a) language in the judgment directing the sale.
Trial by jury
A jury trial on statutory claims (Consumer Fraud Act, etc.) is available in federal court, because of the Seventh Amendment, Inter-Asset Finanz AG v. Refco, Inc., 1993 U.S. Dist. LEXIS 11181, *8-9 (N.D.Ill. 1993); Cellular Dynamics, Inc. v. MCI Telecommunications Corp., 1997 U.S.Dist. LEXIS 7466 (N.D.Ill. 1997), but not in state court, Martin v. Heinold Commodities, 163 Ill.2d 33, 643 N.E.2d 734 (1994). This is one reason why you may want to sue first.
PREDATORY LENDING PRACTICES
Lenders often complain that there is no definition of a "predatory" mortgage loan. However, there are a number of practices that are generally regarded as "predatory." Many are legally actionable.
One predatory lending tactic consists of touting reduced monthly payments as compared with existing loan without disclosure of such material facts as (i) that the homeowners’ taxes and insurance are included in the payments on the existing loan, but not in the payments on the proposed loan, (ii) the number of payments will be greater, and (iii) the total of payments will be greater. Allegations of this nature were made by the Attorney General of Illinois against First Alliance Mortgage, now bankrupt, and by the Federal Trade Commission against Associates.
Another common complaint concerns the deceptive use of "teaser" rates on adjustable rate mortgages. A broker or lender quotes a "10% mortgage" to the unsophisticated homeowner. In fact, the 10% is a "teaser" rate applicable to the first 12-24 months. The rate for the rest of the term is indexed on a basis that would produce a 12-14% rate, which the borrower cannot afford.
A particularly offensive practice is the use of "spurious open end credit." TILA and other consumer credit disclosure laws distinguish between "closed end credit," of which the conventional home mortgage is the classic example, and "open end credit," such as a credit card or home equity line of credit. The disclosure requirements applicable to open end credit are less onerous because the consumer cannot tell, for example, how much she will charge on her credit card over the years.
Certain lenders have taken advantage of the lesser disclosure requirements for open-end credit. They issue open-end credit instruments for wholly inappropriate purposes, such as home improvement financing and to replace mortgages. The effect of using open-end credit documentation is to evade certain TILA disclosure requirements:
Total finance charge
Whether, if you make the minimum required payments, the mortgage will fully amortize, i.e., will you have a large balloon payment
Avoid including "points" in the annual percentage rate.
In addition to these subtle origination abuses, the author has seen outright forgery and alteration of loan documents, coercion of elderly homeowners, and making loans to persons who are clearly mentally incapacitated. Falsification or alteration of applications is a common means of making unaffordable loans.
Home improvement abuses
A considerable number of mortgages result from telephone or door-to-door solicitation by home improvement "contractors." In fact, the solicitors are really "brokers" rather than contractors. Once they sign up a homeowner, they "broker" the work to the cheapest subcontractors they can find, often without required tradesmen’s licenses. They also arrange for financing, either by having the homeowner execute a retail installment contract or by referring the homeowner to a lender or broker. The result is that the homeowner is obligated for large sums of money, secured by his or her home, and receives substandard work or in extreme cases no work. To facilitate the performance of shoddy or no work, the loan proceeds are often disbursed in an illegal manner, e.g., directly to the contractor rather than to the homeowner or into an escrow account from which funds can be released upon certification of a competent architect or inspector.
To "lock in" the homeowner, some of these "contractors" will engage in "spiking," or doing part of the work immediately to negate the homeowner’s statutory rescission rights. The homeowner may believe that her statutory right to cancel the transaction within three days no longer applies after her roof or porch has been removed.
Another tactic is the "two contract ploy," in which the homeowner’s signature is procured on a purportedly binding agreement prior to disclosure of all financial terms. In some cases, the initial agreements represent that the financing terms will be other than the final terms, or contain stiff penalties for cancellation. The homeowner who balks at signing onerous financing terms is then told to pay in cash.
The practitioner should not assume that the price of the work listed on the documents actually was paid to the contractor. Often, the contractor may get as little as 75% of the purported price or "amount financed." This practice is known as "discounting" or "chopping."
Questionable mortgage broker practices
Some lenders have been paying money to borrowers' mortgage brokers to induce them to sign up borrowers at a higher interest rate than necessary. These payments are known as "yield spread premiums" or "YSPs" in the mortgage industry. Their legality is discussed extensively below.
Some mortgage broker agreements require the borrower to pay the broker fee if the borrower decides to cancel or not proceed with the transaction. In a non-purchase money loan -- i.e., one subject to the three-day right to cancel under TILA -- such a provision contradicts the rescission notice and is illegal. Manor Mortgage Corp. v. Giuliano, 251 N.J. Super. 13, 596 A.2d 763 (App.Div. 1991). This is because all compensation payable by the borrower to mortgage brokers is now defined as a finance charge, and upon exercise of the right to rescind the borrower is relieved of liability for all finance charges. If the broker made the loan in its name, under the industry practice commonly known as "table funding," the broker is a creditor and any attempt by the broker to collect a finance charge is a TILA violation. Manor Mortgage, supra (mortgage broker sued for fee after borrower rescinded; court not only held that broker could not recover fee, but where broker qualified as "creditor" because loan was issued in its name, found that attempt to collect fee amounted to a refusal to rescind and awarded statutory damages and attorney’s fees).
Unnecessarily high rates
Between 30% and 50% of homeowners who receive "subprime" or "B-D" mortgage loans actually qualify for "prime" or "A" loans. John Taylor, "An Anti-Predator’s Readers Guide to Tall Tales of Subprime Lending," American Banker, April 27, 2001, p. 12, states:
A study by the Research Institute for Housing America, an offshoot of the Mortgage Bankers Association of America, found that minority borrowers are more apt than whites to receive subprime loans, even after controlling for credit risk factors. Freddie Mac estimates that up to 30% of the subprime loans they have purchased were made to borrowers qualified to receive prime loans. Fannie Mae's CEO claims that half of subprime borrowers should be receiving lower interest rates. . . .
Often, this results from inappropriate payments to mortgage brokers or racial discrimination.
In some cases, the loans are not merely unnecessarily expensive but unaffordable. Some lenders will make loans without any reasonable expectation of repayment for the purpose of acquiring the borrower's equity. In many cases, such loans involve exorbitant "points" and other devices, so that the financing entity is getting a mortgage substantially in excess of the amount of cash actually disbursed to unrelated third parties.
Some lenders advertise that they make "no documentation" subprime loans. This is an open invitation to the making of unaffordable loans.
Excessive points and fees
The average origination cost on a $100,000 residential mortgage loan is 1-2%. While subprime loans may be somewhat more costly to originate, the June 20, 2000 HUD-Treasury report, "Curbing Predatory Home Mortgage Lending," noted that "While subprime lending involves higher costs to the lender than prime lending, in many instances the Task Force saw evidence of fees that far exceeded what would be expected or justified based on economic grounds, and fees that were ‘packed’ into the loan amount without the borrower's understanding."
Single premium credit insurance
This is credit life or disability insurance, the entire premium for which is charged at the outset of the loan, added to the loan balance, and financed. Approximately 50% of the premium consists of commission, payable to the lender. By selling this product, the lender can increase amount of the loan and the amount on which interest is computed without actually disbursing funds.
In many cases, borrowers are told that the credit insurance is mandatory (illegal), or it is simply included in the loan papers without any request or agreement, a practice known as "packing".
Most mortgage loans are refinanced prior to the end of their 15 to 30 year terms. If the single-premium credit insurance policy is still outstanding, the borrower is supposed to receive credit for the unearned portion of the premium upon refinancing. Most borrowers don’t think of asking and are unable to tell if the payoff figure includes a credit for the unearned premium. In many cases, it doesn’t.
The June 20, 2000 report, "Curbing Predatory Home Mortgage Lending," described "loan flipping" as the practice of repeatedly refinancing a mortgage loan without benefit to the borrower, in order to profit from high origination fees, closing costs, points, prepayment penalties and other charges, steadily eroding the borrower's equity in his or her home."
A particularly egregious and offensive aspect of flipping is requiring the borrower to refinance low-rate first mortgages. Many homeowners who need to borrow for home improvements or other needs are steered to predatory lenders who will not simply make a second mortgage home improvement loan, but insist on refinancing the balance on a 6-8% purchase money mortgage with a 10-13% loan. The author has seen subsidized 0% mortgages replaced by 13% predatory loans.
Lenders also promote the use of mortgages to consolidate unsecured credit card and personal loan debt.
Bogus and junk fees and charges
These are used at both the outset of the loan and in servicing loans to increase the lender’s income or to increase the amount of the loan without actually disbursing funds. Typical examples of "junk fees" at origination are $75 for transporting documents, $100 for wire transfers, "warehouse fees," "processing fees," "review fees," and many others.
Several lenders have been accused of imposing late charges on payments that are not in fact late, of imposing property inspection and preservation charges not authorized by the loan documents or, in the case of FHA mortgages, applicable HUD regulations and handbooks. In one case, a lender charged $10 for accepting an electronic funds transfer, without authority in any document.
Subprime loans will often provide for hefty penalties for prepayment. The homeowner who has been induced to sign an unnecessarily expensive loan is thus precluded from depriving the lender of its ill-gotten gains by going to a competitor.
Balloon payments and call provisions
A common feature of predatory lending is structuring loans so that the borrower still owes most of the amount borrowed at the end of the loan. The homeowner is not able to pay the balloon payment at the end of the loan, and either loses the home after making years of high interest payments or is forced to refinance.
Some loans provide that they can be accelerated in the sole discretion of the lender.
In some cases, the borrower actually owes more at the end of the loan than at the beginning, because the loan payments are insufficient to cover the interest.
Loans over 100% loan-to-value (LTV) ratio
Recently lenders have been promoting loans where the amount of the loan exceeds the fair market value of the home, often as much as 125%. Such loans are impossible to refinance except by another, similar loan, locking the borrower into high-rate loans.
Mandatory arbitration clauses require, as a condition of receiving a loan, that a borrower agree to resolve any and all disputes arising out of the loan through arbitration, rather than litigation. The June 20, 2000 HUD-Treasury report found that "Mandatory arbitration may severely disadvantage HOEPA borrowers. Because of the potential for such clauses to restrict unfairly the legal rights of the victims of abusive lending practices, HUD and Treasury believe that Congress should prohibit mandatory arbitration for HOEPA loans."
In many cases, these clauses also contain a waiver of substantive TILA rights, such as the right to attorney’s fees.
Misapplication of payments and miscomputation of interest
Most lawyers, much less borrowers, have no idea whether mortgage payments are being properly computed and applied. Often, they are not.
It has been estimated that 25% of all adjustable rate mortgages are not properly adjusted. In one case, we found that the note and a rider conflicted as to the frequency of adjustments. In another, we found such a short interval between the reference date and the change date that the lender could not apply the formula according to its terms.
Another abuse that often escapes attention concerns the use of "daily interest". Traditionally, banks and mortgage companies treat payments received within the grace period as having been received on the due date (generally, the first of the month). If a payment is received after the grace period, a late charge is imposed, but there is no other consequence unless the borrower falls so far behind that the loan is accelerated. This is what most borrowers think will happen when a mortgage provides for a late charge of, e.g., 10% of the payment if it is late.
Certain "subprime" mortgage companies do not follow this protocol when applying payments received after the due date. Instead, they compute interest on the entire outstanding principal for the additional number of days prior to receipt of the payment. Often, the entire payment will be applied to interest!
This practice is misleading. If the note and TILA disclosure state that the consequence of paying 16 days late is the addition of a $60 late fee, the borrower does not expect that the consequence will be a $60 late fee plus $600 in extra interest.
One of the most commonly used uniform promissory note forms employed by Fannie Mae and Freddie Mac is Form 3200, "Multistate Fixed Rate Note - Single Family - FNMA/FHLMC Uniform Instrument Form 3200 12/83," that provides in pertinent part:
Interest will be charged on unpaid principal until the full amount of principal has been paid. I will pay interest at a yearly rate of %.
The Fannie Mae Servicing Guide, Part III, Ch. 1, § 101 (page 306) says that the language from Form 3200 means one-twelfth of annual interest with each monthly payment, i.e., the manner in which banks and mortgage companies have traditionally calculated interest:
III, 101: Scheduled Mortgage Payments (09/30/96)
The interest portion of the fixed installment must be determined by computing 30 days' interest on the outstanding principal balance as of the last paid installment date. For this calculation, always use the current interest accrual rate for the mortgage. Interest for second mortgages may be determined by a payment-to-payment calculation method if the mortgage instrument requires it. [Emphasis added.]
The Fannie Mae Servicing Guide, Part VI, Ch. 1, §102.01 (page 605) says much the same thing:
VI, 102.01: Interest Calculation (03/20/96)
Interest charged to the mortgagor should always be calculated on the outstanding principal balance of the mortgage as of the last paid installment date, using the current interest accrual rate. A full month's interest should be calculated on the basis of a 360-day year, while a partial month's interest should be based on a 365-day year.
Force placed insurance
All mortgages require the homeowner to insure the home against fire and casualty. If the homeowner fails to pay his insurance premiums (either directly or through an escrow account), the cheapest thing for the lender to do is to advance the premium and add it to the debt, thereby continuing coverage. Instead, some lenders "force place" their own insurance, which has much higher premiums. Often, a substantial portion of the premiums are paid as commissions to an affiliate of the lender. Sometimes, the insurance is for an amount in excess of that authorized by the note and mortgage. Also, the insurer or an affiliate may provide "free" services (paid from the insurance premiums) to the lender, such as tracking whether borrowers have their own insurance.
Some or all of these practices may be contrary to the note and mortgage and the Illinois Collateral Protection Act.
Illinois has a Collateral Protection Act, 815 ILCS 180/1 et seq., which requires specified notices (i) at the time the loan is entered into, 815 ILCS 180/10, and (ii) within 30 days after the forced placement of any insurance, 815 ILCS 180/15. "Substantial compliance" is required if the loan is made on or after July 1, 1997. The Act provides that "A creditor that places collateral protection insurance in substantial compliance with the terms of this Act shall not be directly or indirectly liable in any manner to a debtor, co-signer, guarantor, or any other person, in connection with the placement of the collateral protection insurance." 815 ILCS 180/40. It also provides that "This Act shall not be deemed to create a cause of action for damages on behalf of the debtor or any other person in connection with the placement of collateral protection insurance." 815 ILCS 180/50. The creditor may require that the insurance be paid for at once, as a balloon payment at the end of the loan, or through amortization.
The effect of noncompliance with the Collateral Protection Act has not been determined. One argument is that the debtor may not be charged for insurance except in compliance with the Act.
IS THERE A DEFAULT
The first question a lawyer must ask is whether the mortgage company’s claim of a default is correct. It should be apparent that the effect of some of the predatory practices listed above is to manufacture a default where none exists.
For example, if a lender has used "daily interest" under a mortgage that does not authorize it, it is likely that hundreds or thousands of dollars have been wrongfully allocated to interest instead of principal. Similarly, if rates have not been properly adjusted on an adjustable rate mortgage, the borrower may not be in default. The addition of force placed insurance premiums and other "junk fees" to the loan balance may also create the appearance of a default where none in fact exists.
Another issue is whether the lender has waived strict compliance with the loan documents by accepting irregular payments. There is a long line of real estate contract cases holding that forfeiture will be waived unless there has been a notice of intention to require strict compliance. Allabastro v. Wheaton National Bank, 77 Ill.App.3d 359, 395 N.E.2d 1212 (2d Dist. 1979); Lang v. Parks, 19 Ill.2d 223, 166 N.E.2d 10 (1960); Kingsley v. Roeder, 2 Ill.2d 131, 117 N.E.2d 82 (1954); Clevinger v. Ross, 109 Ill. 349 (1884); Heeren v. Smith, 276 Ill.App. 438 (4th Dist. 1934); Donovan v. Murphy, 217 Ill.App. 31 (1st Dist. 1920). On the other hand, see Zinser v. Uptown Fed. S. & L., 185 Ill.App.3d 979, 542 N.E.2d 87 (1st Dist. 1989), giving effect to a contractual anti-waiver provision in the context of a motor vehicle repossession. Notice requires service of the defaulting party with a definite, written notice of intention to require strict compliance with the contract in the future. Kingsley v. Roeder, supra; Lang v. Parks, supra. Notice is required even when the contract contains a "time is of the essence" provision. Donovan v. Murphy, supra.
The existence of credits or setoffs may negate the existence of a default. For example, in Chicago Title & Trust Co. v. Exchange Nat’l Bank of Chicago, 19 Ill.App. 3d 565, 312 N.E.2d 11 (2d Dist. 1974), the $15,000 balance of the purchase price was to be paid in five annual installments to be secured by a second mortgage. The seller agreed, inter alia, to "remedy condition which permits water to leak into basement." (312 N.E.2d at 14) After attempting to have the seller make the repairs, the purchasers hired an outside plumber who made the repairs, for which they paid $1,190.25, which they then deducted from the first installment. In the seller’s foreclosure action, the Appellate Court held that the purchasers could assert the credit as a defense to the foreclosure suit. The court stated:
There is no default which would permit the mortgagor to accelerate the maturity of the debt when there is a set-off available which is equal to or exceeds the amount of the indebtedness due at the time of default.... The rule is based on the reasoning that it would be inequitable to permit one by his own act to cause a partial failure of the consideration for the mortgage without requiring him to credit the amount of such failure upon the indebtedness for the purchase price of the property. [Citations omitted.] Id.
Further, the court found that the purchaser could assert the credit as a defense rather than file a counterclaim for setoff because the defense, if valid, showed that the purchasers were not in default and prevented acceleration of the entire mortgage indebtedness. See also, Bank Computer Network Corp. v. Continental Illinois Nat’l Bank & Trust Co., 110 Ill.App.3d 492, 442 N.E.2d 586 (1st Dist. 1982), where the court stated that there is no default when the borrower is entitled to a setoff that is equal to or exceeds the amount of the delinquency.
On FHA and VA mortgages, there are various notification and counseling requirements, noncompliance with which may constitute a defense. HUD regulations, 24 C.F.R. §§203.604 and 203.606, require the mortgagee to seek a face-to-face interview with the mortgagors before three loan installments have become past due and review its file to determine compliance with servicing requirements before initiating a foreclosure action. In Bankers Life Co. v. Denton, 120 Ill.App.3d 576, 458 N.E.2d 203 (3d Dist. 1983), the court held that noncompliance with these requirements is an affirmative defense. Similarly, in Federal National Mortgage Association v. Moore, 609 F.Supp. 194 (N.D.Ill. 1985), a case involving an FHA-insured mortgage, foreclosure was denied because of the mortgagee's failure to give to the mortgagor written notice of default and of intention to foreclose and of the mortgagor’s right to apply to HUD for assignment of the mortgage in the form required by HUD regulations. See also, Mellon Mtge. Co. v. Larios, 97 C 2330, 1998 WL 292387 (N.D.Ill., May 20, 1998); Federal Land Bank v. Overboe, 404 N.W.2d 445 (N.D.1987); Union Nat’l Bank v. Cobbs, 567 A.2d 899 (Pa.Super. 1989).
The new Illinois predatory mortgage regulations impose similar counseling requirements. See below.
It is also important to consider whether a default is material. In Sahadi v. Continental Illinois Nat’l Bank & Trust Co., 706 F.2d 193 (7th Cir. 1983), a borrower failed to make payment of accrued interest by a particular date. The court reversed an order of summary judgment in favor of the lender because an issue of fact remained as to whether the alleged breach was material. The court stated that determination of materiality involved an inquiry into such matters as whether the breach worked to defeat the bargained- for objective of the parties and whether the breach was of pecuniary importance.
LEGAL REMEDIES FOR MORTGAGE ABUSES
TILA and HOEPA
The single most important remedy for the homeowner facing foreclosure is the Truth in Lending Act, 15 U.S.C. §§1601 et seq. ("TILA"), as amended by the Home Ownership and Equity Protection Act of 1994 ("HOEPA"), Pub. L. 103-325, 108 Stat. 2190, adding 15 U.S.C. §§1602(aa) and 1639, and implementing FRB Regulation Z, 12 C.F.R. part 226. There is also an Official FRB Commentary, 12 C.F.R. part 226 Supp. I, which despite its name is a regulation issued under the Administrative Procedure Act, 5 U.S.C. §553, and entitled to be treated as such. The portions of Regulation Z and the Commentary implementing HOEPA were substantially revised in December 2001. 66 FR 65604 (Dec. 20, 2001).
TILA applies to any creditor who makes (i) 26 extensions of consumer credit per year, of any type, (ii) 5 extensions of consumer credit secured by real estate, or (iii) 2 loans subject to HOEPA.
TILA was originally enacted in 1967 " to effectively adopt a new national loan vocabulary that means the same in every contract in every state." Mason v. General Finance Corp., 542 F.2d 1226, 1233 (4th Cir. 1976). "The legislative history [of TILA] makes crystal clear that lack of uniformity in the disclosure of the cost of credit was one of the major evils to be remedied by the Act." (Id., 542 F.2d at 1231)
TILA is remedial legislation designed to eliminate impediments to the informed use of credit. Mourning v. Family Publications Service, Inc., 411 U.S. 356, 364-365, 377 (1973).
TILA "is intended to balance scales thought to be weighed in favor of lenders and is thus to be liberally construed in favor of borrowers." Bizier v. Globe Fin. Services Inc., 654 F.2d 1, 3 (1st Cir. 1981); accord, Smith v. Fidelity Consumer Discount Co., 898 F.2d 896, 898 (3d Cir. 1990).
The "scheme of [TILA] is to create a system of private attorneys general to aid its enforcement, and its language should be construed liberally in light of its remedial purpose." McGowan v. King, Inc., 569 F.2d 845, 848 (5th Cir. 1978).
Creditors must strictly comply with TILA. "[A]ny violation of TILA, regardless of the technical nature of the violation, must result in a finding of liability against the lender." In re Steinbrecher, 110 B.R. 155, 161 (Bankr. E.D.Pa. 1990) (citation omitted). Accord Semar v. Platte Valley Fed. Sav. & Loan Ass'n, 791 F.2d 699, 703-04 (9th Cir. 1986). Harm need not be shown for recovery of statutory damages or rescission under TILA: "An objective standard is used to determine violations of the TILA, based on the representations contained in the relevant disclosure documents; it is unnecessary to inquire as to the subjective deception or misunderstanding of particular consumers." Zamrippa v. Cy's Car Sales Inc., 674 F.2d 877, 879 (11th Cir. 1982). Accord, Rodash v. AIB Mortgage Co., 16 F.3d 1142, 1144-5 (11th Cir. 1994) (rescission); Brown v. Marquette S. & L. Ass'n, 686 F.2d 608, 614 (7th Cir. 1982); Wright v. Tower Loan of Mississippi, 679 F.2d 436, 445 (5th Cir. 1982); In re Steinbrecher, supra at 161; Shepeard v. Quality Siding & Window Factory, Inc., 730 F.Supp. 1295, 1299 (D.Del. 1990); In re Russell, 72 B.R. 855 (Bankr. E.D.Pa. 1987).
TILA and Regulation Z accordingly require disclosure of several key credit terms, computed in the precise manner prescribed by the Regulation and using precise terminology:
The "amount financed" is "the amount of credit provided to you [the consumer] or on your behalf." 12 C.F.R. §226.18(b).
The "finance charge" is "the dollar amount the credit will cost you [the consumer]." 12 C.F.R. §226.18(d). It includes "any charge payable directly or indirectly by the consumer and imposed 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).
The "annual percentage rate" is the finance charge expressed as an annual rate.
Tolerances are specified for these items. Most critically, in the context of a foreclosure, the tolerance for an error in the finance charge is an understatement of $35. That is, if you can prove that the actual finance charge is $35 or more greater than the disclosed finance charge, the mortgage is subject to attack for three years after closing.
TILA gives homeowners rescission rights when their principal residence is used to secure an extension of credit, other than one for the initial purchase or construction of the residence. 15 U.S.C. §1635; 12 C.F.R. §226.23. The creditor must furnish two properly-filled-out copies of a notice of the right to cancel to everyone whose interest in their principal residence is subjected to the creditor’s security interest. This is not limited to the borrower; for example, a spouse or child who is on title has the right to cancel and must be notified of that right.
The rescission right is not limited to real property, but includes mobile homes and an interest in a cooperative apartment.
The right to cancel normally extends for three days (federal holidays and Sundays are excluded, but Saturdays are not). However, if the creditor fails to furnish the "material disclosures" (those listed at 12 C.F.R. §226.23 n. 48) and two properly-filled-out notices of the right to cancel to each person entitled thereto, the right continues until (a) the creditor cures the violation by providing new disclosures and a new cancellation period and conforming the loan terms to the disclosures, (b) the property is sold or (c) three years expire. The three years is an absolute time limit. Beach v. Ocwen Fed. Bank, 523 U.S. 410 (1998).
The right to rescind is a statutory remedy, not to be confused with common-law rescission. Its operation is described in 12 C.F.R. §226.23:
(a) Consumer's right to rescind.
(1) In a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section.[fn]47
(2) To exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram or other means of written communication. Notice is considered given when mailed, when filed for telegraphic transmission or, if sent by other means, when delivered to the creditor's designated place of business.
(3) The consumer may exercise the right to rescind until midnight of the third business day following consummation, delivery of the notice required by paragraph (b) of this section, or delivery of all material disclosures,[fn]48 whichever occurs last. If the required notice or material disclosures are not delivered, the right to rescind shall expire 3 years after consummation, upon transfer of all of the consumer's interest in the property, or upon sale of the property, whichever occurs first. In the case of certain administrative proceedings, the rescission period shall be extended in accordance with section 125(f) of the Act. [15 U.S.C. §1635(f)]
(4) When more than one consumer in a transaction has the right to rescind, the exercise of the right by one consumer shall be effective as to all consumers.
(b) Notice of right to rescind. In a transaction subject to rescission, a creditor shall deliver 2 copies of the notice of the right to rescind to each consumer entitled to rescind. The notice shall be on a separate document that identifies the transaction and shall clearly and conspicuously disclose the following:
(1) The retention or acquisition of a security interest in the consumer's principal dwelling.
(2) The consumer's right to rescind the transaction.
(3) How to exercise the right to rescind, with a form for that purpose, designating the address of the creditor's place of business.
(4) The effects of rescission, as described in paragraph (d) of this section.
(5) The date the rescission period expires. . . .
(f) Exempt transactions. The right to rescind does not apply to the following:
(1) A residential mortgage transaction [defined in 15 U.S.C. §1602(w) as one where a "security interest is created or retained against the consumer's dwelling to finance the acquisition or initial construction of such dwelling"].
(2) A credit plan in which a state agency is a creditor.
A separate notice of rescission should be sent to the original creditor and each assignee, although the statute and regulations only require notice to the creditor and the overwhelming authority on the matter holds that the filing of a complaint is sufficient notice that the plaintiff is exercising her right to rescind. See Taylor v. Domestic Remodeling, Inc., 97 F.3d 96, 100 (5th Cir. 1996); Elliott v. ITT Corp, 764 F. Supp. 102, 106 (N.D. Ill. 1991); Eveland v. Star Bank, NA, 976 F. Supp. 721 (S.D.Ohio. 1997).
Under 15 U.S.C. §1641(c), the borrower is entitled to assert the right to rescind against any assignee of the loan. In addition, it is liable for damages to the extent "the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement provided in connection with such transaction pursuant to this subchapter" and "the assignment to the assignee was voluntary." This is further discussed below.
Furthermore, 15 U.S.C. §1635(g) provides:
In any action in which it is determined that a creditor has violated this section, in addition to rescission the court may award relief under section 1640 of this title for violations of this subchapter not relating to the right to rescind.
Upon exercise of the right to rescind, the creditor is required to remove its security interest from the property. Failure to do so may subject the creditor to additional liability in damages. Rollins v. Dwyer, 666 F.2d 141, 145 (5th Cir. 1982); Williams v. Gelt Financial Corp., 237 B.R. 590, 599 (E.D.Pa. 1999); Aquino v. Public Finance Consumer Discount Co., 606 F.Supp. 504, 510 (E.D.Pa. 1985). Note that the one-year statute of limitations for such a claim runs from the date a rescission demand is not complied with. Reid v. Liberty Consumer Discount Co., 484 F.Supp. 435, 441 (E.D.Pa.1980); In re Tucker, 74 B.R. 923, 932 (Bankr.E.D.Pa.1987); Bookhart v. Mid-Penn Consumer Discount Co., 559 F.Supp. 208, 212 (Bankr.E.D.Pa. 1983); Dowdy v. First Metropolitan Mtge. Co., 01 C 7211, 2002 WL 745851 (N.D.Ill., Jan. 29, 2002).
The creditor can apply to a court to condition the removal of the security interest upon the consumer’s tender of the loan proceeds. If the creditor does not rescind, the statute provides for forfeiture of the loan proceeds or goods purchased. Again, courts have held that they have discretion whether to enforce the forfeiture. Cases are divided as to whether a court has such authority, although most acknowledge it. Williams v. Homestake Mortgage Co., 968 F.2d 1137 (11th Cir. 1992); In re Quenzer, 266 B.R. 760 (Bankr.D.Kan. 2001); Lynch v. GMAC Mortgage Corp., 170 B.R. 26, 29 (Bankr.D.N.H.1994) (requiring borrower to repay principal); Apaydin v. Citibank Federal Savings Bank, 201 B.R. 716, 723-24 (Bankr.E.D.Pa.1996) (same). Among the relevant considerations is the wilfulness of the creditor’s conduct and the creditor’s record of compliance with TILA. Apaydin v. Citibank Federal Savings Bank, 201 B.R. 716, 723-24 (Bankr.E.D.Pa.1996).
Discretion to modify works both ways, in that the court’s discretion includes requiring the borrower to repay at a future date or in installments. FDIC v. Hughes Development Co., 938 F.2d 889, 890 (8th Cir.1991) (relying on pre-simplification cases to require borrower to repay principal within 1 year).
The tender amount is (1) the principal, (2) minus all closing costs, and (3) minus all payments made, which are applied entirely to principal. Semar v. Platte Valley Fed. Sav. & Loan Ass'n, supra, 791 F.2d 699 (9th Cir. 1986). Commentary par. 226.23(d)(2)1, provides that the consumer cannot be required to pay "any amount in the form of money or property," including "finance charges already accrued, as well as other charges such as broker fees, application and commitment fees, or fees for a title search or appraisal....."
In 1994, Congress added HOEPA as an amendment to TILA. The added sections are 15 U.S.C. §1602(aa), defining loans subject to HOEPA, and 15 U.S.C. §1639, creating special disclosure and substantive requirements. Loans subject to HOEPA are often referred to as "Section 32 loans" because the implementing Regulation Z section was originally 12 C.F.R. §226.32. The December 2001 revision moved certain provisions into 12 C.F.R. §226.34.
Basically, HOEPA applies to a mortgage described in 15 U.S.C. §1602(aa) ("Section 1602(aa) mortgage"). A Section 1602(aa) mortgage is a mortgage loan secured by a consumer's principal dwelling, other than one entered into to finance the original construction or acquisition of the dwelling, where either (a) "the total points and fees payable by the consumer at or before closing will exceed the greater of-- (i) 8 percent of the total loan amount; or (ii) $400" or (b) "the annual percentage rate at consummation of the transaction will exceed by more than 10 percentage points the yield on Treasury securities having comparable periods of maturity on the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor". "Points and fees" are defined to include all items included in the finance charge, except interest or the time-price differential, and all compensation paid to mortgage brokers. The "total loan amount" is the amount financed minus any item included in the "points and fees." 12 C.F.R. Part 226 Supp. I, par. 32(a)(1)(ii).
The December 2001 Regulation Z revision changed the "trigger," effective October 1, 2002. The APR trigger was changed to 8% over the Treasury yield for first mortgages and 10% for junior mortgages. The Treasury yield was approximately 6% in early April 2002.
The "points and fees" trigger was left at 8%, but single-premium credit insurance is now included in the "points and fees." This includes premiums for credit life, accident, health, loss-of-income, debt cancellation coverage, or similar products. If they are financed by the creditor, they are (a) counted toward the "points and fees" and (b) deducted from the amount financed in calculating the total loan amount.
If a mortgage loan is covered by HOEPA, 15 U.S.C. §1639 and 12 C.F.R. §226.32(c) require that the borrower must be given a special disclosure at least three business days prior to closing stating:
"You are not required to complete this agreement merely because you have 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 obligations under the loan."
The annual percentage rate;
Each level of monthly payments;
Any balloon payment.
The "amount borrowed," which is the principal amount of the note. If credit insurance is included, that fact must be stated.
In addition, HOEPA imposes certain substantive requirements on high-interest and high-fee loans. Due on demand clauses are prohibited. Prepayment penalties are limited. Specifically, any prepayment penalty provision must be its terms exclude refinancing by the same creditor. Section 1639(c) provides:
(c) No prepayment penalty
(1) In general
(A) Limitation on terms
A mortgage referred to in section 1602(aa) of this title may not contain terms under which a consumer must pay a prepayment penalty for paying all or part of the principal before the date on which the principal is due.
For purposes of this subsection, any method of computing a refund of unearned scheduled interest is a prepayment penalty if it is less favorable to the consumer than the actuarial method (as that term is defined in section 1615(d) of this title).
Notwithstanding paragraph (1), a mortgage referred to in section 1602(aa) of this title may contain a prepayment penalty (including terms calculating a refund by a method that is not prohibited under section 1615 of this title for the transaction in question) if--
(A) at the time the mortgage is consummated--
(i) the consumer is not liable for an amount of monthly indebtedness payments (including the amount of credit extended or to be extended under the transaction) that is greater than 50 percent of the monthly gross income of the consumer; and
(ii) the income and expenses of the consumer are verified by a financial statement signed by the consumer, by a credit report, and in the case of employment income, by payment records or by verification from the employer of the consumer (which verification may be in the form of a copy of a pay stub or other payment record supplied by the consumer);
(B) the penalty applies only to a prepayment made with amounts obtained by the consumer by means other than a refinancing by the creditor under the mortgage, or an affiliate of that creditor;
(C) the penalty does not apply after the end of the 5-year period beginning on the date on which the mortgage is consummated; and
(D) the penalty is not prohibited under other applicable law.
Home improvement disbursements must be in the form of a check payable to the borrower, or to the contractor and borrower jointly, or through an escrow. HOEPA also prohibits a pattern of making loans that cannot be repaid without recourse to the security.
New 12 C.F.R. § 226.34(a)(4) creates a presumption of a violation if the consumer’s repayment ability is not verified and documented.
New 12 C.F.R. §226.34(a)(3) prohibits the original creditor, an assignee or a servicer from refinancing a HOEPA loan for a period of one year following the original extension of credit unless the refinancing is in the borrower’s interest.
Finally, new 12 C.F.R. §226.34(b) prohibits use of open-end credit to evade the restrictions of HOEPA.
Noncompliance with HOEPA entitles the borrower to rescind for up to three years. In addition, there is a special damage provision: the borrower may recover an amount equal to all finance charges paid, either at closing ("prepaid finance charges") or as part of his monthly payments.
In a surprising number of cases, the finance charge and annual percentage rate are not accurate. Often, this results from improper exclusion of items from the finance charge.
Common TILA violations in connection with mortgages include:
Collection of fees for recording instruments that are not in fact disbursed to governmental agencies. Such undisbursed fees are finance charges.
Failure to include in the finance charge fees for closing the transaction.
Under-the-table payments by the borrower to mortgage brokers. All compensation to a mortgage broker from a borrower is now defined as a finance charge. (Yield spread premiums, discussed below, are not finance charges; they may be "points and fees" for purposes of HOEPA and other predatory lending statutes.)
For non-HOEPA loans, the violations must exceed the applicable tolerance. However, the only tolerance under HOEPA is $100 applicable to the "amount borrowed."
Evasion of HOEPA. There is a practice by certain lenders of making mortgage loans which are supposed to be just under the 8% HOEPA threshold on fees and points, e.g., 7.99%. In fact, because the governmental fees are inflated or not paid over to governmental agencies, or some other item is not included in the finance charge, the points and fees are, e.g., 8.005%. If HOEPA is not complied with, and it will not have been if the lender is trying to make a loan just under the threshold, the loan is rescindable.
Use of the wrong "notice of right to cancel" form on refinancings. A refinancing by the same creditor (i.e., the party to whom the note being refinanced is payable on its face is the same as the party to whom the new note is payable on its face) only entitles the borrower to rescind the increased credit. An assignment of the loan does not make the assignee a "creditor" for this purpose (although a merger does). Some mortgagees use the form providing for limited rescission rights in transactions that carry full rescission rights. This gives rise to a continuing three-year right to cancel, with all payments applied to principal.
Failure to fill in the notice of right to cancel handed to the borrower. Often the borrower is given a blank copy, and only that retained by the closing agent is filled in. This does not do much for disclosure. Since TILA is a disclosure statute, the operative document is that given to the borrower. Reese v. Hammer Financial, 99 C 716, 1999 WL 1101677, 1999 U.S.Dist. LEXIS 18812 (N.D.Ill., Nov. 29, 1999). The usual form of rescission notice requires the borrower to acknowledge receipt of the document -- this creates a rebuttable presumption of receipt -- but the acknowledgment is that the borrower received two pieces of paper entitled "notice of right to cancel," not that they complied with the law or were correctly filled out.
Having the borrower sign, at the closing, a document representing that he has not rescinded. This contradicts the required notice and renders it ineffective. Rodash v. AIB Mortgage Co., 16 F.3d 1142 (11th Cir. 1994).
Providing a correct notice of right to cancel but contradicting the information elsewhere. Jenkins v. Landmark Mtge. Corp., 696 F.Supp. 1089 (W.D.Va. 1988); Apaydin v. Citibank Federal Savings Bank, 201 B.R. 716, 723-24 (Bankr.E.D.Pa.1996); see Smith v. Cash Store Management, Inc., 195 F.3d 325, 332 (7th Cir. 1999) (concurring and dissenting opinion).
Permitting use of a mortgage broker agreement that requires the borrower to pay the broker fee if the borrower decides to cancel or not proceed with the transaction. This contradicts the rescission notice and is illegal. Manor Mortgage Corp. v. Giuliano, 251 N.J. Super. 13, 596 A.2d 763 (App.Div. 1991). All compensation payable by the borrower to mortgage brokers is now defined as a finance charge, and upon exercise of the right to rescind the borrower is relieved of any obligation to pay broker fees.
Misdating the notice of right to cancel: Taylor v. Domestic Remodeling, Inc., 97 F.3d 96, 99 (5th Cir. 1996) (incorrect rescission date combined with disbursement of loan constitutes violation of TILA); Williamson v. Lafferty, 698 F.2d 767, 768-69 (5th Cir. 1983) (failure to fill in rescission expiration date violates TILA). One court has held that stating a date that is too long, rather than one that is too short, is not actionable if the borrower in fact is given the extra period. Hawaii Community Federal Credit Union v. Keka, supra, 94 Haw. 213, 11 P.3d 1 (2000).
Some lenders attempt to close transactions long-distance, using courier services. It is very easy to violate TILA in this situation, by misdating the notice of right to cancel or failing to deliver completed disclosures to the borrower.
Failure to give the financial disclosures, two copies of the notice of right to cancel, and the HOEPA disclosures (if applicable) to each person entitled to rescind.
Failure to provide these documents in a form in which the borrower can keep prior to consummation. Merely showing the documents to the borrower is not sufficient; the borrower must be free to leave with the document. Spearman v. Tom Wood Pontiac GMC Inc., IP00-1340-C-T/G, 2001 WL 987849 (S.D.Ind., July 30, 2001); Lozada v. Dale Baker Oldsmobile, Inc., 197 F.R.D. 321, 327 (W.D.Mich. 2000). This was clarified by an April 2, 2002 amendment to the Federal Reserve Board Commentary, adding ¶ 17(b)3, which provides that (1) prior to becoming obligated the consumer must be given possession of a copy of the disclosures, which may be the one he signs, that he can take away with him if he wants, and (2) upon signing the consumer must be given a copy of the disclosures to keep. The creditor need not furnish two copies.
Failure to disclose all payment levels on a HOEPA loan.
Inclusion of prepayment penalties that fail to conform to HOEPA restrictions. HOEPA requires that a prepayment penalty provide by its terms that it does not apply to refinancing by the same creditor.
Improper treatment of note provisions entitling the borrower to a rate reduction under specified circumstances.
Failing to disclose a balloon payment in a HOEPA notice, as required by 12 C.F.R. part 226 Supp. I, ¶ 32(c)(3)2: "If a loan with a term of five years or more provides for a balloon payment, the balloon payment must be disclosed."
Besides rescission, remedies in a TILA case include statutory and actual damages and attorney’s fees. 15 U.S.C. §1640. Statutory damages in a non-HOEPA individual case involving residential real property security are twice the finance charge, with a $200 floor and a $2,000 ceiling. As a practical matter, the ceiling always applies. The damages are assessed per transaction, and the fact that more than one obligor is involved does not multiply the damages.
In a class action, the basic statutory damages are capped at 1% of the defendant’s net worth or $500,000, whichever is less. The minimum $200 does not apply. HOEPA damages are not changed.
The statute of limitations for a damage claim under TILA is generally one year. A TILA claim for damages may be asserted as a setoff after one year. Wood Acceptance Co. v. King, 18 Ill.App.3d 149, 309 N.E.2d 403 (1st Dist. 1974); Associates Finance, Inc. v. Cedillo, 89 Ill.App.3d 179, 411 N.E.2d 1194 (2d Dist. 1980); Mt. Vernon Memorial Estates, Inc. v. Wood, 88 Ill.App.3d 666, 410 N.E.2d 995 (1st Dist. 1980); National Boulevard Bank v. Thompson, 85 Ill.App.3d 1145, 407 N.E.2d 739 (1st Dist. 1980); Public Finance Corp. v. Riddle, 83 Ill.App.3d 417, 403 N.E.2d 1316 (3rd Dist. 1980).
Under § 1635(g), in an action in which rescission is granted, the borrower is also entitled to assert claims for damages for violations not relating to the right to rescind. Whether this extends the limitations period is the subject of litigation.
Real Estate Settlement Procedures Act, 12 U.S.C. §§2601 et seq. ("RESPA") and HUD Regulation X, 24 C.F.R. part 3500
Another statute that the foreclosure defense lawyer must be familiar with is the Real Estate Settlement Procedures Act, 12 U.S.C. §§2601 et seq. ("RESPA"), and its implementing Regulation X, 24 C.F.R. part 3500, issued by the Department of Housing and Urban Development ("HUD"). This statute covers a number of issues relating to "federally related" residential mortgages, which are defined (12 U.S.C. § 2602(1)) to cover nearly every loan made or held or serviced by an institutional lender:
Good Faith Estimate
Regulation X, 24 C.F.R. §3500.7(a), requires that "the lender shall provide all applicants for a federally related mortgage loan with a good faith estimate of the amount of or range of charges for the specific settlement services the borrower is likely to incur in connection with the settlement." The good faith estimate must be either delivered or placed in the mail "not later than three business days after the application is received or prepared," unless the application is denied within that period."
A good faith estimate "consists of an estimate, as a dollar amount or range, of each charge which . . . [w]ill be listed in section L of the HUD-1 or HUD-1A in accordance with the instructions set forth in Appendix A to this part; and . . . That the borrower will normally pay or incur at or before settlement based upon common practice in the locality of the mortgaged property. Each such estimate must be made in good faith and bear a reasonable relationship to the charge a borrower is likely to be required to pay at settlement, and must be based upon experience in the locality of the mortgaged property. As to each charge with respect to which the lender requires a particular settlement service provider to be used, the lender shall make its estimate based upon the lender's knowledge of the amounts charged by such provider."
Section 3500.7(b) imposes a similar obligation on a mortgage broker. The broker "must provide a good faith estimate within three days of receiving a loan application based on his or her knowledge of the range of costs . . . ."
There does not appear to be a private right of action under RESPA for providing a "good faith estimate" that is not accurate and complete. However, the good faith estimate may give rise to a "bait and switch" claim under the Illinois Consumer Fraud Act.
RESPA, 12 U.S.C. §2605, and Regulation X, 24 C.F.R. § 3500.17, impose limitations on escrow account deposit requirements. ,Overescrowing was formerly commonplace, but most lenders are now complying with the statute and regulations. GMAC Mtge. Corp. v. Stapleton, 236 Ill.App.3d 486, 603 N.E.2d 767 (1,st Dist. 1992), leave to appeal denied, 248 Ill.2d 641, 610 N.E.2d 1262 (1993); Leff v. Olympic Fed. S. & L. Ass'n, 1986 WL 10636 (N.D.Ill. 1986); Aitken v. Fleet Mtge. Corp., 90 C 3708, 1991 U.S.Dist. LEXIS 10420 (N.D.Ill. 1991), and 1992 U.S.Dist. LEXIS 1687, 1992 WL 33926 (N.D.Ill., Feb. 12, 1992); Poindexter v. National Mtge. Corp., 1991 U.S.Dist. LEXIS 19643 (N.D.Ill., Dec. 23, 1991), later opinion, 1995 U.S.Dist. LEXIS 5396 (N.D.Ill., April 24, 1995); Sanders v. Lincoln Service Corp., 1993 U.S.Dist. LEXIS 4454 (N.D.Ill. 1993); Robinson v. Empire of America Realty Credit Corp., 90 C 5063, 1991 WL 26593, 1991 U.S.Dist. LEXIS 2084 (N.D.Ill., Feb. 20, 1991); In re Mortgage Escrow Deposit Litigation, M.D.L. 899, 1994 U.S.Dist. LEXIS 12746 (N.D.Ill., Sept. 8, 1994); Greenberg v. Republic Federal S. & L. Ass'n, 1995 U.S.Dist. LEXIS 5866 (N.D.Ill., May 1, 1995); Weinberger v. Bell Federal S. & L. Ass’n, 262 Ill.App.3d 1047, 635 N.E.2d 647 (1st Dist. 1994).
There is probably no direct private right of action for violation of the escrow deposit limitations, State of Louisiana v. Litton Mortgage Co., 50 F.3d 1298 (5th Cir. 1995); Allison v. Liberty Savings, 695 F.2d 1086 (7th Cir. 1982), but overescrowing is actionable on other theories, such as breach of contract and consumer fraud.
Cranston Gonzales Act, 12 U.S.C. §2605
The Cranston Gonzales amendment to RESPA, 12 U.S.C. §2605, imposes two obligations on mortgage servicers.
First, when servicing is transferred, both the transferor and transferee must give the borrower a notice containing prescribed information. Unless the notice is provided at closing, the transferor must generally give notice 15 days in advance of transfer and the transferee 15 days after transfer:
(b) Notice by transferor or loan servicing at time of transfer.
(1) Notice requirement. Each servicer of any federally related mortgage loan shall notify the borrower in writing of any assignment, sale, or transfer of the servicing of the loan to any other person.
(2) Time of notice.
(A) In general. Except as provided under subparagraphs (B) and (C), the notice required under paragraph (1) shall be made to the borrower not less than 15 days before the effective date of transfer of the servicing of the mortgage loan (with respect to which such notice is made).
(B) Exception for certain proceedings. The notice required under paragraph (1) shall be made to the borrower not more than 30 days after the effective date of assignment, sale, or transfer of the servicing of the mortgage loan (with respect to which such notice is made) in any case in which the assignment, sale, or transfer of the servicing of the mortgage loan is preceded by--
(i) termination of the contract for servicing the loan for cause;
(ii) commencement of proceedings for bankruptcy of the servicer; or
(iii) commencement of proceedings by the Federal Deposit Insurance Corporation or the Resolution Trust Corporation for conservatorship or receivership of the servicer (or an entity by which the servicer is owned or controlled).
(C) Exception for notice provided at closing. The provisions of subparagraphs (A) and (B) shall not apply to any assignment, sale, or transfer of the servicing of any mortgage loan if the person who makes the loan provides to the borrower, at settlement (with respect to the property for which the mortgage loan is made), written notice under paragraph (3) of such transfer.
(3) Contents of notice. The notice required under paragraph (1) shall include the following information:
(A) The effective date of transfer of the servicing described in such paragraph.
(B) The name, address, and toll-free or collect call telephone number of the transferee servicer.
(C) A toll-free or collect call telephone number for (i) an individual employed by the transferor servicer, or (ii) the department of the transferor servicer, that can be contacted by the borrower to answer inquiries relating to the transfer of servicing.
(D) The name and toll-free or collect call telephone number for (i) an individual employed by the transferee servicer, or (ii) the department of the transferee servicer, that can be contacted by the borrower to answer inquiries relating to the transfer of servicing.
(E) The date on which the transferor servicer who is servicing the mortgage loan before the assignment, sale, or transfer will cease to accept payments relating to the loan and the date on which the transferee servicer will begin to accept such payments.
(F) Any information concerning the effect the transfer may have, if any, on the terms of or the continued availability of mortgage life or disability insurance or an other type of optional insurance and what action, if any, the borrower must take to maintain coverage.
(G) A statement that the assignment, sale, or transfer of the servicing of the mortgage loan does not affect any term or condition of the security instruments other than terms directly related to the servicing of such loan.
(c) Notice by transferee or loan servicing at time of transfer.
(1) Notice requirement. Each transferee servicer to whom the servicing of an federally related mortgage loan is assigned, sold, or transferred shall notify the borrower of any such assignment, sale, or transfer.
(2) Time of notice.
(A) In general. Except as provided in subparagraphs (B) and (C), the notice required under paragraph (1) shall be made to the borrower not more than 15 days after the effective date of transfer of the servicing of the mortgage loan (with respect to which such notice is made).
(B) Exception for certain proceedings. The notice required under paragraph (1) shall be made to the borrower not more than 30 days after the effective date of assignment, sale, or transfer of the servicing of the mortgage loan (with respect to which such notice is made) in any case in which the assignment, sale, or transfer of the servicing of the mortgage loan is preceded by--
(i) termination of the contract for servicing the loan for cause;
(ii) commencement of proceedings for bankruptcy of the servicer; or
(iii) commencement of proceedings by the Federal Deposit Insurance Corporation or the Resolution Trust Corporation for conservatorship or receivership of the servicer (or an entity by which the servicer is owned or controlled).
(C) Exception for notice provided at closing. The provisions of subparagraphs (A) and (B) shall not apply to any assignment, sale, or transfer of the servicing of any mortgage loan if the person who makes the loan provides to the borrower, at settlement (with respect to the property for which the mortgage loan is made), written notice under paragraph (3) of such transfer.
(3) Contents of notice. Any notice required under paragraph (1) shall include the information described in subsection (b)(3).
Payments made to the wrong party during the transition period cannot be treated as late:
(d) Treatment of loan payments during transfer period. During the 60-day period beginning on the effective date of transfer of the servicing of any federally related mortgage loan, a late fee may not be imposed on the borrower with respect to any payment on such loan and no such payment may be treated as late for any other purposes, if the payment is received by the transferor servicer (rather than the transferee servicer who should properly receive payment) before the due date applicable to such payment.
Second, the statute imposes an obligation on a mortgage servicer to respond to a "qualified written request" inquiring or complaining about the account:
(e) Duty of loan servicer to respond to borrower inquiries.
(1) Notice of receipt of inquiry.
(A) In general. If any servicer of a federally related mortgage loan receives a qualified written request from the borrower (or an agent of the borrower) for information relating to the servicing of such loan, the servicer shall provide a written response acknowledging receipt of the correspondence within 20 days (excluding legal public holidays, Saturdays, and Sundays) unless the action requested is taken within such period.
(B) Qualified written request. For purposes of this subsection, a qualified written request shall be a written correspondence, other than notice on a payment coupon or other payment medium supplied by the servicer, that–
(i) includes, or otherwise enables the servicer to identify, the name and account of the borrower; and
(ii) includes a statement of the reasons for the belief of the borrower, to the extent applicable, that the account is in error or provides sufficient detail to the servicer regarding other information sought by the borrower.
(2) Action with respect to inquiry. Not later than 60 days (excluding legal public holidays, Saturdays, and Sundays) after the receipt from any borrower of any qualified written request under paragraph (1) and, if applicable, before taking any action with respect to the inquiry of the borrower, the servicer shall–
(A) make appropriate corrections in the account of the borrower, including the crediting of any late charges or penalties, and transmit to the borrower a written notification of such correction (which shall include the name and telephone number of a representative of the servicer who can provide assistance to the borrower);
(B) after conducting an investigation, provide the borrower with a written explanation or clarification that includes--
(i) to the extent applicable, a statement of the reasons for which the servicer believes the account of the borrower is correct as determined by the servicer; and
(ii) the name and telephone number of an individual employed by, or the office or department of, the servicer who can provide assistance to the borrower; or
(C) after conducting an investigation, provide the borrower with a written explanation or clarification that includes--
(i) information requested by the borrower or an explanation of why the information requested is unavailable or cannot be obtained by the servicer; and
(ii) the name and telephone number of an individual employed by, or the office or department of, the servicer who can provide assistance to the borrower.
(3) Protection of credit rating. During the 60-day period beginning on the date of the servicer's receipt from any borrower of a qualified written request relating to a dispute regarding the borrower's payments, a servicer may not provide information regarding any overdue payment, owed by such borrower and relating to such period or qualified written request, to any consumer reporting agency (as such term is defined under section 603 of the Fair Reporting Act [15 U.S.C. §1681a]).
The request must relate to "servicing." A request directed solely to the validity of the mortgage documents has been held not to qualify. Morequity, Inc. v. Naeem, 118 F.Supp.2d 885, 901 (N.D.Ill. 2000). However, anything relating to debits and credits made to the account or to which the borrower may be entitled should qualify. If the borrower asks for the justification for some charge or fee and the justification is a provision in the note or mortgage, the instrument should be provided.
There is an express private right of action for violation of these obligations. 12 U.S.C. §2605(f) provides:
(f) Damages and costs. Whoever fails to comply with any provision of this section shall be liable to the borrower for each such failure in the following amounts:
(1) Individuals. In the case of any action by an individual, an amount equal to the sum of--
(A) any actual damages to the borrower as a result of the failure; and
(B) any additional damages, as the court may allow, in the case of a pattern or practice of noncompliance with the requirements of this section, in an amount not to exceed $ 1,000.
(2) Class actions. In the case of a class action, an amount equal to the sum of–
(A) any actual damages to each of the borrowers in the class as a result of the failure; and
(B) any additional damages, as the court may allow, in the case of a pattern or practice of noncompliance with the requirements of this section, in an amount not greater than $ 1,000 for each member of the class, except that the total amount of damages under this subparagraph in any class action may not exceed the lesser of--
(i) $ 500,000; or
(ii) 1 percent of the net worth of the servicer.
(3) Costs. In addition to the amounts under paragraph (1) or (2), in the case of any successful action under this section, the costs of the action, together with any attorneys fees incurred in connection with such action as the court may determine to be reasonable under the circumstances.
(4) Nonliability. A transferor or transferee servicer shall not be liable under this subsection for any failure to comply with any requirement under this section if, within 60 days after discovering an error (whether pursuant to a final written examination report or the servicer's own procedures) and before the commencement of an action under this subsection and the receipt of written notice of the error from the borrower, the servicer notifies the person concerned of the error and makes whatever adjustments are necessary in the appropriate account to ensure that the person will not be required to pay an amount in excess of any amount that the person otherwise would have paid.
Kickbacks, yield spread premiums, bogus charges: 12 U.S.C. §2607
Section 8 of RESPA, 12 U.S.C. § 2607, and Regulation X, 24 C.F.R. §3500.14, prohibit referral fees and kickbacks. The scope and extent of the prohibition is the subject of much litigation, and is unsettled.
The prohibitions of the statute are as follows:
2607. Prohibition against kickbacks and unearned fees
(a) Business referrals. No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
(b) Splitting charges. No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.
(c) Fees, salaries, compensation, or other payments. Nothing in this section shall be construed as prohibiting (1) the payment of a fee (A) to attorneys at law for services actually rendered or (B) by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance or (C) by a lender to its duly appointed agent for services actually performed in the making of a loan, (2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed, or (3) payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and brokers, (4) affiliated business arrangements so long as (A) a disclosure is made of the existence of such an arrangement to the person being referred and, in connection with such referral, such person is provided a written estimate of the charge or range of charges generally made by the provider to which the person is referred (i) in the case of a face-to-face referral or a referral made in writing or by electronic media, at or before the time of the referral (and compliance with this requirement in such case may be evidenced by a notation in a written, electronic, or similar system of records maintained in the regular course of business); (ii) in the case of a referral made by telephone, within 3 business days after the referral by telephone, (and in such case an abbreviated verbal disclosure of the existence of the arrangement and the fact that a written disclosure will be provided within 3 business days shall be made to the person being referred during the telephone referral); or (iii) in the case of a referral by a lender (including a referral by a lender to an affiliated lender), at the time the estimates required under section 5(c) [12 USC §2604(c)] are provided (notwithstanding clause (i) or (ii)); and any required written receipt of such disclosure (without regard to the manner of the disclosure under clause (i), (ii), or (iii)) may be obtained at the closing or settlement (except that a person making a face-to-face referral who provides the written disclosure at or before the time of the referral shall attempt to obtain any required written receipt of such disclosure at such time and if the person being referred chooses not to acknowledge the receipt of the disclosure at that time, that fact shall be noted in the written, electronic, or similar system of records maintained in the regular course of business by the person making the referral), (B) such person is not required to use any particular provider of settlement services, and (C) the only thing of value that is received from the arrangement, other than the payments permitted under this subsection, is a return on the ownership interest or franchise relationship, or (5) such other payments or classes of payments or other transfers as are specified in regulations prescribed by the Secretary, after consultation with the Attorney General, the Secretary of Veterans Affairs, the Federal Home Loan Bank Board, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Secretary of Agriculture. For purposes of the preceding sentence, the following shall not be considered a violation of clause (4)(B): (i) any arrangement that requires a buyer, borrower, or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender to represent the lender's interest in a real estate transaction, or (ii) any arrangement where an attorney or law firm represents a client in a real estate transaction and issues or law firm represents a client in a real estate transaction and issues or arranges for the issuance of a policy of title insurance in the transaction directly as agent or through a separate corporate title insurance agency that may be established by that attorney or law firm and operated as an adjunct to his or its law practice.
Section 2608(d) creates a private right of action for three times the improper portion of the charge:
(d) Penalties for violations; joint and several liability; treble damages; actions for injunction by Secretary and by State officials; costs and attorney fees; construction of State laws.
(1) Any person or persons who violate the provisions of this section shall be fined not more than $ 10,000 or imprisoned for not more than one year, or both.
(2) Any person or persons who violate the prohibitions or limitations of this section shall be jointly and severally liable to the person or persons charged for the settlement service involved in the violation in an amount equal to three times the amount of any charge paid for such settlement service.
(3) No person or persons shall be liable for a violation of the provisions of section 8(c)(4)(A) [subsec. (c)(4)(A) of this section] if such person or persons proves by a preponderance of the evidence that such violation was not intentional and resulted from a bona fide error notwithstanding maintenance of procedures that are reasonably adapted to avoid such error.
(4) The Secretary, the Attorney General of any State, or the insurance commissioner of any State may bring an action to enjoin violations of this section.
(5) In any private action brought pursuant to this subsection, the court may award to the prevailing party the court costs of the action together with reasonable attorneys fees.
(6) No provision of State law or regulation that imposes more stringent limitations on affiliated business arrangements shall be construed as being inconsistent with this section.
Regulation X originally tracked the language of § 8. However, it was amended in 1994 to significantly expand its scope. Its current text is as follows:
Prohibition against kickbacks and unearned fees.
(a) Section 8 violation. Any violation of this section is a violation of section 8 of RESPA (12 U.S.C. 2607) and is subject to enforcement as such under §3500.19.
(b) No referral fees. No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. Any referral of a settlement service is not a compensable service, except as set forth in §3500.14(g)(1). A company may not pay any other company or the employees of any other company for the referral of settlement service business.
(c) No split of charges except for actual services performed. No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether or not a service is compensable. Nor may the prohibitions of this Part be avoided by creating an arrangement wherein the purchaser of services splits the fee.
(d) Thing of value. This term is broadly defined in section 3(2) of RESPA (12 U.S.C. 2602(2)). It includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person's expenses, or reduction in credit against an existing obligation. The term "payment'' is used throughout §§3500.14 and 3500.15 as synonymous with the giving or receiving any "thing of value'' and does not require transfer of money.
(e) Agreement or understanding. An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by a practice, pattern or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business.
(1) A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business.
(2) A referral also occurs whenever a person paying for a settlement service or business incident thereto is required to use (see §3500.2, "required use'') a particular provider of a settlement service or business incident thereto.
(g) Fees, salaries, compensation, or other payments.
(1) Section 8 of RESPA permits:
(i) A payment to an attorney at law for services actually rendered;
(ii) A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance;
(iii) A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan;
(iv) A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed;
(v) A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers. (The statutory exemption restated in this paragraph refers only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity, and has no applicability to any fee arrangements between real estate brokers and mortgage brokers or between mortgage brokers.);
(vi) Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto; or
(vii) An employer's payment to its own employees for any referral activities.
(2) The Department may investigate high prices to see if they are the result of a referral fee or a split of a fee. If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided. These facts may be used as evidence of a violation of section 8 and may serve as a basis for a RESPA investigation. High prices standing alone are not proof of a RESPA violation. The value of a referral (i.e., the value of any additional business obtained thereby) is not to be taken into account in determining whether the payment exceeds the reasonable value of such goods, facilities or services. The fact that the transfer of the thing of value does not result in an increase in any charge made by the person giving the thing of value is irrelevant in determining whether the act is prohibited.
(3) Multiple services. When a person in a position to refer settlement service business, such as an attorney, mortgage lender, real estate broker or agent, or developer or builder, receives a payment for providing additional settlement services as part of a real estate transaction, such payment must be for services that are actual, necessary and distinct from the primary services provided by such person. For example, for an attorney of the buyer or seller to receive compensation as a title agent, the attorney must perform core title agent services (for which liability arises) separate from attorney services, including the evaluation of the title search to determine the insurability of the title, the clearance of underwriting objections, the actual issuance of the policy or policies on behalf of the title insurance company, and, where customary, issuance of the title commitment, and the conducting of the title search and closing.
(h) Recordkeeping. Any documents provided pursuant to this section shall be retained for five (5) years from the date of execution.
(i) Appendix B of this part. Illustrations in Appendix B of this part demonstrate some of the requirements of this section.
Two principal issues are presented by the text of the current statute and regulation: (1) Does it prohibit "yield spread premiums" and (2) Does it require a "split" of charges?
Yield spread premiums
A yield spread premium is a payment by a lender to the borrower's mortgage broker that is tied to an increase in the borrower's interest rate. The lender establishes a base or "par" interest rate, at which it will make or purchase a loan from a give class of borrower. If the broker induces the borrower to sign loan papers at a higher rate, the lender pays a "yield spread premium" linked to the increase in the rate.
On its face, such a payment would appear to violate §8 of RESPA and § 3500.14 of Regulation X. It is a payment for the broker’s referral of a borrower induced to pay an above-market interest rate.
Nevertheless, under pressure from the banking industry, HUD has sought to legalize yield spread premiums. On March 1, 1999, HUD issued policy statement 1999-1, 64 Fed.Reg. 10080, in which it imposed two requirements for a yield spread premium to not violate 12 U.S.C. §2607 and 24 C.F.R. 3500.14: (a) it must be "clearly disclosed so that the consumer can understand the nature and recipient of the payment," and (ii) it must represent reasonable compensation for services rendered.
In addition, some courts read 1999-1 to impose a third requirement -- (c) that under the agreement between the broker and lender the yield spread premium in fact represents compensation for services rendered and not a payment for bringing the lender a borrower induced to pay a supracompetitive rate. Culpepper v. Inland Mtge. Corp., 132 F.3d 692 (11th Cir. 1998), opinion on denial of rehearing, 144 F.3d 717 (11th Cir. 1998), class certified on remand, 189 F.R.D. 668 (N.D.Ala. 1999), later opinion, 1999 U.S.Dist. LEXIS 11846 (N.D.Ala. March 22, 1999), order stayed pending appeal, 1999 U.S.Dist. LEXIS 15986 (N.D.Ala., July 19, 1999).
In a second opinion in the Culpepper case, Culpepper v. Irwin Mortgage Corp., 253 F.3d 1324, 1332 (11th Cir. 2001), the court reaffirmed that a yield spread premium determined by whether the borrower was signed up at a rate above "par" on a rate chart violates RESPA.
HUD then issued a second statement of policy, 2001-1, which purported to eliminate requirement (c). 66 F.R. 53051 (2001).
The validity of 2001-1 is unclear. In Echevarria v. Chicago Title & Trust Co., 256 F.3d 623 (7th Cir. 2001), dealing with the issue of whether HUD could eliminate the requirement of a "split" (discussed below), the court distinguished between "the deference due regulations promulgated by formal notice-and-comment rulemaking or formal adjudications and those made informally." 256 F.3d at 628, citing Christensen v. Harris County, 529 U.S. 576 (2000). Neither policy statement was issued pursuant to formal notice-and-comment rulemaking.
On the other hand, the Eighth Circuit, in Glover v. Standard Federal Bank, No. 00-3611, 2002 WL 432992 (March 21, 2002), gave effect to 2001-1 and came to an opposite conclusion from Culpepper:
When reviewing an agency's construction of a statute it administers, a court must first ask whether Congress has directly spoken to the precise question at issue. Chevron U.S.A. Inc. v. Natural Res. Defense Council, Inc., 467 U.S. 837, 842 (1984). The legality of a YSP payment (or any other specific type of payment) to a mortgage broker is not directly addressed by RESPA. Neither is how one deals with the tension created by the words of Sections 8(a) and 8(c). Thus, the intent of Congress on this issue is not expressly set forth in the statute. Therefore, under Chevron, we must determine whether HUD's analysis as set forth in its regulation is based on a permissible construction of the statute. Id. at 843.
"If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation." Id. at 843-44. Agency regulations promulgated under express congressional authority are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Id. at 844. In the instant case, it appears Congress did intend to delegate authority to HUD by expressly authorizing HUD to "prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions, as may be necessary to achieve the purposes of [RESPA]." 12 U.S.C. § 2617(a). HUD promulgated rules under RESPA at 24 C.F.R. § 3500.01 et. seq., subject to notice-and-comment. Because these rules were promulgated under the express authority of Congress and adjudicated with apparent congressional intent to carry the force of law, they are accorded Chevron deference. United States v. Mead Corp., 121 S.Ct. 2164, 2172 (2001). However, these regulations are not directly at issue today, as the language of the Section 8(a) regulation issued by HUD simply mirrors that of the statute.
. . . In this case, however, we have a duly promulgated regulation, which has the force of law under Chevron, but which for our purposes continues the statutory ambiguity. It remains unstated and unclear under the regulation, as under the statute, whether payment of a YSP to a mortgage broker does, or must, in whole or in part, constitute an unearned fee. Thus we are not dealing with Mead, and its corresponding line of cases, which address the issue of deference due regulations or other congressionally authorized interpretations of a guiding statute. See Mead, 533 U.S. 218; Chevron, 467 U.S. at 842; Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (giving lesser agency rulings, statements, interpretations and opinions concerning statutory meaning deference only proportional to their power to persuade given the agency's specialized experience, investigations and available information).
We look, instead, to Bowles v. Seminole Rock & Sand Co. and its progeny for guidance in determining what deference is due an agency interpretation of its own ambiguous regulation. See Christensen, 529 U.S. at 588 (giving deference to an agency's interpretation of its own regulation only if the language of the regulation is ambiguous); Auer v. Robbins, 519 U.S. 452, 461 (1997) (giving controlling deference to an agency's interpretation of its own ambiguous regulation unless plainly erroneous or inconsistent with the regulation); Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 413-14 (1945) ("Since this involves an interpretation of an administrative regulation a court must necessarily look to the administrative construction of the regulation if the meaning of the words used is in doubt.... [T]he ultimate criterion is the administrative interpretation, which becomes of controlling weight unless it is plainly erroneous or inconsistent with the regulation."). Referring to this line of cases, we believe that HUD's Policy Statements interpreting its own ambiguous regulation are controlling authority unless they are plainly erroneous or inconsistent with the regulation or the purpose of RESPA. Christensen, 529 U.S. at 588 (construing Auer v. Robbins, 519 U.S. at 462 ).
However, if Christensen does not contemplate situations, as here, where the agency regulation does nothing more than mirror the ambiguous language of the statute, our decision to give deference to HUD's Policy Statements remains steadfast. See Cunningham v. Scibana, 259 F.3d 303, 307 n. 1 (4th Cir.2001) (holding that Christensen does not apply if there is no ambiguous interpretive language in the regulation, that is if the agency "simply repeated the statutory language in the regulation and left its interpretation of [the statutory language] to a program [or policy] statement," Skidmore principles apply). HUD's Policy Statements in this instance pack sufficient power to persuade given HUD's specialized mission, experience and broad investigation into the consumer lending market. Skidmore, 323 U.S. at 140.
Requirement of "split"
The other current issue under RESPA §7 is whether a "split" is required. In many cases, a lender or title company will simply "mark up" an item, e.g., charge $50 for a credit report that actually cost $40. HUD has long taken the position that this is a violation of §7, whether the lender just overcharged or whether the credit report issuer is privy to the arrangement (e.g., it gets $50 and kicks back $40).
In Echevarria, supra, the Seventh Circuit took the position that a "split" was essential. This raises the question of what constitutes a "split". In Echevarria, the Court of Appeals cited with approval the decision in Christakos v. Intercounty Title Co., 99 C 8334, 2000 U.S. Dist. LEXIS 12438 (N.D.Ill., Aug 25, 2000), where both the lender being paid off and the title company charged for recording the release of the loan being paid off. Only one release was recorded. The court held that a "split" existed when "Ms. Christakos claims that she paid $52.50 for the settlement charge to record the release, $ 23.50 of which went to Mellon, who actually recorded the release and thus earned the fee, and $ 29 of which went to Intercounty, who did nothing in return. These payments were made from the same pool of funds from the loan proceeds over which Intercounty, as settlement agent, had control and directed payments made from. Therefore, Intercounty received an unearned ‘portion’ of a settlement fee that was
unearned, in violation of §2607(b)."
HUD policy statement 2001-1 states that Echevarria is wrong and formally adopts the position that a "split" is not required. Echevarria had declined to adopt prior informal statements to the same effect, but left the door open to a formal statement. The Department of Justice has taken the position in amicus filings that a "split" is no longer required.
Fair Debt Collection Practices Act, 15 U.S.C. §1692 et seq.
An assignee who acquires a debt that is already in default, either for its own account or for purposes of collection, meets the definition of "debt collector" in the Fair Debt Collection Practices Act, 15 U.S.C. §1692 et seq. ("FDCPA"). Kimber v. Federal Financial Corp., 668 F.Supp. 1480 (M.D.Ala. 1987). Lawyers that regularly collect debts by foreclosing on real estate meet the definition of "debt collector." Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, and Clark, L.L.C., 214 F.3d 872 (7th Cir. 2000); In re Littles, 90 Bankr. 669, 676 (Bankr. E.D. Pa. 1988), aff'd as modified sub nom., Crossley v. Lieberman, 90 Bankr. 682 (E.D. Pa. 1988), aff'd, 868 F.2d 566 (3d Cir. 1989); Shapiro & Meinhold v. Zartman, 823 P.2d 120 (Colo. 1992). The original lender is exempt from the definition of debt collector, as is someone who "services" a loan which is not claimed to be in default.
The FDCPA imposes certain notification requirements, 15 U.S.C. §1692e(11) and §1692g. Many debt collectors do not comply with these. Miller v. McCalla, Raymer, supra. The FDCPA also prohibits collection practices which are misleading, 15 U.S.C. §1692e, unfair, 15 U.S.C. §1692f, or harassing or abusive, 15 U.S.C. §1692d.
Among the mortgage company practices specifically prohibited by the FDCPA, assuming its applicability, are:
Adding attorney’s fees or servicing expenses not authorized by law or contract. 15 U.S.C. §§1692e(2)(B), 1692f(1).
Inaccurate credit reporting, 15 U.S.C. §1692e(8).
Equal Credit Opportunity Act, 15 U.S.C. § 1691 et seq., and Federal Reserve Board Regulation B, 12 C.F.R. part 202.
The ECOA makes it unlawful for a "creditor to discriminate against any applicant, with respect to any aspect of a credit transaction--
(1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract);
(2) because all or part of the applicant's income derives from any public assistance program; or
(3) because the applicant has in good faith exercised any right under the Consumer Credit Protection Act [15 U.S.C. §§1601 et seq.].
Regulation B, 12 C.F.R. § 202.7, prohibits a lender from requiring the signature of a spouse if the applicant alone qualifies for the proposed transaction. There is a considerable body of caselaw addressing the issue of when requiring a spouse to guaranty a loan is a violation of the statute. If a violation exists, the spouse’s obligation is nullified.
The ECOA also prohibits "reverse redlining," where members of minority groups are not denied credit but are extended credit on unfavorable terms. See Newton v. United Cos. Fin. Corp., 24 F.Supp.2d 444, 455 (E.D.Pa. 1998); Williams v. Gelt Fin. Corp., 237 B.R. 590, 594 (E.D.Pa. 1999); United Cos. Lending Corp. v. Sargeant, 20 F.Supp.2d 192, 203 n. 5 (D.Mass. 1998).
The ECOA also prohibits retaliation for exercising rights under any section of the Consumer Credit Protection Act. This includes TILA and HOEPA and the Fair Credit Reporting Act.
Regulation B extends the application of the ECOA to discrimination in servicing or enforcement of credit obligations as well as discrimination in the extension of credit.
Finally, ECOA and Regulation B require written notice of the denial of credit. 15 U.S.C. §1691d, 12 C.F.R. §202.9. Literally, there is an exemption if the creditor makes a counteroffer that is accepted by the consumer. However, some cases require that "counteroffer" be similar to the credit initially requested, and impose liability if the creditor makes an offer substantially different from the one requested. Newton v. United Companies Financial Corp., 24 F. Supp. 2d 444 (E.D. Pa. 1998).
The notification provisions of the ECOA may be violated regardless of whether there is any substantive discrimination claim. Pinkett v. Payday Today Loans, LLC, 99 C 3332, 1999 U.S. Dist. LEXIS 12098 (N.D.Ill., July 22, 1999).
Discrimination: Fair Housing Act (Title VIII) and 42 U.S.C. §1981-2
These statutes also prohibit "reverse redlining," where members of minority groups are not denied credit but are extended credit on unfavorable terms. See Johnson v. Equicredit Corp., 01 C 5197, 2002 WL 448991 (N.D.Ill., March 22, 2002); Matthews v. New Century Mtge. Corp., 185 F.Supp.2d 874 (S.D.Ohio 2002).
The Fair Credit Reporting Act, 15 U.S.C. § 1681
Most provisions of the FCRA regulate credit bureaus. However, §1681s-2 creates a private right of action if a consumer complains to a credit bureau that an item is inaccurate, the credit bureau (as is its obligation) contacts that creditor for information about the item, and the creditor furnishes false information to the credit bureau in response to the verification request.
Illinois Consumer Fraud Act, 815 ILCS 505/1 et seq.
Section 2 of the Illinois Consumer Fraud Act, 815 ILCS 505/2 ("ICFA"), provides:
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 [815 ILCS 510/2], are hereby declared unlawful whether any person has in fact been misled, deceived or damaged thereby. In construing this section consideration shall be given to the interpretations of the Federal Trade Commission and the federal courts relating to Section 5(a) of the Federal Trade Commission Act [15 U.S.C. §45].
Section 2 of the Uniform Deceptive Trade Practices Act, 815 ILCS 510/2, referred to in §2 of the ICFA, provides:
A person engages in a deceptive trade practice when, in the course of his business, vocation or occupation, he: * * *
(5) represents that goods or services have . . . characteristics . . . [or] benefits . .. that they do not have . . . .
(9) advertises goods or services with intent not to sell them as advertised . . . .
(12) engages in any other conduct which similarly creates a likelihood of confusion or of misunderstanding.
See also §2K, 815 ILCS 505/2K, prohibiting advertising of "bank rates" or "bank financing" and the like by any creditor which is not a bank.
A private right of action is authorized by ICFA §10a, 815 ILCS 505/10a, which provides:
Sec. 10a. Action for actual damages. (a) Any person who suffers actual damage as a result of a violation of this Act committed by any other person may bring an action against such person. The court, in its discretion may award actual economic damages or any other relief which the court deems proper . . . .
(b) Such action may be commenced in the county in which the person against whom it is brought resides, has his principal place of business, or is doing business, or in the county where the transaction or any substantial portion thereof occurred.
(c) Except as provided in subsections (f), (g), and (h) of this Section, in any action brought by a person under this Section, the Court may grant injunctive relief where appropriate and may award, in addition to the relief provided in this Section, reasonable attorney's fees and costs to the prevailing party.
(d) Upon commencement of any action brought under this Section the plaintiff shall mail a copy of the complaint or other initial pleading to the Attorney General and, upon entry of any judgment or order in the action, shall mail a copy of such judgment or order to the Attorney General.
(e) Any action for damages under this Section shall be forever barred unless commenced within 3 years after the cause of action accrued; provided that, whenever any action is brought by the Attorney General or a State's Attorney for a violation of this Act, the running of the foregoing statute of limitations, with respect to every private right of action for damages which is based in whole or in part on any matter complained of in said action by the Attorney General or State's Attorney, shall be suspended during the pendency thereof, and for one year thereafter. . . .
The extension of credit is the provision of a "service" subject to the ICFA. Law Office of William J. Stogsdill v. Cragin Federal Bank for Savings, 268 Ill.App.3d 433, 645 N.E.2d 564 (2d Dist. 1995); Bankier v. First Fed. S. & L. Ass’n of Champaign, 225 Ill.App.3d 864, 588 N.E.2d 391 (4th Dist. 1992); Allenson v. Hoyne Savings Bank, 272 Ill.App.3d 938, 651 N.E.2d 573 (1st Dist. 1995); Fidelity Financial Services, Inc. v. Hicks, 214 Ill.App.3d 398, 574 N.E.2d 15 (1st Dist. 1991).
ICFA §2 makes unlawful both "deceptive" and "unfair" practices. The basic elements of a deception claim are (1) a deceptive act or practice, (2) at least if an omission is concerned, defendant's intent that the plaintiff rely on the deception, and (3) that the deception occurred in the course of conduct involving trade or commerce. Vance v. National Benefit Ass'n, 1999 U.S.Dist. LEXIS 13846 (N.D.Ill. 1999), *13; Shields v. Lefta, Inc., 888 F. Supp. 891 (N.D. Ill. 1995); Siegel v. Levy Org. Dev. Co., 153 Ill.2d 534, 607 N.E.2d 194, 198 (1992); Brandt v. Time Ins. Co., 302 Ill.App.3d 159, 704 N.E.2d 843, 846 (1st Dist. 1998); Bankier v. First Fed. Sav. & Loan Ass'n, 225 Ill.App.3d 864, 588 N.E.2d 391 (4th Dist.), leave to appeal denied, 146 Ill.2d 622, 602 N.E.2d 446 (1992).
The test of "deception" is whether a representation "creates the likelihood of deception or has the capacity to deceive" the persons exposed to the practice in the particular case. Elder v. Coronet Ins. Co., 201 Ill.App.3d 733, 558 N.E.2d 1312 (1st Dist. 1990); Williams v. Bruno Appliance & Furniture Mart, Inc., 62 Ill.App.3d 219, 222, 379 N.E.2d 52, 54 (1st Dist. 1978); Beard v. Gress, 90 Ill.App.3d 622, 625, 413 N.E.2d 448 (1st Dist. 1980).
The ICFA imposes an affirmative duty to disclose material facts pertaining to a transaction: "Under the Act the omission of any material fact is deceptive conduct." Crowder v. Bob Oberling Enterprises, Inc., 148 Ill.App.3d 313, 317, 499 N.E.2d 115 (1st Dist. 1986); Simeon Mgmt. Corp. v. FTC, 579 F.2d 1137, 1145 (9th Cir. 1978) ("[f]ailure to disclose material information may cause an advertisement to be false or deceptive within the meaning of the FTCA [Federal Trade Commission Act] even though the advertisement does not state false facts"); J. B. Williams Co. v. FTC, 381 F.2d 884, 888 (6th Cir. 1967) (court found a violation of FTCA §5 based on the manufacturer's failure to disclose that "Geritol" was useful only to individuals who were deficient in one of the vitamins or minerals contained in the product and required affirmative disclosure of "the negative fact that a great majority of persons who experience these symptoms do not experience them because there is a vitamin or iron deficiency"). Thus, material omissions are actionable even if no duty to disclose the omitted information, other than that imposed by the CFA itself, exists. Celex Group, Inc. v. Executive Gallery, Inc., 877 F.Supp. 1114, 1129 (N.D.Ill., Jan. 31, 1995) (Castillo, J.), citing Totz v. Continental Du Page Acura, 236 Ill.App.3d 891, 602 N.E.2d 1374 (2d Dist. 1992) (car dealer has duty to disclose that vehicle has been previously damaged in an accident).
Even the "unthinking, the ignorant and the credulous" are protected from deceptive conduct, Williams, supra, quoting from Rodale Press, Inc., 71 F.T.C. 1184, 1237-38 (1967). Accordingly, lack of due diligence on the part of the injured party is no defense. Zimmerman v. Northfield Real Estate, Inc., 156 Ill.App.3d 154, 168, 510 N.E.2d 409 (1st Dist. 1987); Beard v. Gress, 90 Ill.App.3d 622, 413 N.E.2d 448 (1st Dist. 1980) ("neither the mental state of the person making a misrepresentation nor the diligence of the party injured to check as to the accuracy of the misrepresentation [is] material to the existence of a cause of action for that misrepresentation"); Carter v. Mueller, 120 Ill.App.3d 312, 320, 457 N.E.2d 1335 (1st Dist. 1983). Deception is evaluated from the perspective of an unsophisticated consumer. FTC v. Standard Education Society, 302 U.S. 112, 115 (1937) ("The fact that a false statement may be obviously false to those who are trained and experienced does not change its character, nor take away its power to deceive others less experienced. . . . Laws are made to protect the trusting as well as the suspicious"); Clomon v. Jackson, 988 F.2d 1314, 1318-1319 (2d Cir. 1993) (the law protects "the vast multitude which includes the ignorant, the unthinking and the credulous," and "in evaluating the tendency of language to deceive," courts and agencies "look not to the most sophisticated readers but rather to the least"); Gammon v. GC Services, 27 F.3d 1254, 1257 (7th Cir. 1994) (following Clomon, standard is that of the "unsophisticated" consumer and protects the average consumer "who is uninformed, naive, or trusting").
The fact that an astute consumer could have detected the practice is irrelevant when the fact is that most consumers under the circumstances do not check. For example, in People ex rel. Hartigan v. Stianos, 131 Ill.App.3d 575, 475 N.E.2d 1024 (2d Dist. 1985), the court held that a retailer's practice of charging consumers sales tax in an amount slightly greater than that authorized by law was both deceptive and unfair:
We conclude the practice described in this case is both deceptive and unfair as those terms are used in the Consumer Fraud Act. The sales tax rates which may be charged to consumers have been fixed by statute; the legislature set the tax rate at 1.25%, but the evidence here is that defendants collected an average of 4.75%. While the three sales upon which this case is premised reflect only a few cents in overcharges, it is apparent that similar overcharges, if permitted to continue, could aggregate very substantial losses and injury to the consuming public. It is also unfair to permit the extraction from the consumer of excessive sums under the guise it is a lawful tax. If, as defendants alleged in their answer, the excess sums collected were turned over to the State, defendants' conduct remains unfair and deceptive to the consumers' injury. (475 N.E.2d at 1029)
Obviously, the amount of sales tax is set by law, and a consumer who looked up the statute and then did the computations upon being presented with a cash register tape at the supermarket could detect the overcharge. Of course, consumers generally do not whip out the Revenue Act and a calculator when the clerk rings up their grocery purchase. They simply accept the supermarket's representation of the amount of the tax and pay. Given the context in which the representation was made -- i.e., the normal shopping habits of consumers -- inflating the amount of the tax has the "tendency" and "capacity" to deceive.
The prohibitions of "unfair" and "deceptive" practices are distinct. Elder v. Coronet Ins. Co., 201 Ill.App.3d 733, 558 N.E.2d 1312 (1st Dist. 1990). In determining whether a practice is "unfair," both federal and state law consider:
(1) whether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise -- whether, in other words, it is within at least the penumbra of some common-law, statutory or other established concept of unfairness;
(2) whether it is immoral, unethical, oppressive or unscrupulous;
(3) whether it causes substantial injury to consumers (or competitors or other businessmen).
FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244-45 n. 5 (1972); Scott v. Association for Childbirth at Home, Int'l, 88 Ill.2d 279, 430 N.E.2d 1012 (1981); Elder v. Coronet Ins. Co., supra; People ex rel Hartigan v. All American Aluminum & Construction Co., 171 Ill.App.3d 27, 524 N.E.2d 1067 (1st Dist. 1988); People ex rel. Hartigan v. Stianos, 131 Ill.App.3d 575, 475 N.E.2d 1024 (2d Dist. 1985); People ex rel. Fahner v. Hedrich, 108 Ill.App.3d 83, 89-90, 438 N.E.2d 924 (1st Dist. 1982); People ex rel. Fahner v. Walsh, 122 Ill.App.3d 481, 461 N.E.2d 78 (2d Dist. 1984); People ex rel. Hartigan v. Knecht Services, Inc., 216 Ill.App.3d 843, 575 N.E.2d 1378 (2d Dist. 1991); Ekl v. Knecht, 223 Ill.App.3d 234, 585 N.E.2d 156 (2d Dist. 1991).
Elimination of common law fraud restrictions
There is no requirement of reliance on the part of the consumer. Martin v. Heinold Commodities, 163 Ill.2d 33, 643 N.E.2d 734, 754 (1994); Swanagan v. Al Piemonte Ford Sales, 1995 U.S. Dist. LEXIS 11863 (N.D.Ill., August 15, 1995); Brooks v. Midas-International Corp., 47 Ill.App.3d 266, 272-73, 361 N.E.2d 815 (1st Dist. 1977) (if Midas represented in its advertising that replacement auto exhaust systems would be Installed for only an installation charge but actually imposed additional charges, all of Midas' customers would be entitled to a refund of the additional charges irrespective of whether they relied upon or even saw the advertising). Nor is it necessary that the representation or omission be made directly to the consumer, as long as it is intended to impact on the consumer. Fisher v. Quality Hyundai, Inc., 01 C 3243, 2002 WL 47968 (N.D.Ill., Jan. 11, 2002) (misrepresentation made to source of financing).
It is necessary, however, to show a causal connection between the violation and the amount sought as damages. This is generally quite simple in the case of inflated or unauthorized charges.
Misrepresentations of opinion, false promises of future conduct and misrepresentations by innuendo are prohibited, even though they might not have been actionable at common law. Duhl v. Nash Realty, Inc., 102 Ill.App.3d 483, 495, 568 N.E.2d 1294 (1st Dist. 1982); Buzzard v. Bolger, 117 Ill.App.3d 887, 453 N.E.2d 1129, 1131-32 (2d Dist. 1983). Privity is not required. Ramson v. Layne, 668 F.Supp. 1162 (N.D.Ill. 1987) (liability of endorser); Elder v. Coronet Ins. Co., 201 Ill.App.3d 733, 558 N.E.2d 1312 (1st Dist. 1990).
The fact that mortgage brokers and lenders are regulated under the Illinois Residential Mortgage License Act of 1987, 205 ILCS 635/1-1 et seq., does not immunize them from challenge under the Consumer Fraud Act. People ex rel. Hartigan v. Northern Illinois Mtge. Co., 201 Ill.App.3d 156, 559 N.E.2d 14 (1st Dist. 1990).
Mortgage practices challenged under Consumer Fraud Act
Specific practices relating to mortgage lending that have been held to be deceptive or unfair include:
Last minute addition of fees and charges. People ex rel. Hartigan v. Northern Illinois Mtge. Co., supra, 201 Ill.App.3d 156, 559 N.E.2d 14 (1st Dist. 1990); Provident Bank v. Wright, 00 C 6027, 2001 WL 777054 (N.D.Ill., July 11, 2001); see In re Peacock Buick, Inc., 86 FTC 1532 (1975).
Bait-and-switch practices and failing to honor promises relating to interest rates. People ex rel. Hartigan v. Northern Illinois Mtge. Co., supra, 201 Ill.App.3d 156, 559 N.E.2d 14 (1st Dist. 1990); Provident Bank v. Wright, supra, 00 C 6027, 2001 WL 777054 (N.D.Ill., July 11, 2001); see Ashlock v. Sunwest Bank of Roswell, N.A., 107 N.M. 100, 753 P.2d 346 (1988) (bank which advertised that it would pay a certain rate of interest was obligated to pay that rate); Williams v. Bruno Appliance & Furniture Mart, Inc., 62 Ill.App.3d 219, 222, 379 N.E.2d 52, 54 (1st Dist. 1978) (bait and switch practices actionable); Hawaii Community Federal Credit Union v. Keka, supra, 94 Haw. 213, 11 P.3d 1 (2000).
Yield spread premiums paid to mortgage brokers. Vargas v. Universal Mtge. Corp., 01 C 0087, 2001 WL 558045 (N.D.Ill, May 21, 2001), later opinion, 2001 WL 1545874 (N.D.Ill., Nov. 29, 2001); DeLeon v. Beneficial Constr. Co., 998 F.Supp. 859 (N.D.Ill. 1998), later op., 55 F.Supp. 2d 819 (N.D.Ill. 1999); Hastings v. Fidelity Mtge. Decisions Corp., 984 F.Supp. 600 (N.D.Ill. 1997); see Browder v. Hanley Dawson Cadillac Co., 62 Ill.App.3d 623, 379 N.E.2d 1206 (1st Dist. 1978); Fox v. Industrial Cas. Co., 98 Ill.App.3d 543, 424 N.E.2d 839 (1st Dist. 1981); Fitzgerald v. Chicago Title & Trust Co., 72 Ill.2d 179, 380 N.E.2d 790 (1978) .
Imposition of unauthorized charges. Orkin Exterminating Co., 108 F.T.C. 263 (1986), aff'd, 849 F.2d 1354 (11th Cir. 1988); Haroco, Inc. v. American Nat'l Bank & Trust Co., 747 F.2d 384 (7th Cir. 1984), aff'd, 473 U.S. 606 (1985), on remand, 647 F.Supp. 1026 (N.D.Ill. 1986) (prime rate case); Littlefield v. Goldome Bank, 142 A.D.2d 978, 530 N.Y.S.2d 400 (1988) (unauthorized charges); Leff v. Olympic Federal Sav. & Loan Ass'n, 1986 WL 10636 (N.D.Ill. 1986) (overescrowing); Rumford v. Countrywide Funding Corp., 287 Ill.App.3d 330, 678 N.E.2d 369 (2d Dist. 1997).
Misstating the annual percentage rate or finance charge. Kleidon v. Rizza Chevrolet, Inc., 173 Ill.App.3d 116, 527 N.E.2d 374 (1st Dist. 1988), appeal denied, 123 Ill.2d 559, 535 N.E.2d 402; Beard v. Gress, 90 Ill. App. 3d 622, 413 N.E.2d 448 (4th Dist. 1980); April v. Union Mortgage Co., 709 F.Supp. 809 (N.D.Ill. 1989) (misstatement of finance charge required to be disclosed under TILA actionable as Consumer Fraud Act violation). Misrepresentations as to the time in which or terms on which loan applications could be closed. People ex rel. Hartigan v. Commonwealth Mtge. Corp. of Am., 732 F. Supp. 885 (N.D. Ill. 1990); People ex rel. Hartigan v. Northern Illinois Mtge. Co., 201 Ill.App.3d 156, 559 N.E.2d 14 (1st Dist. 1990).
Wrongful foreclosure. Smith v. Keycorp Mtge., Inc., 151 B.R. 870 (N.D.Ill. 1993).
Home improvement fraud. Heastie v. Community Bank of Greater Peoria, 690 F.Supp. 716 (N.D.Ill. 1989), later opinion, 125 F.R.D. 669 (N.D.Ill. 1990), later opinions, 727 F.Supp. 1133 (N.D.Ill. 1990), and 727 F.Supp. 1140 (N.D.Ill. 1990); People ex rel Hartigan v. All American Aluminum & Construction Co., supra, 171 Ill.App.3d 27, 524 N.E.2d 1067 (1st Dist. 1988); Mason v. Fieldstone Mtge. Co., 00 C 228, 2000 WL 1643589 (N.D.Ill., Oct. 20, 2000); Diamond Mtge. Corp. v. Armstrong, 176 Ill.App.3d 64, 530 N.E.2d 1041 (1st Dist. 1988).
Overescrowing. GMAC Mtge. Corp. v. Stapleton, 236 Ill.App.3d 486, 603 N.E.2d 767 (1st Dist. 1992), leave to appeal denied, 248 Ill.2d 641, 610 N.E.2d 1262 (1993); Leff v. Olympic Fed. S. & L. Ass'n, 86 C 3026, 1986 WL 10636 (N.D.Ill. 1986); Aitken v. Fleet Mtge. Corp., 90 C 3708, 1991 U.S.Dist. LEXIS 10420, 1991 WL 152533 (N.D.Ill. 1991), and 1992 U.S.Dist. LEXIS 1687, 1992 WL 33926 (N.D.Ill., Feb. 12, 1992); Poindexter v. National Mtge. Corp., 1991 U.S.Dist. LEXIS 19643 (N.D.Ill., Dec. 23, 1991), later opinion, 1995 U.S.Dist. LEXIS 5396 (N.D.Ill., April 24, 1995); Sanders v. Lincoln Service Corp., 91 C 4542, 1993 WL 112543, 1993 U.S.Dist. LEXIS 4454 (N.D.Ill. 1993); Robinson v. Empire of America Realty Credit Corp., 90 C 5063, 1991 WL 26593, 1991 U.S.Dist. LEXIS 2084 (N.D.Ill., Feb. 20, 1991); In re Mortgage Escrow Deposit Litigation, M.D.L. 899, 1994 U.S.Dist. LEXIS 12746 (N.D.Ill., Sept. 8, 1994); Greenberg v. Republic Federal S. & L. Ass'n, 1995 U.S.Dist. LEXIS 5866 (N.D.Ill., May 1, 1995); Weinberger v. Bell Federal S. & L. Ass’n, 262 Ill.App.3d 1047, 635 N.E.2d 647 (1st Dist. 1994).
Flipping. Chandler v. American General Finance, Inc., 1-01-2789, 2002 WL 464909 (Ill.App., 1st Dist., March 27, 2002).
Improper allocation of payments between principal and interest. Allenson v. Hoyne Savings Bank, 272 Ill.App.3d 938, 651 N.E.2d 573 (1st Dist. 1995).
Interference with rescission rights. Horvath v. Adelson, Golden & Loria, P.C., 97-266-F, 2000 WL 33159239 (Mass. Super., June 16, 2000).
Making loans which cannot reasonably be expected to be repaid except through foreclosure. Fidelity Financial Services, Inc. v. Hicks, 214 Ill.App.3d 398, 574 N.E.2d 15 (1st Dist. 1991).
Illinois Residential Improvement Loan Act, 815 ILCS 135/1 et seq.
This statute makes it unlawful to (a) "disburse funds to or for the account of, or as directed by a contractor pursuant to a loan transaction for improvement or repair of (including remodeling of and additions to) a residential structure without requiring and receiving prior to each such disbursement a completion certificate as prescribed by this Act" (815 ILCS 135/1), (b) "disburse funds to or for the account of, or as directed by, a contractor pursuant to an issuance or transfer thereto of a negotiable instrument evidencing a loan for improvement or repair of (including remodeling of and additions to) a residential structure without requiring and receiving prior to each such disbursement a completion certificate as prescribed by this Act" (815 ILCS 135/2), (c) disburse funds "which are in excess of the value of labor performed and materials delivered as certified in a duly executed and delivered completion certificate" (815 ILCS 135/4).
A form of completion certificate is provided (815 ILCS 135/3). FHA Title I loans are not covered. (815 ILCS 135/5).
Only criminal penalties are provided for. There is one case holding that the statute does not create a private right of action. Luckett v. Alpha Construction & Development, Inc., 00 C 4553, 2001 WL 1286815 (N.D.Ill., Oct. 23, 2001). However, it should be treated as part of the terms of the contract on the theory that"In the absence of language to the contrary, the laws and statutes pertinent to a contract and in force at the time the contract is executed are considered a part of that contract as through they were expressly incorporated therein." Brandt v. Time Ins. Co., 302 Ill.App.3d 159, 169, 704 N.E.2d 843, 850 (1st Dist. 1998).
Illinois Residential Mortgage License Act, 205 ILCS 635/1-1 et seq., and regulations, 38 Ill. Admin. Code part 1050
This is the Illinois statute regulating mortgage brokers and lenders and providing for their licensing. The regulatory agency is the Office of Banks and Real Estate ("OBRE").
A number of provisions of the statute and regulations are pertinent to predatory lending litigation. For example, the regulations require a written agreement between the broker and client, setting forth exactly what the broker is to do, and provide that attorney's fees are awardable in action for breach. 38 Ill. Admin. Code §1050.1010 provides:
Before a mortgage loan applicant, also referred to herein as "borrower" or "customer", signs a completed residential mortgage loan application or gives the licensee any consideration, whichever comes first, a loan brokerage agreement shall be required and shall be in writing and signed by both the mortgage loan applicant and a licensee whose services to such customer shall be loan brokering as defined at Section 1-4(o) of the Act.
a) The loan brokerage agreement shall carry a clear and conspicuous statement that, upon request, a copy shall be made available to the borrower or the borrower's attorney for review prior to signing.
b) Both the licensee's authorized representative and the borrower shall sign and date the loan brokerage agreement at the same time, and a copy of the executed agreement shall be given to the customer at the time of signing.
c) The loan brokerage agreement shall contain an explicit description of the services the licensee agrees to perform for the borrower and a good faith estimate of all consideration and remuneration to be exchanged in conjunction with such services. In the same area of the agreement shall be language, of prominence equal to or greater than such estimate, listing the types of situations or conditions which could materially affect the amounts indicated due to details which could not be known by the licensee at the time of signing the loan brokerage agreement. "Examples of such situation or conditions may include, but not be limited to, an appraised value different from that estimated by the borrower or credit obligations which the borrower fails to report."
d) The loan brokerage agreement shall carry a clear and conspicuous statement as to the conditions under which the borrower is obligated to pay the licensee.
e) The loan brokerage agreement shall provide that if the licensee makes false or misleading statements in such agreement, the borrower may, upon written notice:
1) void the agreement;
2) recover monies paid to the broker for which no services have been performed; and
3) recover actual costs, including attorney fees for enforcing the borrower's rights under the loan brokerage agreement.
f) The loan brokerage agreement shall incorporate by reference the "Loan Brokerage Disclosure Statement" described in Section 1050.1020 of this Subpart.
g) Except for a Rate-Lock Fee Agreement in accordance with Section 1050.1335, the loan brokerage agreement shall be the only agreement between the borrower and licensee with respect to a single loan; except, the licensee shall also provide to the customer any disclosure statement necessary to comply with federal and State requirements, including but not limited to, the Consumer Protection Credit Act (15 U.S.C. 1601), Equal Credit Opportunity Act (Title VII), and Truth in Lending Act (Title I) and Consumer Fraud and Deceptive Business Practices Act [815 ILCS 505].
Another regulation (38 Ill. Adm. Code §1050.840) provides that "A licensee will make a good faith effort to process and properly credit to a mortgage loan account any payment from a mortgagor on the same calendar date such payment is physically delivered, either in person or via United States Mail, at the address designated by the licensee for payments."
Another (§1050.860(b)) provides that "Within ten (10) business days of receipt of a written request from an entity authorized by the borrower, a licensee shall furnish a written notice of the total amount required to pay in full an outstanding mortgage loan, as of a specified date. Such payoff letter shall itemize and explain all charges included in the total figure stated."
Reports filed under the Act may contain useful information. For example, 38 Ill. Admin. Code §1050.630 requires an "Annual Report of Mortgage Activity" which must include "the number and aggregate dollar amount of application for, and the number granted and the aggregate dollar amount of, loans", broken down by residential mortgage loans; construction loans; and home improvement and rehabilitation loans and by census tract or zip code. See also §§1050.640 and .650.
Illinois predatory lending regulations
Effective May 17, 2001, OBRE exercised its authority under the Act, as well as under the statutes regulating credit unions and state chartered banks and thrifts, to issue new predatory mortgage regulations. 38 Ill. Admin. Code part 345. Identical regulations were issued by the Department of Financial Institutions ("DFI") under the Consumer Installment Loan Act and Sales Finance Agency Act. The regulations have been upheld against a federal preemption challenge. Illinois Ass’n of Mortgage Brokers v. Office of Banks and Real Estate, 174 F.Supp.2d 815 (N.D.Ill. 2001).
Neither the regulations nor the Residential Mortgage License Act contain an express private right of action. However, OBRE and DFI have stated that a private right of action should be implied. Topoluk, Predatory Lending: Illinois and Minnesota Developments, 55 Consumer Fin. L. Q. 86, 90 (2001). In any event, CILA does have a private right of action. Violations should in any event be cognizable under the Consumer Fraud Act.
The Illinois regulations expand upon the HOEPA "triggers." 38 Ill. Admin. Code §345.10. Illinois defines "points and fees" to mean (1) "all items required to be disclosed as points and fees under 12 CFR 226.32 (2000, no subsequent amendments or editions included)" plus (2) "the premium of any single premium credit life, credit disability, credit unemployment, or any other life or health insurance that is financed directly or indirectly into the loan" plus (3) "all compensation paid directly or indirectly to a mortgage broker, including a broker that originates a loan in its own name in a tablefunded transaction, not otherwise included in 12 CFR 226.4". The latter includes yield spread premiums.
Illinois then defines as a "High risk home loan on residential real property" a "home equity loan in which: (1) at the time of origination, the APR exceeds by more than 6 percentage points in the case of a first lien mortgage, or by more than 8 percentage points in the case of a junior mortgage, the yield on U.S. Treasury securities having comparable periods of maturity to the loan maturity as of the fifteenth day of the month immediately preceding the month in which the application for the loan is received by the lender; or (2) the total points and fees payable by the consumer at or before closing will exceed the greater of 5% of the total loan amount or $800. The $800 figure shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index."
The U.S. Treasury yields were at about 6% in early April 2002. Any loan with an interest rate above 11% should be analyzed as to whether the rate "trigger" is met.
The regulations exclude "a loan that is made primarily for a business purpose unrelated to the residential real property securing the loan or to an open-end credit plan subject to 12 CFR 226 (2000, no subsequent amendments or editions are included)" and purchase money loans. 38 Ill. Admin. Code §345.10.
Among the prohibitions to which "subject loans" are subject are the following:
Repayment ability. Section 345.20 provides that "A lender shall not make a high risk home loan if the lender does not believe at the time the loan is consummated that the borrower or borrowers will be able to make the scheduled payments to repay the obligation based upon a consideration of their current and expected income, current obligations, employment status and other financial resources (other than the borrower's equity in the dwelling that secures repayment of the loan). A borrower shall be presumed to be able to repay the loan if, at the time the loan is consummated, or at the time of the first rate adjustment in the case of a lower introductory interest rate, the borrower's scheduled monthly payments on the loan (including principal, interest, taxes, insurance and assessments), combined with the scheduled payments for all other disclosed debts, do not exceed 50% of the borrower's monthly gross income." The lender is required to verify the borrower's ability to repay the loan. Minimum verification requirements include:
a) The borrower prepares and submits to the lender a personal income and expense statement in a form prescribed by the Commissioner who may permit the use of other forms such as the URLA (Fannie Mae Form 1003 (10/92), available from Fannie Mae, 3900 Wisconsin Avenue, NW, Washington, DC 20016-2892 and Freddie Mac Form 85 (10/92), available from Freddie Mac at 1101 Pennsylvania Avenue, NW, Suite 950, PO Box 37347, Washington, DC 20077-0001, no subsequent amendments or editions) and Transmittal Summary (Fannie Mae Form 1077 (3/97), available from Fannie Mae, 3900 Wisconsin Avenue, NW, Washington, DC 20016-2892 and Freddie Mac Form 1008 (3/97), available from Freddie Mac at 1101 Pennsylvania Avenue, NW, Suite 950, PO Box 37347, Washington, DC 20077-0001, no subsequent amendments or editions).
b) Income is verified by means of tax returns, pay stubs, accounting statements or other prudent means.
c) A credit report is obtained regarding the borrower.
Prohibition of deceptive practices. Section 345.40 provides that "No lender shall employ fraudulent or deceptive acts or practices in the making of a high risk home loan, including deceptive marketing and sales efforts."
Prepayment penalties. Section 345.45 limits prepayment penalties as follows:
No lender shall make a high risk home loan that includes a penalty provision for payment made:
a) after the expiration of the 36 month period following the date the loan was made; or
b) that is more than:
1) 3% of the total loan amount, if the prepayment is made within the first 12 month period following the date the loan was made; or
2) 2% of the total loan amount, if the prepayment is made within the second 12 month period after the date the loan was made; or
3) 1% of the total loan amount, if the prepayment is made within the third 12 month period following the date the loan was made.
Single premium insurance. Section 345.45 prohibits financing of single premium insurance:
No lender shall make a high risk home loan that finances a single premium credit life, credit disability, credit unemployment, or any other life or health insurance, directly or indirectly. Insurance calculated and paid on a monthly basis shall not be considered to be financed by the lender.
Flipping. Section 345.60 limits refinancing:
No lender shall refinance any high risk home loan, where such refinancing charges additional points and fees, within a 12 month period after the original loan agreement was signed, unless the refinancing results in a financial benefit to the borrower.
Balloon payments. Section 345.65 limits balloon payments:
No lender shall make a high risk home loan that contains a scheduled final payment that is more than twice as large as the average of earlier scheduled monthly payments unless such balloon payment becomes due and payable at least 15 years after the loan's origination. This prohibition does not apply when the payment schedule is adjusted to account for the seasonal or irregular income of the borrower or if the purpose of the loan is a "bridge" loan connected with the acquisition or construction of a dwelling intended to become the borrower's principal dwelling.
Financing of points and fees. Section 345.65 limits financing of points and fees:
No lender shall make a high risk home loan that finances points and fees in excess of 6% of the total loan amount.
Disbursements to home improvement contractors. Section 345.80 limits payments to home improvement contractors:
No lender shall make a payment of any proceeds of a high risk home loan to a contractor under a home improvement contract other than:
a) by instrument payable to the borrower or jointly to the borrower and the contractor; or
b) at the election of the borrower, by a third party escrow agent in accordance with the terms established in a written agreement signed by the borrower, the lender, and the contractor before the date of payment.
Negative amortization. Section 345.90 prohibits negative amortization:
No lender shall make a high risk home loan, other than a loan secured only by a reverse mortgage, with terms under which the outstanding balance will increase at any time over the course of the loan because the regular periodic payments do not cover the full amount of the interest due, unless the negative amortization is the consequence of a temporary forbearance sought by the borrower.
High LTV loans. Section 345.100 prohibits loans in excess of 100% LTV:
No lender shall make a high risk home loan where the loan amount exceeds the value of the property securing the loan plus reasonable closing costs not to exceed 5% of the total loan amount.
Foreclosure counseling. Section 345.110 requires counseling prior to foreclosure proceedings:
a) In the event that a high risk home loan becomes delinquent by more than 30 days, the servicer shall send a notice advising the borrower that he or she may wish to seek consumer credit counseling.
b) The notice required in subsection (a) shall, at a minimum, include the following language:
"YOUR LOAN IS OR WAS MORE THAN 30 DAYS PAST DUE. YOU MAY BE EXPERIENCING FINANCIAL DIFFICULTY. IT MAY BE IN YOUR BEST INTEREST TO SEEK APPROVED CONSUMER CREDIT COUNSELING. A LIST OF APPROVED CREDIT COUNSELORS MAY BE OBTAINED FROM THE ILLINOIS OFFICE OF BANKS AND REAL ESTATE."
c) If, within 15 days after mailing the notice provided for under subsection (b), a lender or its agent is notified in writing by an approved consumer credit counselor and the approved consumer credit counselor advises the lender or its agent that the borrower is seeking approved consumer credit counseling, then the lender and its agent shall not institute legal action under Part 15 of Article XV of the Code of Civil Procedure for 30 days from the date of that notice. Only one such 30-day period of forbearance is allowed under this Section per subject loan.
d) If, within the 30-day period provided under subsection (c), the lender or its agent, the approved consumer credit counselor, and the borrower agree to a debt management plan, then the lender and its agent shall not institute legal action under Part 15 of Article XV of the Code of Civil Procedure for so long as the debt management plan is complied with by the borrower.
1) The agreed debt management plan must be in writing and signed by the lender or its agent, the approved consumer credit counselor, and the borrower. No modification of an approved debt management plan can be made without the mutual agreement of the lender or its agent, the approved consumer credit counselor, and the borrower.
2) Upon written notice to the lender or its agent, the borrower may change approved consumer credit counselors.
e) If the borrower fails to comply with the agreed debt management plan, then nothing in this Subpart shall be construed to impair the legal right of the lender or its agent to enforce contracts or mortgage agreements.
f) This Section applies only to high risk home loans as defined by Section 345.10.
County and City ordinances.
There are Cook County and City of Chicago ordinances which define predatory lending and provide that the County and City will not deposit money into institutions engaged in predatory lending practices. The Cook County ordinance may be found at and the City of Chicago ordinance is § 2-32-455 of the Municipal Code. Neither ordinance has a private right of action.
Illinois Interest Act, 815 ILCS 205/0.01 et seq.
Illinois no longer imposes any rate limitation on mortgage loans. Section 4, 815 ILCS 205/4. However, the Interest Act does contain several provisions regulating terms of mortgage loans.
Points are limited to three if the stated interest rate (not the annual percentage rate) exceeds 8% (§4.1, 815 ILCS 205/4.1). Prepayment penalties are prohibited if stated interest rate exceeds 8% (§4, 815 ILCS 205/4). Late charges are limited to 5% of the outstanding payment. (§4.1a, 815 ILCS 205/4.1a) Another provision states that interest may not be charged for any period after the total indebtedness if paid in full. (§4(3), 815 ILCS 205/4(3)). The charging and collecting of contractually unauthorized interest may violate the Interest Act (§5, 815 ILCS 205/5).
The Interest Act also contains provisions authorizing home equity plans, which must exceed $5,000 before a mortgage may be obtained. Interest Act, §§4.2 and 4.3, 815 ILCS 205/4.2 and 4.3. These limit transaction and annual fees and closing costs.
An alternative scheme authorizing home equity plans is provided by the Illinois Financial Services Development Act, 205 ILCS 675/1 et seq. These may be used by any bank, savings and loan association, savings bank or credit union with an Illinois home office or branch, and any Consumer Installment Loan Act or Sales Finance Agency Act licensee. It authorizes more charges and fees than the Interest Act.
There are also provisions dealing with home equity plan terms in the Illinois Banking Act, 205 ILCS 5/5d, the Illinois Credit Union Act, 205 ILCS 305/46, and the Illinois Savings and Loan Act, 205 ILCS 105/1-6b, governing home equity plans issued by the listed types of institutions.
The Interest Act provides stiff penalties for violation, coupled with a good faith defense (§6, 815 ILCS 205/6).
An assignment of a beneficial interest in a land trust may or may not qualify as a mortgage loan within the Interest Act provisions eliminating rate caps on mortgage loans.
There is extensive federal preemption of the above provisions, the exact extent of which is unclear.
The Depositary Institution Deregulation and Monetary Control Act of 1980, 12 U.S.C. §§ 1735f-7a and 1831d ("DIDMCA"), and Office of Thrift Supervision ("OTS") regulations, 12 C.F.R. part 590, issued pursuant to the Home Owners Loan Act of 1933, 12 U.S.C. §1461 et seq., preempt the points cap on purchase money first mortgages. The cases are divided as to whether DIDMCA effects preemption on non purchase money first mortgages and whether the technical reenactment of §4.1a overcomes DIDMCA. Fidelity Financial Services, Inc. v. Hicks, 214 Ill.App.3d 398, 574 N.E.2d 15 (1st Dist. 1991); Reed v. World Wide Financial Services, Inc., 98 C 4294, 1998 WL 852854 (N.D.Ill., Nov. 27, 1998); Stern v. Norwest Mortgage, Inc., 284 Ill.App.3d 506, 672 N.E.2d 296, 301 (1st Dist. 1996); Gora v. Banc One Financial Services, Inc., 95 C 2542, 1995 WL 613131 (N.D.Ill., Oct. 17, 1995). Junior mortgages are not affected.
The Alternative Mortgage Transaction Parity Act, 12 U.S.C. §3801 et seq. ("AMTPA") preempts the Illinois points and prepayment penalty restrictions on all balloon loans and adjustable rate mortgage loans. Implementing regulations of the Office of Thrift Supervision ("OTS"), formerly the Federal Home Loan Bank Board ("FHLBB"), 12 C.F.R. part 560, provide that prepayment penalties may be imposed notwithstanding state law on loans made by institutions supervised by OTS.
The OTS regulations do impose certain conditions, one of which is that in the case of adjustable rate loans requires that the "variable rate program disclosures" be furnished when an application form is furnished or when a nonrefundable fee is paid by the consumer, whichever comes first. Occasionally this is not complied with, particularly when brokers try to "bait and switch" the borrower. See McCarthy v. Option One Mtge. Corp., 01 C 3935, 2001 WL 1826284 (N.D.Ill., Feb. 11, 2001).
The National Bank Act, 12 U.S.C. §§85-6, 371, and Office of the Comptroller of the Currency ("OCC") regulations, 12 C.F.R. parts 7, 34, may also preempt some state regulation in this area. For example, OCC regulations define late fees as "interest" within the meaning of the National Bank Act. 12 C.F.R. §7.4001(a). A national bank may generally "export" rates and charges considered to be "interest" from its home state into any state in which it does business. Smiley v. Citibank (S.D.), N.A., 517 U.S. 735 (1996).
Preemption based on the status of the lender only applies if the originator of the loan qualifies.
Consumer Installment Loan Act, 205 ILCS 670/1, and Department of Financial Institutions Regulations, 38 Ill. Adm. Code Part 110
This statute provides for licensing of consumer lenders making loans up to $25,000, including real estate secured loans. There no longer are any restrictions on the rate of interest that may be charged; 205 ILCS 670/15 states that a licensee "may charge, contract for and receive thereon interest at the rate agreed upon by the licensee and the borrower, subject to the provisions of this Act." Loans may be either interest-bearing or precomputed.
Section 15 authorizes late charges on each installment in default for a period of not less than 10 days in an amount not exceeding 5% of the installment on installments in excess of $200, or $10 on installments of $200 or less, but only one delinquency or collection charge may be collected on any installment regardless of the period during which it remains in default.
Section 15d provides that "No amount in addition to the charges authorized by this Act shall be directly or indirectly charged, contracted for, or received, except (1) lawful fees paid to any public officer or agency to record, file or release security; (2) (i) costs and disbursements actually incurred in connection with a real estate loan, for any title insurance, title examination, abstract of title, survey, or appraisal, or paid to a trustee in connection with a trust deed, and (ii) in connection with a real estate loan those charges authorized by Section 4.1a of the Interest Act [815 ILCS 205/4.1a], whether called "points" or otherwise, which charges are imposed as a condition for making the loan and are not refundable in the event of prepayment of the loan; (3) costs and disbursements, including reasonable attorney's fees, incurred in legal proceedings to collect a loan or to realize on a security after default; (4) an amount not exceeding $25, plus any actual expenses incurred in connection with a check or draft that is not honored because of insufficient or uncollected funds or because no such account exists; and (5) a document preparation fee not to exceed $25 for obtaining and reviewing credit reports and preparation of other documents." Other charges authorized in other sections include interest, late charges, and premiums for credit and property insurance and "insurance in lieu of perfecting a security interest provided that the premiums for such insurance do not exceed the fees that otherwise could be contracted for by the licensee under this Section."
CILA imposes certain disclosure requirements, but provides that "A licensee who complies with the federal Truth in Lending Act, amendments thereto, and any regulations issued or which may be issued thereunder, shall be deemed to be in compliance with the provisions of this Section . . . "
Section 16b prohibits security interests in real estate if the principal amount is $3,000 or less.
Section 18 prohibits "false, misleading or deceptive" advertising and advertising that quotes rates other than as an annual percentage rate.
Sections 20(b) and 20.7 provide a cause of action for a violation of §§1, 12, 15, 15a, 15b, 15d, 15e, 16, 17, 18, or 19.1.
Fiduciary liability of mortgage broker
One who undertakes to find and arrange financing or similar products for another becomes the latter's agent for that purpose, and owes statutory, contractual and fiduciary duties to act in the interest of the principal and make full disclosure of all material facts. "A person who undertakes to manage some affair for another, on the authority and for the account of the latter, is an agent." In re Estate of Morys, 17 Ill.App.3d 6, 9, 307 N.E.2d 669 (1st Dist. 1973).
A mortgage loan broker is an agent procured by the borrower to obtain a loan. Wyatt v Union Mtge. Co., 24 Cal.3d 773, 782, 157 Cal.Rptr. 392, 397, 598 P.2d 45 (1979) (a mortgage broker owes a fiduciary duty of the "highest good faith toward his principal," the prospective borrower, and "is 'charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal's decision'"). Accord: Allabastro v. Cummins, 90 Ill.App.3d 394, 413 N.E.2d 86, 82 (1st Dist. 1980); In re Dukes, 24 B.R. 404, 411-12 (Bankr. E.D.Mich. 1982) ("the fiduciary, Salem Mortgage Company, failed to provide the borrower-principal with any sort of estimate as to the ultimate charges until a matter of minutes before the borrower was to enter into the loan agreement"); Community Fed. Savings v. Reynolds, 1989 U.S. Dist. LEXIS 10115 (N.D.Ill. August 18, 1989); First City Mtge. Co. v. Gillis, 694 S.W.2d 144, 147 (Tex.Civ.App. 1985) (requirement of fiduciary duty forbids conduct on the part of the broker which is fraudulent or adverse to his principal's interest and also imposes duty of full disclosure of facts material to his principal); In re Russell, 72 B.R. 855 (Bankr. E.D.Pa 1987); Langer v. Haber Mortgages, Ltd., New York Law Journal, August 2, 1995, p. 21 (N.Y. Sup.Ct.).
Many predatory practices of mortgage brokers, including particularly the receipt of "yield spread premiums," are arguably violations of fiduciary duty. Other promising candidates include repetitive refinancings of little or no ,benefit to the borrower. Note that if the mortgage lender is on notice of the breach, or induces it through the payment of a yield spread premium, the taint may extend to the lender.<,/p>
EQUITABLE DEFENSES IN MORTGAGE FORECLOSURES
Illinois recognizes equitable defenses such as unclean hands in a mortgage foreclosure, but the equities have to arise out of the transaction that gave rise to the note and mortgage. Northern Trust Co. v. Halas, 257 Ill.App.3d 565, 629 N.E.2d 158 (1st Dist. 1993); State Bank of Geneva v. Sorenson, 167 Ill.App.3d 674, 521 N.E.2d 587 (2d Dist. 1988). Conduct which makes the loan unaffordable, such as payment of yield spread premiums, may constitute a valid defense.
Unless expressly disclaimed, every contract in Illinois includes an implied obligation of good faith and fair dealing. Falk v. Northern Trust Co., 1-00-2958, 2001 WL 1673420 (1st Dist. Dec. 31, 2001). While this covenant does not override express contract provisions, it limits the exercise of discretion by a party to avoid unfair surprise and oppression. Chemical Bank v. Paul, 244 Ill.App.3d 772, 614 N.E.2d 436 (1st Dist. 1993). It may be of particular relevance to lender practices relating to the allocation of payments and escrow deposit requirements.
Outrageous interest rates have been found to be unconscionable by several courts. Brown v. C.I.L., Inc., 1996 U.S. Dist. LEXIS 4053 (N.D.Ill., March 29, 1996), adopting, 1996 U.S.Dist. LEXIS 4917 (N.D.Ill., Jan. 28, 1996)(motion to dismiss); Cobb v. Monarch Fin. Corp., 913 F. Supp. 1164 (N.D.Ill. 1995), later opinion, 1996 U.S. Dist. LEXIS 2814 (N.D.Ill. 1996), later opinion, 1996 U.S. Dist. LEXIS 7776 (N.D.Ill. 1996), later opinion 1997 U.S. Dist. LEXIS 754 (N.D.Ill. 1997); Carboni v. Arrospide, 2 Cal.App.4th 76, 2 Cal.Rptr. 2d 845 (1991), rehearing denied, Jan. 21, 1992 (200%).
LIABILITY OF ASSIGNEES AND HOLDERS
In many cases, the foreclosure defense lawyer will be attempting to assert claims arising from the origination of the loan against a later holder or assignee of the loan.
FTC "Holder rule" (16 C.F.R. part 433)
In 1976, the Federal Trade Commission promulgated a regulation, 16 C.F.R. part 433, intended to address the problem of consumer liability to financial institutions which finance the purchase of defective goods. As explained in the FTC's Staff Guidelines on Trade Regulation Rule Concerning Preservation of Consumers' Claims and Defenses, the purpose of the regulation was to make it impossible "for a seller to arrange credit terms for buyers which separate the consumer's legal duty to pay from the seller's legal duty to keep his promises." Prior to the regulation, this could be accomplished in three ways: (1) "[T]he seller may execute a credit contract with a buyer which contains a promissory note," which was then negotiated to a financing institution. (2) "[T]he seller may incorporate a written provision called a 'waiver of defenses' in the text of an installment sales agreement" and then assign the agreement to a financing institution. (3) "[A] seller may arrange a direct loan for his buyer" from the financing institution. (Id.)
The FTC regulation "is directed at all three of the above situations." Seller-arranged direct loans were expressly included because "[i]n jurisdictions where efforts have been made to curtail the use of promissory notes and waivers of defenses, the Commission documented a significant increase in the use of arranged loans to accomplish the same end." (Id.)
The FTC regulation has two parts. The first part, 16 C.F.R. §433.2(a), applies to situations (1) and (2) -- where the seller and the consumer enter into an obligation which is then assigned or transferred to a financing institution. In that situation, the FTC regulation eliminates holder in due course status for the financing institution by requiring that the contract contain the following statement:
ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED PURSUANT HERETO OR WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.
The second part of the regulation, 16 C.F.R. §433.2(b), applies to situation (3) -- where the seller refers the consumer to a lender which proceeds to enter into a loan agreement with the consumer. Section 433.2(b) is triggered when a "creditor" makes a cash advance to a consumer which the consumer applies, "in whole or substantial part, to a purchase of goods or services from a seller who (1) refers consumers to the creditor or (2) is affiliated with the creditor by common control, contract, or business arrangement." (16 C.F.R. §433.1(d)) It requires that "any consumer credit contract made in connection with such purchase money loan" -- i.e., the contract between the consumer and the lender -- contain the following notice:
ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.
The Seventh and Eleventh Circuits and the Illinois Supreme Court have held that the FTC required notice does not overcome the limitation on assignee liability in the Truth in Lending Act, 15 U.S.C. §1641. Walker v. Wallace Auto Sales, 155 F.3d 927 (7th Cir. 1998); Ellis v. GMAC, 160 F.3d 703 (11th Cir. 1998); Jackson v. South Holland Dodge, Inc., 197 Ill.2d 39, 755 N.E.2d 462 (2001). The Illinois Supreme Court has held that it only applies if the consumer could claim rescission or revocation of acceptance. Jackson, supra.
TRUTH IN LENDING ACT
Any consumer who has the right to rescind a mortgage loan under the Truth in Lending Act can rescind against any transferee of the loan. 15 U.S.C. §1641(c) provides:
Right of rescission by consumer unaffected
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.
The transferee of a HOEPA loan has limited damage liability as well. 15 U.S.C. §1641(d) provides:
(d) Rights upon assignment of certain mortgages
(1) In General
Any person who purchases or is otherwise assigned a mortgage referred to in section 1602(aa) of this title shall be subject to all claims and defenses with respect to that mortgage that the consumer could assert against the creditor of the mortgage, unless the purchaser or assignee demonstrates, by a preponderance of the evidence, that a reasonable person exercising ordinary due diligence, could not determine, based on the documentation required by this title, the itemization of the amount financed, and other disclosure of disbursements that the mortgage was a mortgage referred to in section 1602(aa) of this title. The preceding sentence does not affect rights of a consumer under subsection (a), (b), or (c) of this section or any other provision of this subchapter.
(2) Limitation on damages
Notwithstanding any other provision of law, relief provided as a result of any action made permissible by paragraph (1) may not exceed--
(A) with respect to actions based upon a violation of this subchapter, the amount specified in section 1640 of this title; and
(B) with respect to all other causes of action, the sum of--
(i) the amount of all remaining indebtedness; and
(ii) the total amount paid by the consumer in connection with the transaction.
The amount of damages that may be awarded under paragraph (2)(B) shall be reduced by the amount of any damages awarded under paragraph (2)(A).
Any person who sells or otherwise assigns a mortgage referred to in section 1602(aa) of this title shall include a prominent notice of the potential liability under this subsection as determined by the Board.
Truth in Lending damage liability of an assignee of a non-HOEPA mortgage loan is dependent on whether the violation is apparent on the face of the documents transferred. 15 U.S.C. §1641(e) provides:
(e) Liability of assignee for consumer credit transactions secured by real property--
(1) In general
Except as otherwise specifically provided in this subchapter, any civil action against a creditor for a violation of this subchapter, and any proceeding under section 1607 of this title against a creditor, with respect to a consumer credit transaction secured by real property may be maintained against any assignee of such creditor only if--
(A) the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement provided in connection with such transaction pursuant to this subchapter; and
(B) the assignment to the assignee was voluntary.
(2) Violation apparent on the fact of the disclosure described
For the purpose of this section, a violation is apparent on the face of the disclosure statement if--
(A) the disclosure can be determined to be incomplete or inaccurate by a comparison among the disclosure statement, any itemization of the amount financed, the note, or any other disclosure of disbursement; or
(B) the disclosure statement does not use the terms or format required to be used by this subchapter.
However, there is some tendency to construe §1641(d) narrowly. Dowdy v. First Metropolitan Mtge. Co., 01 C 7211, 2002 WL 745851 (N.D.Ill., Jan. 29, 2002).
Common law liability
Mortgage companies often claim to be holders in due course. They rarely are. The first problem is that mortgage loan documents are generally not transferred by endorsement on the note. This is essential to make one a "holder." Adams v. Madison Realty & Development, Inc., 853 F.2d 163 (3d Cir. 1988) ("holder" is one who receives by endorsement on the note / mortgage or "allonge" physically affixed thereto; usual practice of executing assignment does not make recipient a "holder"). If any transferee did not take by endorsement, it and later owners are not "holders." Lopez v. Puzina, 239 Cal.App.2d 708, 49 Cal.Rptr. 122 (1966).
Under Illinois law, an assignee of a note and mortgage who is not a holder in due course, takes it subject to whatever infirmities it has in the hands of the original obligee. "The rule is that the assignee of a contract takes it subject to the defenses which existed against the assignor at the time of the assignment." Allis-Chalmers Credit Corp. v. McCormick, 30 Ill.App.3d 423, 424, 331 N.E.2d 832 (4th Dist. 1975); accord, Montgomery Ward & Co. v. Wetzel, 98 Ill.App.3d 243, 423 N.E.2d 1170, 1175 (1st Dist. 1981) ("the assignee thus takes the assignor's interest subject to all legal and equitable defenses existing at the time of assignment"); Inland Real Estate Corp. v. Oak Park Trust & Savings Bank, 127 Ill.App.3d 535, 469 N.E.2d 204, 209 (1st Dist. 1983) ("It is a well established general rule that the assignee of a trust deed in the nature of a mortgage takes it subject to the same defenses that existed between the original parties to the instrument"); UCC§3-306, 810 ILCS 5/3-306 ("Unless he has the rights of a holder in due course any person takes the instrument subject to . . . all defenses of any party which would be available in an action on a simple contract"); Hirsh v. Arnold, 318 Ill. 28, 148 N.E. 882, 888 (1925) (usury case: "a purchaser of a mortgage or trust deed takes it subject to all the infirmities to which it is liable in the hands of the mortgagee, and in equity the mortgagor is entitled to every defense against the assignee which he would have made against the original mortgagee"); Chicago City Bank & Trust Co. v. Garvey, 89 C 8094, 1990 WL 125505, 1990 U.S.Dist. LEXIS 10903 (N.D.Ill., Aug. 21, 1990) ("The assignee of a mortgage takes it subject to the same equities it was subject to in the hands of the assignor . . . ."), aff’g, In re Radford, 1988 Bankr. LEXIS 1898 (Bank. N.D.Ill. Oct. 27, 1988); Cobe v. Guyer, 237 Ill. 568, 86 N.E. 1088, 1090 (1909) (usury was defense in suit by receiver of original creditor; "[s]o long as any part of the original debt remains unpaid, the debtor may insist upon the deduction of the usury"); House v. Davis, 60 Ill. 367, 370 (1871) ("if the assignee had notice of the usury, the defense could be made as to him," and "so long as any part of the debt remains unpaid, the debtor may insist upon a deduction of the usury from the part remaining unpaid," and may bring an affirmative action to restrain collection of amounts beyond that); Central Life Ins. Co. v. Sawiak, 262 Ill.App. 569, 577 (1st Dist. 1931) (defense of usury sustained against assignee).
The mortgagor has the right to bring an affirmative claim, at least to the extent of a right to have title quieted and the mortgage removed. Chicago City Bank & Trust Co. v. Garvey, supra.
¹Copyright Daniel A. Edelman 2002.
²Daniel A. Edelman is a principal of Edelman, Combs, Latturner & Goodwin, LLC. He is a 1976 graduate of the University of Chicago Law School. From 1976 to 1981 he was an associate at the Chicago office of Kirkland & Ellis with heavy involvement in the defense of consumer class action litigation (such as the General Motors Engine Interchange cases). In 1981 he became an associate at Reuben & Proctor, a medium-sized firm formed by some former Kirkland & Ellis lawyers, and was made a partner there in 1982. From the end of 1985 he has been in private practice in downtown Chicago. Virtually all of his practice involves litigation on behalf of consumers. He is the author or coauthor of numerous publications on class actions and consumer protection law, including Predatory Lending Litigation in Illinois (2001); Consumer Class Action Manual (2d-4th editions), National Consumer Law Center 1990-1999; Payday Loans: Big Interest Rates and Little Regulation, 11 Loy.Consumer L.Rptr. 14 (1999); Fair Debt Collection Practices Act Update -- 1999, Chicago Bar Ass’n 1999; An Overview of The Fair Debt Collection Practices Act, in Financial Services Litigation, Practicing Law Institute (1999); Consumer Fraud and Insurance Claims, in Bad Faith and Extracontractual Damage Claims in Insurance Litigation, Chicago Bar Ass'n 1992; Chapter 8, "Fair Debt Collection Practices Act," Ohio Consumer Law (1995 ed.); Fair Debt Collection: The Need for Private Enforcement, 7 Loy.Consumer L.Rptr. 89 (1995); The Fair Debt Collection Practices Act: Recent Developments, 8 Loy.Consumer L. Rptr. 303 (1996); Residential Mortgage Litigation, in Financial Services Litigation, Practicing Law Institute (1996); Automobile Leasing: Problems and Solutions, 7 Loy.Consumer L.Rptr. 14 (1994); Current Trends in Residential Mortgage Litigation, 12 Rev. of Banking & Financial Services 71 (1996); Applicability of Illinois Consumer Fraud Act in Favor of Out-of-State Consumers, 8 Loy.Consumer L.Rptr. 27 (1996); Illinois Consumer Law (Chicago Bar Ass'n 1996).
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