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The Lender Engaged in Unfair Lending Practices

You may be able to fight your foreclosure by proving one or more violations of federal or state laws designed to protect you against illegal lending practices.

Two federal laws protect against unfair lending practices associated with residential mortgages and loans: the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA). Both allow you to sue for money damages, including a refund of any financing costs you paid. Both of them also let you cancel your mortgage under some circumstances. Cancelling the mortgage would usually work to defeat the foreclosure, if you could arrange for a refinance to return the remaining loan principal to the lender.

As powerful as these statutes may sound, most lenders are aware of them and either comply with their requirements or structure their loans so that they don’t apply. Still, your case may be the exception.

The Right to Rescind the Loan

For the purpose of fighting a foreclosure, the most important provision of these laws is that you may, for some types of loans and some types of violations, be able to retroactively cancel or rescind your loan. This is referred to as the right to an extended rescission.

Both laws require a lender to give you a three-day rescission period when you take out the loan. But your right to rescind is extended for three years if it later comes to light that the lender violated an important part of the law. Even better, the three-year period is itself extended in the event of a foreclosure. So, if one or both of these laws cover the mortgage being foreclosed on, and you can show a material violation of these laws, you can cancel the loan and by doing that defeat the foreclosure. But those are a couple of big “ifs.” Let’s take them one at a time.

What Loans Are Covered

The right to extended rescission applies only if you did not use the mortgage loan to buy or build your primary residence. So a first mortgage, which you used to buy your house, is not covered. But a home equity loan, equity line of credit, or refinancing loan would be covered. (The law is aimed at predatory lenders who use loans to skim the equity from borrowers’ homes, particular older, minority and low-income homeowners.)

But lenders of second or third mortgages rarely foreclose—so the right to rescind is unlikely to help you with foreclosure. It might, however, help you if you refinanced your first mortgage and the holder of the new mortgage is foreclosing.

HOEPA applies only to (1) loans that are closed-end consumer credit—that is, loans that are repayable under specific repayment terms over a specified term, and (2) loans that fall into at least one of the following two categories:

• The loan is a high-cost mortgage that has an annual percentage rate (APR) that is at least 10% above the rate for U.S. Treasury securities of a comparable term. For example, if the yield on a 15-year Treasury bond is 6%, an APR of 16% on a 15-year loan will qualify. For first-mortgage loans made after October 1, 2002, the loan’s APR must be at least 8% above the Treasury rate. The APR trigger for junior liens remains at 10%.
• The loan has up-front fees and charges (including broker fees and, as of October 1, 2002, premiums and other charges for credit insurance) that are at least 8% of the loan amount or $400 (an amount that changes annually with the Consumer Price Index), whichever is greater.

What Is a Material Violation of TILA and HOEPA

To be able to rescind your loan, you must also show that the lender materially violated the law—in plain English, that it violated a significant provision of the law.

Material violations of TILA. Lenders violate this law when they don’t make the disclosures it requires, including the annual percentage rate, the finance charge, the amount financed, the total payments, the payment schedule, and more. Typically, these terms are found in a document called Truth in Lending Disclosure Statement. The numbers on this disclosure statement must be accurate to within very narrow tolerances. Depending on the type of loan, the disclosed annual percentage rate (APR) must be within one-eighth of one percentage point of the actual APR. The total finance charge cannot be understated by more than $100 in most cases and by not more than $35 if the creditor has started foreclosure proceedings.

Material violations of HOEPA. The violations must be something that deprived you of the benefits of HOEPA. A lender that makes a HOEPA loan must comply with various notice provisions. The lender is also prohibited from including certain mortgage terms, such as balloon payments in loans with terms of less than five years and negative amortization requiring more than two payments to be paid in advance from the loan proceeds.

Who Can Be Held Responsible for TILA and HOEPA Violations

TILA and HOEPA apply not only to the original lender or mortgage originator, but also to any person or entity who became an owner through an assignment. In other words, downstream mortgage holders are held accountable for the sins of the original lenders. Downstream mortgage holders can escape liability only if they can demonstrate that a reasonable person exercising ordinary due diligence could not have determined that the loan was covered by HOEPA.

How to Rescind a Loan

To rescind a loan, you must give the lender (not the mortgage servicer) a written notice of rescission. If the rescission is successful, the lender must return everything you paid except for payments of loan principal, and you must return the portion of the loan principal that has not yet been repaid. In other words, when you rescind a loan, you can get out from under the loan (and the foreclosure), but you can’t keep the loan proceeds. You’ll need to refinance to repay the principal.

More information on TILA and HOEPA. Any attorney you hire to fight your foreclosure should be intimately familiar with TILA and HOEPA and know how those laws may help you in fighting your foreclosure. If you are representing yourself, I recommend that you buy a copy of Foreclosures, by John Rao, Odette Williamson, and Tara Twomey, published by the National Consumer Law Center (www.nclc.org).