Refinance

JUDGE RESCINDS 5-YEAR OLD LOAN AND AMORTIZES TENDER OVER 30 YEARS

Posted on May 23, 2010. Filed under: bankruptcy, Case Law, FHA, Foreclosure Defense, Fraud, Loan Modification, Mortgage Fraud, Mortgage Law, Predatory Lending, Refinance, right to rescind, Truth in Lending Act |

This is proof positive that the outcome of your case depends entirely on the judge’s disposition and sensibilities. When there is clear and convincing evidence of predatory lending and fraud, the court can use its equitable powers to remediate the inequities.

In Re McGee v. Gregory Funding LLC, Dist. Court, D. Oregon 2010, on September 22, 2005 Plaintiff refinanced his home for $174,900 at 7.54% with a one year balloon payment of $175,999.66. Defendant received $9,800 as a loan origination fee and Plaintiff signed an option to extend the loan for an additional fee of $6980. TILA and HOEPA disclosures were not provided at settlement and the balloon rider was never signed by Plaintiff.

The following year Plaintiff tried obtaining a conventional loan but since Defendant did not report the payment history on Plaintiffs loan, he could not qualify for a refinance with any other lender. As such Plaintiff had to extend his loan with Defendant for another year and in the process ended up paying Defendant additional $9500 in fees. Again no material disclosures were provided.

On December 19, 2007 Plaintiff entered in to a third transaction with Defendant by signing an amendment for $216,216 at 7.54% that included advances for property taxes, legal fees and a modification fee totaling $14,320.68. Again Defendant failed to provide disclosures.

Plaintiff filed for bankruptcy protection in the District of Oregon on September 22, 2008, which was confirmed on April 16, 2009. The Bankruptcy Court ordered relief from the automatic stay on September 2, 2009.

Plaintiff filed a motion for temporary restraining order/preliminary injunction (“TRO/PI”). The court granted plaintiff’s motion for a TRO on November 10, 2010, prohibiting defendants from executing its proposed sale of plaintiff’s property on the Multnomah County Courthouse steps scheduled November 10, 2010 at 10:00 a.m.

Judge Ann Aiken found it troubling that Plaintiff was charged a total of $36, 418.81 in loan origination fees for three transactions over a four-year period, stating that considering the FHA recently announced a limitation of loan origination fees charged to borrowers as no more than 1% of the loan amount, Plaintiff’s loan fees of 5% and 7%, even considering the increased risk associated with a sub-prime loan, runs counter to 12 C.F.R. section 226.23(f)’s comment that fees must be bona fide and reasonable.

The court stated that HOEPA rescission does not have a statute of limitations subject to tolling, but a statute of repose that creates a substantive right not subject to tolling. Notwithstanding the foregoing the judge held that pursuant to King v. State of California, 784 F.2d 910.915 (9th Cir. 1986, cert denied, 486 U.S. 802 (1987), there was authority to allow Plaintiff to rescind the first transaction under the doctrine of equitable tolling. “Pursuant to the Ninth Circuit’s ruling in King, supra, it is permissible for district courts to evaluate specific claims of fraudulent concealment and equitable tolling to determine if the general rule would be unjust or frustrate the purpose of the Act”. The court found those circumstances existed here and therefore warranted tolling.

Finally to overcome Plaintiffs inability to obtain new financing for tender purposes, the court ordered Defendant to file an amended proof of claim with the bankruptcy court using the tender amount as the secured debt payable at 7.547% interest over 30 years.

In re: James P. McGee, Plaintiff,

v.

GREGORY FUNDING, LLC, an Oregon limited liability company, and RANDAL SUTHERLIN, Defendants.

Civil No. 09-1258-AA.

United States District Court, D. Oregon.

February 20, 2010.

Tami F. Bishop, M. Caroline Cantrell, M. Caroline Cantrell & Assoc. PC, Portland, Oregon, Attorneys for Debtor/Plaintiff.

Kathryn P. Salyer, Farleigh Wada Witt, Portland, Oregon, Attorney for Defendants.

OPINION AND ORDER

ANN AIKEN, District Judge.

Plaintiff filed a motion for temporary restraining order/preliminary injunction (“TRO/PI”). The court granted plaintiff’s motion for a TRO on November 10, 2010, prohibiting defendants from executing its proposed sale of plaintiff’s property on the Multnomah County Courthouse steps scheduled November 10, 2010 at 10:00 a.m. On November 23, 2010, the date scheduled to hear plaintiff’s motion for a preliminary injunction, the parties elected to forego oral argument and submit the matter to the court on the briefs. Plaintiff’s motion for a preliminary injunction is granted.

BACKGROUND

Plaintiff brings this action for injunctive relief, actual damages, statutory damages, attorney fees and costs against defendants for violation of the Truth in Lending Act, 15 U.S.C. sections 1601 et seq. and 1640(a) (“TILA”), among others.

Plaintiff, an African-American male, alleges this is a “residential predatory lending case” arising from a “fraudulent” home mortgage refinance transaction originated by defendant Gregory Funding, LLC with defendant Randal Sutherlin as the loan interviewer. Defendants originated a series of three loan transactions with plaintiff signed on September 12, 2005, September 26, 2006, and December 19, 2007. Plaintiff alleges those loans “stripped plaintiff of his home equity and put him at risk of losing his home.” Plaintiff alleges that he failed to receive accurate, material disclosures required by TILA and the Home Ownership and Equity Protection Act of 1994 (“HOEPA”) at the closing of both his second and third loans. As a result, plaintiff exercised his right to rescind the 2006 and 2007 loans under TILA, and filed the action at bar to enforce those rights.

Plaintiff filed for bankruptcy protection in the District of Oregon on September 22, 2008, which was confirmed on April 16, 2008. The Bankruptcy Court ordered relief from the automatic stay on September 2, 2009.

In September 2005, plaintiff contacted defendant Gregory Funding, LLC (“Gregory”) to request information regarding refinancing his home. At that time there was a pending foreclosure sale on plaintiff’s home. Plaintiff had recently started a new job. Defendant Sutherlin visited plaintiff’s home to discuss refinancing and spent about fifteen minutes with plaintiff. Later that day, Sutherlin phoned plaintiff to inform him that the loan was approved and the closing would take place within a couple of weeks. Plaintiff was not asked to provide tax returns, pay stubs, or complete a credit application at any point during the refinance. There is no record of a real estate appraisal completed at any point to determine the value of plaintiff’s home. On September 12, 2005, plaintiff signed the closing documents and refinanced his home for $174,900 at 7.54% interest with a one-year balloon payment of $175,999.66. A fixed rate balloon note was signed setting forth 12 principal and interest payments of $1,100 with the first payment due November 1, 2005, and a late payment fee of $55. Defendant Gregory received $9,800 as a loan origination fee from the transaction. Plaintiff signed an option to extend the loan for a fee of $6,980. The loan maturity date was October 1, 2006.

The material disclosures required by HOEPA for a high cost loan were not provided to plaintiff prior to or at the closing. Plaintiff did not sign and receive his two copies of his right to cancel under TILA and the balloon rider to the deed of trust was unsigned at closing.

In August 2006, plaintiff began shopping for a conventional loan; however, due to defendant Gregory not reporting the payment history on plaintiff’s loan, he was unable to qualify for a refinance with another lender. Plaintiff therefore entered into a second loan transaction with defendants on September 21, 2006. Plaintiff signed a document titled First Amendment to Promissory Note at defendants’ office on September 21, 2006. The transaction was for $184,400 at 7.54% interest with a one-year balloon payment of $185,559.72. The first amendment set forth 12 principal and interest payments of $1,159.72 and a late payment fee of $57.99 with the first payment due November 1, 2006. Defendant Gregory received $9,500 as a loan fee from the transaction. The loan maturity date was October 1, 2007. Again, the material disclosures required by HOEPA for a high cost loan were not provided to plaintiff prior to or at the closing including the HUD H-8 form (explaining a limited right to cancel for same lender refinancing).

Plaintiff made the November and December 2006 and January 2007, payments and did not make another payment until November 2007. He made a payment of $2,500 on November 15, 2007, and another payment of $3,500 on November 29, 2007. On December 1, 2007, plaintiff was an estimated $6,177.26 in arrears. In early December 2007, plaintiff discussed his refinancing options with defendant Sutherlin. On December 19, 2007, plaintiff believed he was entering into a 30-year principle and interest conventional mortgage when he entered into the third loan transaction with defendants.

Plaintiff alleges that Sutherlin failed to inform him that the loan was an interest only loan with a balloon payment due in 30 years of an amount higher than the original loan amount. Plaintiff was not asked to provide proof of his income or ability to repay the loan prior to signing the second amendment. This transaction was for $216,216 at 7.54% interest with a loan maturity date of December 31, 2007 under the second amendment to the note. According to the second amendment, Gregory advanced an additional $21,406.46 to borrower as 1) property insurance ($450); 2) property taxes (46,223.23); 3) lender attorney fees ($360); 4) one-day interest ($52.55); and 5) extension and modification fee ($14,320.68). The first amendment was $14,400 plus $21,406.46 in lender advances under the second amendment for a total of $205,806.46. The second amendment is for an explained difference of $10,409.54. Plaintiff was not provided a good faith estimate prior to closing or a HUD statement at closing detailing the loan fees and costs paid to defendant. The additional loan fee under the second amendment was $16,216. Gregory advanced all but $1,895.32 of the fee. Plaintiff paid the balance at closing of the second transaction.

Again, defendants failed to provide any material disclosures required by HOEPA for a high cost loan including the HUD H-8 form. The limited right to cancel provided on the H-8 form for same lender refinancing was not provided to plaintiff when he signed the first amendment to the promissory note. Plaintiff did not make any payments under the second amendment to the note. Defendant charged plaintiff $30,906.46 in fees for the 2006 and 2008 loans and an additional $9,840 for the original loan in 2005, for a total of $40,746.46 in fees for the three transactions. Plaintiff alleges these fees are excessive and unreasonable. Further, plaintiff alleges that defendants’ actions in refinancing plaintiff’s loan three times within a two year period without regard to the best interest of plaintiff establishes an egregious pattern or practice of making loans in violation of 12 C.F.R. section 226.32.

Gregory set a foreclosure sale date for September 23, 2008, in the interior foyer of the Multnomah County Courthouse. Plaintiff filed for bankruptcy protection under Chapter 13 on September 22, 2008.

The sale of plaintiff’s home was held on October 27, 2009, with defendant as the sole bidder. Defendant now moves to execute its proposed sale of plaintiff’s home.

STANDARDS

The party seeking a preliminary injunction must demonstrate that he is (1) likely to succeed on the merits; (2) likely to suffer irreparable harm in the absence of preliminary relief; (3) the balance of equities tips in his favor; and (4) an injunction is in the public interest. Winter v. Natural Res. Def. Council, Inc., 129 S. Ct. 365, 374 (2008).

“Under either formulation, the moving party must demonstrate a significant threat of irreparable injury. . . .” Id. “A plaintiff must do more than merely allege imminent harm sufficient to establish standing; a plaintiff must demonstrate immediate threatened injury as a prerequisite to preliminary injunctive relief.” Caribbean Marine Services Co. v. Baldridge, 844 F.2d 668, 674 (9th Cir. 1988) (emphasis in original). “Speculative injury does not constitute irreparable injury.” Goldie’s Book Store v. Super. Ct. of State of Cal., 739 F.2d 466, 472 (9th Cir. 1984). If the party seeking the injunction cannot demonstrate irreparable injury, then the district court need not address the merits and may deny the motion for an injunction. Oakland Tribune, Inc. v. Chronicle Pub. Co., 762 F.2d 1374, 1376 (9th Cir. 1985).

DISCUSSION

Defendants assert that plaintiff is not entitled to enjoin the foreclosure sale because (1) the issue is moot because the foreclosure sale was completed by delivery and recording of a Trustee’s Deed, prior to this court’s entry of the TRO on November 10, 2009; and (2) plaintiff’s preliminary injunction claim fails on the merits because plaintiff’s rescission claim is time barred.

Moot, Not Likely to Succeed on Merits and No Irreparable Harm

Defendants argue plaintiff’s claim for injunction is moot. The property at issue was sold at a foreclosure sale on October 27, 2009, and a Trustee’s Deed was recorded on November 6, 2009. This court entered a TRO on November 10, 2009. Justiciability requires the existence of an actual case or controversy. Plaintiff must meet the “case or controversy” requirements at all stages of the litigation and “not merely at the time” the lawsuit is instituted. Roe v. Wade, 410 U.S. 113, 125 (1973). A case becomes moot “if, at some time after the institution of the action, the parties no longer have a legally cognizable stake in the outcome.” Goodwin v. C.N.J., Inc., 436 F.3d 44, 49 (1st Cir. 2006).

Defendants also argue that plaintiff is not likely to succeed on the merits. Plaintiff agrees that the only claim supporting his motion for injunction is the rescission claim under TILA. Pursuant to 15 U.S.C. section 1635(f), “an obligor’s right of rescission . . . expires three years after the date of consummation of the transaction, . . . notwithstanding the fact that the information and forms required under this section or any other disclosures required under this chapter have not been delivered to the obligor.” Section 1635(f) represents an absolute limitation on rescission actions which bars any claim filed more than three years after consummation of the transaction. Miguel v. Country Funding Corp., 309 F.3d 1161 (9th Cir. 2002). This remains true regardless of a foreclosure. 15 U.S.C. section 1635(I); Beach v. Ocwen Federal Bank, 523 U.S. 410, 417-18 (1998).

The loan to plaintiff occurred on September 12, 2005. Defendants argue that any right to rescind that loan, including the trust deed given to secure it, timed out as of September 11, 2008.

Finally, defendants argue that there is no irreparable harm to plaintiff. Defendants assert that plaintiff will not suffer irreparable harm and instead will suffer only monetary injury. Monetary injury is not normally considered irreparable. LA Mem’l Coliseum Comm’n v. NFL, 634 F.2d 1197, 1202 (9th Cir. 1980). Defendants assert that the foreclosure is complete, therefore, the only possible remedy remaining is monetary damages.

I disagree and grant plaintiff’s motion for preliminary injunction. There is no dispute that the right of rescission on subsequent transactions applies only to the extent that the lender advances new funds to the obligor. 12 C.F.R. 226.23(f)(2). That section provides as follows:

(f) Exempt Transactions. The right to rescind does not apply to the following:

(2) A refinancing or consolidation by the same creditor of an extension of credit already secured by the consumer’s principal dwelling. The right of rescission shall apply, however, to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing or consolidation.

Therefore, for purposes of rescission, a new advance does not include amounts solely attributed to the cost of refinancing, including finance charges on the new transaction such as an extension fee.

Defendants argue that the only additional “credit” advanced in the first extension was for the extension fee, which is a finance charge and not part of the “amount financed” for purposes of Regulation Z.

Similarly, defendants argue that the Second Amendment also did not include any advances which gave rise to the right of rescission. In the second extension, $6,673.23 was advanced to pay insurance premiums and property taxes both due. Defendants assert that these amounts are considered advances to protect the collateral, and could have been made by defendants under the existing trust deed without further action by plaintiff. Therefore, defendants assert, these amounts would also be considered part of the “costs” of refinancing. Further, the second extension included advances for $360 in attorney’s fees, $52.55 in prepaid interest, and $14,320.68 toward the extension fee. Defendants assert that all of these amounts are finance charges for the purposes of Regulation Z, and therefore, excluded from the amount financed in determining whether “new funds” have been advanced for rescission purposes.

Section 1635(e)(2), however, provides an express exemption for a “refinancing or consolidation (with no new advances) of the principal balance then due and any accrued and unpaid finance charges of an existing extension of credit by the same creditor secured by an interest in the same property.” 12 C.F.R. section 226.23(f). The regulation states that the right to rescind applies “to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amount attributed solely to the costs of refinancing or consolidation.” Here, plaintiff’s refinancing of his original loan (second transaction) with defendant was exempt from rescission, except “to the extent the new amount financed exceeded the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of refinancing or consolidation.” The second transaction signed on September 21, 2006, was for $184,400 and included $9,500 as an additional amount paid to defendants. The amount financed, $184,400, exceeded the balance of the first loan ($174,900); therefore, plaintiff had a right to rescind the second transaction (the First Amendment to the Promissory Note). Similarly, the third transaction also falls under the exemption as it was for the amount of $216,216 with finance charges of $17,078.81. The amount financed, $216,216 exceeded the balance of the second transaction ($184,400), and therefore plaintiff had a right to rescind the third transaction.

While true that section 1635(e)(2) limits a rescission of a refinance with no new advances, the Board’s regulation clearly states that new amounts financed that exceed the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of refinancing or consolidation are rescindable under the TILA. The Board’s construction of section 1635(d)(2) is entitled to deference. See Household Credit Services, Inc. v. Pfennig, 541 U.S. 232 (2004) (recognizing the Board and its staff are designed by Congress as the primary source of interpretation of truth-in-lending law). Therefore, pursuant to section 12 C.F.R. 226.23(f)(2), the refinancing exemption applies to the additional amounts financed and renders both the second and third transactions subject to rescission under 15 U.S.C. section 1635.

Moreover, Official Staff Comment 4 to 12 C.F.R. section 226.23(f), holds that for purposes of the right of rescission, generally “a new advance does not include amounts attributed solely to the costs of refinancing[,]” however, those fees allocated to the borrower must be “bona fide and reasonable in nature.” Plaintiff paid lender fees in the amount of 5.63% of the loan amount in his first transaction with defendants. In his second transaction, he paid 5.15% of the loan amount in lender fees; and finally, in his third transaction, plaintiff paid 7.9% of the loan amount in lender fees. Plaintiff was charged a total of $36,418.81 in loan origination fees for three transactions. In a little over four years, from September 12, 2005, to October 27, 2009, plaintiff’s debt to defendants increased from $174,900 to $253,945.92, or $79,045.92. Given that the Federal Housing Administration (“FHA”) recently announced a limitation on loan origination fees charged to a borrower as no more than 1% of the loan, plaintiff’s loan fees of 5% and 7%, even considering the increased risk associated with a sub-prime loan, seems “unreasonable,” and runs counter to section 226.23(f)’s comment that borrower fees must be “bona fide and reasonable.”

Finally, due to the lack of disclosures including a Good Faith Estimate of costs, it is difficult to discern whether the fees paid by plaintiff were bona fide and reasonable real estate related fees that are nonrescindable as a new advance, or a finance charge that is rescindable under 15 U.S.C. section 1635; 12 C.F.R. section 226.23(f)(2). Given these circumstances, the court will construe the statute in the light most favorable to plaintiff, deeming the fees unreasonable finance charges, and therefore allowing plaintiff to rescind the second and third loan transactions.

The Home Ownership and Equity Protection Act, (“HOEPA”), an amendment to TILA, created a special class of regulated closed end loans made at high annual percentage rates or with excessive costs and fees. HOEPA prohibits balloon payments and early financing unless it is in the best interests of the borrower. The lender is required to verify the borrower’s ability to repay the loan before extending credit. 15 U.S.C. section 1639. Mandatory compliance for creditors began on October 1, 2002, and if creditors fail to comply with the HOEPA required disclosures and prohibitions, the consequence is rescission under section 1635. HOEPA rescission does not have a statute of limitations subject to tolling, but a statute of repose that creates a substantive right not subject to tolling. TILA section 130(e).

Further, home equity loans that exceed either an APR trigger of 8% or a points and fees trigger of 8% are subject to additional consumer protections, including: three day advance disclosures regarding the high cost of the loan; and prohibitions on abusive loan terms and creditor practices. As calculated by plaintiff, the September 12, 2005, transaction has an APR rate spread of 9.06% and a 6.45% points and fees. The second transaction from September 21, 2006, has an APR rate spread of 8.021% and 5.43% points and fees. The final transaction from December 19, 2009 has an APR rate spread of 4.475% and 8.12% points and fees. All three transactions fall under HOEPA as high rate loans that required additional disclosures to plaintiff not less than three business days before closing the loan. Plaintiff maintains the required disclosures were never provided to him by defendants.

Besides regulating the cost of a home loan, HOEPA prohibits balloon payments, early refinancing also knows as “loan flipping,” and making unaffordable loans without verifying the borrower’s ability to repay the loan. All three transactions at issue here contained balloon payments in violation of HOEPA. The first two transactions contained a term of five years or less along with a balloon payment.

HOEPA and TILA. provide the authority for this court to allow plaintiff to rescind both the second and third transactions with defendant. Pursuant to King v. State of California, 784 F.2d 910, 915 (9th Cir. 1986), cert. denied, 484 U.S. 802 (1987), this court also has authority to allow plaintiff to rescind the first transaction under the doctrine of equitable tolling. King held, “the doctrine of equitable tolling may, in the appropriate circumstances, suspend the limitations period until the borrower discovers or had reasonable opportunity to discover the fraud or nondisclosures that form the basis of the TILA action[.]” Pursuant to the Ninth Circuit’s ruling in King, supra, it is permissible for district courts to evaluate specific claims of fraudulent concealment and equitable tolling to determine if the general rule would be unjust or frustrate the purpose of the Act. I find those circumstances exist here and therefore adjust the Limitations period accordingly to allow plaintiff to rescind the first transaction.

Finally, defendants argue that regardless of plaintiff’s ability to rescind the transactions, plaintiff is still not likely to succeed on the merits of his recession claim because plaintiff is unable to repay the loan proceeds. Plaintiff’s loan has been in default status for several years. He obtained protection of the bankruptcy court and then defaulted on the Loan post-petition, thus causing the bankruptcy court to order relief from the stay. The burden of proof that plaintiff can repay the loan proceeds rests with plaintiff, without such a showing, plaintiff cannot prove that he is likely to succeed on the merits. See Yamamoto v. Bank of New York, 329 F.3d 1167, 1172 (9th Cir. 2003)(when lender contests notice of rescission, the security interest is not extinguished upon giving the notice and instead occurs only when the court so orders, and upon terms the court deems just, including conditioning rescission on the repayment of the loan proceeds).

Plaintiff represents to this court that he intends to modify his current bankruptcy plan to make monthly adequate protection payments toward tender through his Chapter 13 plan in a manner similar to making payments on secured personal property under 11 U.S.C. section 11326. The tender, including the interest rate of 7.547%, would be amortized over 30 years. Defendant would file an amended proof of claim using the tender amounts as the secured debt. Brian Lynch, the Chapter 13 trustee, is agreeable to working with plaintiff in putting together a proposal to pay the tender requirement. A comparative market analysis of the property estimates the property’s current value ranging from $200,000 to $225,000 considering the economy, sales, and market trends. Plaintiff is currently residing in his home with his children. He intends to make a monthly payment through his chapter 13 bankruptcy plan as adequate protection to defendants. Plaintiff has current homeowner’s insurance and he will be responsible for maintaining the property taxes with the county. Further, I find that plaintiff will suffer irreparable harm if he and his children are rendered homeless by the sale of his home. I find that plaintiff is likely to succeed on the merits, he is likely to suffer irreparable harm in the absence of the injunction; the balance of equities tip in his favor; and an injunction is in the public interest.

CONCLUSION

Plaintiff’s motion for a preliminary injunction (doc. 5) is granted. Defendants’ motion to strike plaintiff’s exhibits (doc. 27) is denied.

IT IS SO ORDERED.

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Lenders Increasingly Facing Forensic Loan Audits

Posted on February 4, 2010. Filed under: Foreclosure Defense, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending, Refinance, RESPA, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , |

For the past couple of years, it has become a fairly common practice for lenders and servicers to employ forensic loan audits on pools of mortgages, with the goal of uncovering patterns of noncompliance with federal and local regulations, the presence of fraud and/or the testing of high fee violations. Unfortunately, for these same lenders, the practice of forensic loan auditing has slipped over to the consumer side of the market and is now being used against the lenders themselves.

Homeowners, many of whom are facing foreclosures, have begun hiring forensic loan auditors to review their loan documents, and if violations are found, they are hiring attorneys to bring their case against the lenders. What do they hope to gain? At the very least, the homeowners are trying to forestall a foreclosure, push for a loan modification or, at the end of continuum, try to get the loan rescinded.

“The forensic loan review as we know it today came about two years ago, when the mortgage market started to melt down,” explains Jeffrey Taylor, co-founder and managing director for Orlando-based Digital Risk LLC. “The idea of the forensic review was to look for a breach of representations and warranties so the investor or servicer could put the loan back to the originator. This is when you had all the big banks reviewing nonperforming assets to see if there was any fraud material or breaches so as to put them back to the entity that sold the loan.”

Originally, and still today, most forensic loan reviews are done by institutions on nonconforming assets. Starting in about 2008, the concept morphed into a kind of consumer protection program. Forensic loan auditing companies have since sprouted up like weeds, and many advisors are now advocating the program as a best practice and the first step before bringing a lawsuit against the lender to get a “bad” mortgage rescinded or force a loan modification.

“Every constituent along the way is looking for their own get-out-of-jail-free card,” observes Frank Pallotta, a principal with Loan Value Group LLC of Rumson, N.J. “I’ve been seeing this for the last two years. It started with banks that bought loans from small correspondents, and when those loans were going down, they would look for anything in the loan documentss to put it back to the person they bought the loan from. Fannie and Freddie are doing it, too. Now you have borrowers going to the banks to see if they have all their documents in place; they want their own get-out-of-jail-free card.”

Litigation-a-go-go

In some regards, lenders should be worried, as a swarm of potential lawsuits could fly in their direction. These might not always be hefty lawsuits, considering they mostly represent individual loan amounts, but they are annoying and the fees to defend the institution from these efforts can mount up very quickly. In addition, if homeowners are successful in the bids to rescind a loan, the lender has to pay back all closing costs and finance charges.
The industry should also be concerned because experts in mortgage loan rescissions say it is very hard for a bank to mount an effective defense against people who can prove that their loan contained violations.

“It is extremely difficult for lenders to defend against a lawsuit when they face a bona fide rescission claim,” says Seth Leventhal, an attorney with Fafinski Mark & Johnson PA in Eden Prairie, Minn., who often works with banks.

Additionally, in this age of securitization, many banks don’t own the loans they originated, but, says Leventhal, this is not a defense. “If they don’t own the loan anymore, they are going to have to get in touch with the servicer who does,” he says.

On the other hand, the homeowner’s cost to arrange a loan audit and hire an attorney can be prohibitive, so there is some balance.
Jon Maddux, principal and founder of Carlsbad, Calif.-based You Walk Away LLC, started one of the first companies offering forensic home loan audits for homeowners back in January 2008.

“We found that about 80% of the loans we audited had some type of violation,” he says. “And we thought it was going to be a great new tactic to help the distressed homeowner.”

However, it wasn’t. Homeowners would take the audit findings to their lender or servicer, only to find themselves pretty much as ignored as they were before they made the investment in the audit.

“We found lenders weren’t really reacting to an audit,” says Maddux, adding that lenders and servicers would only react to lawsuits based on audit information.

An audit by itself is not some magical way to make everything go away; it’s just the beginning, adds Dean Mostofi, the founder of National Loan Audits in Rockville, Md.

“Borrowers who contact lenders with an audit don’t get too far,” he says. “It’s in their best interest to go in with an attorney.”

The problem is, Mostofi states, that the first point of contact is the loss mitigation department, and “those people typically have no idea what you are talking about. To get past them sometimes requires lawsuits.”

Paper chase

The forensic loan audit lets the homeowner know if the closing documents contain any violations of the Truth In Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA), or if there was any kind of fraud or misrepresentation.

“We go through the important documents – in particular, the applications – TILA disclosure, Department of Housing and Urban Development forms, the note, etc., making sure that everything was disclosed properly to the borrower and that borrowers knew what they were getting into,” says Mostofi. “We also look at the borrower’s income to see if everything was properly disclosed. If the lender didn’t care about the borrower’s income, then we look further for other signs that it might be a predatory loan.”

According to August Blass, CEO and president of Walnut Creek, Calif.-based National Loan Auditors, a forensic loan audit is a thorough risk assessment audit performed by professionals who have industry and legal qualifications to review loan documents and portfolios for potential compliance or underwriting violations, and provide an informative, accurate loan auditing report detailing errors or misrepresentations.

Some elements of a forensic loan audit, says Blass, should include: a compliance analysis report based on data from the actual file; post-closing underwriting review and analysis; and summary of applicable statutes, prevailing case law and action steps that the attorney or loss mitigation group may chose to act upon.

TILA’s statute of limitations extends back three years, so most people who end up on their lender’s doorsteps are people who financed or refinanced during the boom period of 2005 through early 2007. If serious violations are discovered, the borrower can move to have the mortgage rescinded.

Not everyone appreciates the efforts of the forensic loan auditors working the homeowner side of the business.

“It began with a bunch of entrepreneurial, ex-mortgage brokers who learned how to game the system the first time, then started offering services to consumers to teach them the game,” Digital Risk’s Taylor says.

A year ago, most people didn’t know what a forensic audit was, but “now almost everyone knows,” says Mostofi. “The problem that we are having is that the banks are coming back and telling borrowers that everyone who is offering some kind of service to help them is a crook because they are charging a fee.”

Indeed, fees for a forensic audit often fall into the $2,000 to $5,000 range – but a hefty sum for someone facing foreclosure.
This could all be a desperate attempt to get a loan rescinded, but in regard to loan rescissions, there’s bad news and good news.

“Yes, it’s tough for lenders to defend themselves,” says James Thompson, an attorney in the Chicago office of Jenner & Block LLP who represents banks and finance companies. But, he adds, there is an exception: the plaintiff in this kind of lawsuit has to essentially buy back the loan, which means the plaintive (borrower) has to get new financing.

“The borrower has to be able to repay the amount he borrowed,” explains Thompson. “If the property is underwater, as many of these are, the borrower can’t go out and get a replacement mortgage that would give him the entire amount he would need to repay the lender.”

In some court cases, as part of the initial lawsuit, the plaintiff needs to prove that he or she is capable of getting a refinancing. What happens if the court grants a rescission but the consumer can’t find financing? Oddly, no one knows, because court cases haven’t gotten that far.

“Every one of these cases gets resolved,” says Thompson. “The borrowers are struggling to get the attention of the overworked loan servicers, who are scrambling with as many loan modifications and workouts they can come up with. You can get to the head of the line sometimes if you show up with an attorney and forensic loan examination, saying, ‘Here is a TILA violation; we want to rescind.'”

“I don’t see very many of these litigating,” National Loan Auditors’ Blass concurs. “It brings the settlement offer to the table a little faster. It’s not as if the lender would not have brought an offer to the table without the audit. It just seems to fast-track the process a little bit more.”

Forensic loan audits expose mistakes and unscrupulous lending practices that will assist the borrower in negotiation efforts, Blass adds. “Federal-, state- or county-specific lending violations and the legal guidelines for remedy, can pave the way to successful and expedient modification.”

Perhaps, the bigger nightmare of all is not the lawsuits brought by individual homeowners, but the big law firms finding all these individuals and bringing them together for a class action suit.

“The plaintiff bar is as active as ever. They have these big dragnets, trying to capture all the misdeeds of mortgage bankers, going after them with class-action lawsuits,” says David Lykken, president of Mortgage Banking Solutions in Austin, Texas.

This just aggravates the situation, adds Lykken. “I have not seen one class-action lawsuit bring about any positive change. Punitive damages just drain the cash-out of already cash-strapped companies.”

Steve Bergsman is a freelance writer based in Mesa, Ariz., and author of “After The Fall: Opportunities & Strategies for Real Estate Investing in the Coming Decade,” published by John Wiley & Sons.

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Why banks want you all alone when negotiating a loan modification

Posted on July 5, 2009. Filed under: Banking, bankruptcy, Case Law, Foreclosure Defense, Housing, Legislation, Loan Modification, Mortgage Audit, Mortgage Law, Politics, Predatory Lending, Refinance | Tags: , , , , , , , , , , , , , , , |

They are telling you to run away from loan modification companies who charge a fee. They are paying the politicians to introduce laws making it difficult for you to hire an attorney when negotiating a loan workout. They want you to contact them directly and without the assistance of an advocate. They are scaring you to think that anyone who charges a fee for helping you negotiate a loan modification must be a crook. They claim all mortgage professionals, lawyers and forensic loan examiners who charge a fee are scam artists. They say it should all be free because theoretically you can do all of it yourself.

Just like you can file your own taxes and represent yourself in court, you can also spend the time and effort to learn the ins and outs and nuances of negotiating a favorable loan modification with the same predatory bank that put you in the mess you are in. You can stay up all night and study law so you can go up against their high priced lawyers. You can take time off work and stay on the phone four hours a day trying to get through to their loss mitigation departments. You can re-send the same documents over and over again because mysteriously they keep losing your entire file more than once. That is right you can certainly do this all yourself.

And the reason why you should go to the negotiating table all alone and without any backup is because they want to protect you from the big bad lawyers, mortgage auditors and loan modification companies who have the nerve to charge a fee for helping you! Imagine that. People actually want to make a living while providing a valuable service. What a crime.

Is anyone with an IQ above 10 buying this nonsense? If you had a choice would you go to an IRS audit without a skilled CPA? Would you defend yourself in a criminal trial without the best lawyer money could buy? So why should negotiating with a bank be any different than negotiating with the IRS? Because bankers are more ethical than IRS agents? That must be it.

More….

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Melfi v. WMC Mortg. Corp

Posted on June 28, 2009. Filed under: Case Law, Mortgage Audit, Refinance, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , , , , , , , |

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND. Hon. Mary M. Lisi, U.S. District Judge.
Melfi v. WMC Mortg. Corp., 2009 U.S. Dist. LEXIS 1454 (D.R.I., Jan. 9, 2009)

DISPOSITION:

Affirmed.

COUNSEL: Christopher M. Lefebvre with whom Claude F. Lefebvre and Christopher M. Lefebvre, P.C. were on brief for appellant.

Jeffrey S. Patterson with whom David E. Fialkow and Nelson Mullins Riley & Scarborough, LLP were on brief for appellees, Deutsche Bank National Trust Company, N.A. and Wells Fargo Bank, N.A.

JUDGES: Before Boudin, Hansen, * and Lipez, Circuit Judges.
*

Of the Eighth Circuit, sitting by designation.

OPINION BY: BOUDIN

OPINION

BOUDIN, Circuit Judge. In April 2006, Joseph Melfi refinanced his home mortgage with WMC Mortgage Corporation (“WMC”). At the closing, Melfi received from WMC a notice of his right to rescind the transaction. The notice is required for such a transaction by the Truth in Lending Act (“TILA”), 15 U.S.C. § 1635(a) (2006). Assuming that the notice complies with TILA, a borrower is given three “business days” to rescind the transaction; otherwise, the period is much longer. Id. The question in this case is whether the notice given Melfi adequately complied.

The three-day period aims “to give the consumer the opportunity to reconsider any transaction which would  [*2]  have the serious consequence of encumbering the title to his [or her] home.” S. Rep. No. 96-368, at 28 (1979), reprinted in 1980 U.S.C.C.A.N. 236, 264. Under TILA, the requirements for the notice are established by the Federal Reserve Board (“the Board”) in its Regulation Z. 12 C.F.R. § 226.23 (2007). Failure to provide proper notice extends to three years the borrower’s deadline to rescind. Id. § 226.23 (a)(3).

About 20 months after the closing, Melfi attempted to rescind the transaction. The incentives for a borrower to do so may be substantial where a new loan is available, especially if rates have fallen or substantial interest has been paid during the period of the original loan. “When a consumer rescinds a transaction . . . the consumer shall not be liable for any amount, including any finance charge” and “the creditor shall return any money or property that has been given to anyone in connection with the transaction . . . .” 12 C.F.R. 226.23(d)(1), (2).

Melfi argued that the notice of his right to cancel was deficient because it left blank the spaces for the date of the transaction (although the date was stamped on the top right corner of the notice) and the actual deadline to  [*3]  rescind. WMC and co-defendants Deutsche Bank and Wells Fargo (the loan’s trustee and servicer, respectively) refused to allow the rescission, and Melfi then brought this action in the federal district court in Rhode Island.

The district court, following our decision in Palmer v. Champion Mortgage, 465 F.3d 24 (1st Cir. 2006), asked whether a borrower of average intelligence would be confused by the Notice. Melfi v. WMC Mortgage Corp., No. 08-024ML, 2009 U.S. Dist. LEXIS 1454, 2009 WL 64338, at *1 (D.R.I. Jan. 9, 2009). The court ruled that even if the omissions in the notice were violations, they were at most technical violations that did not give rise to an extended rescission period because the notice was clear and conspicuous despite the omissions, and it dismissed Melfi’s complaint. 2009 U.S. Dist. LEXIS 1454, [WL] at *3.

Melfi now appeals. Our review is de novo, accepting all of the well-pleaded facts in the complaint as true and drawing reasonable inferences in favor of Melfi. Andrew Robinson Int’l, Inc. v. Hartford Fire Ins. Co., 547 F.3d 48, 51 (1st Cir. 2008). We may consider materials incorporated in the complaint (here, the notice Melfi received) and also facts subject to judicial notice. In re Colonial Mortgage Bankers Corp., 324 F.3d 12, 14 (1st Cir. 2003).

TILA  [*4]  provides that “[t]he creditor shall clearly and conspicuously disclose, in accordance with regulations of the Board, to any obligor [here, Melfi] in a transaction subject to this section the rights of the obligor under this section.” 15 U.S.C. § 1635(a). Regulation Z says what the notice of the right to cancel must clearly and conspicuously disclose; pertinently, the regulation requires that the notice include “[t]he date the rescission period expires.” 12 C.F.R. § 226.23(b)(1)(v). The Board has created a model form; a creditor must provide either the model form or a “substantially similar notice.” 12 C.F.R. § 226.23(b)(2). The use of the model form insulates the creditor from most insufficient disclosure claims. 15 U.S.C. § 1604(b). WMC gave Melfi the model form, but the spaces left for the date of the transaction and the date of the rescission deadline were not filled in. The form Melfi received had the date of the transaction stamped at its top (but it was not so designated) and then read in part:

You are entering into a transaction that will result in a mortgage/lien/security interest on your home. You have a legal right under federal law to cancel this transaction, without cost,  [*5]  within THREE BUSINESS DAYS from whichever of the following events occurs LAST:

(1) The date of the transaction, which is ; or

(2) The date you receive your Truth in Lending disclosures; or

(3) The date you received this notice of your right to cancel.

. . . .

HOW TO CANCEL

If you decide to cancel this transaction, you may do so by notifying us in writing. . . .

You may use any written statement that is signed and dated by you and states your intention to cancel and/or you may use this notice by dating and signing below. Keep one copy of this notice because it contains important information about your rights.

If you cancel by mail or telegram, you must send the notice no later than MIDNIGHT of (or MIDNIGHT of the THIRD BUSINESS DAY following the latest of the three events listed above). If you send or deliver your written notice to cancel some other way, it must be delivered to the above address no later than that time.

. . . .

Melfi’s argument is straightforward. Regulation Z requires in substance the deadline for rescission be provided; one of the three measuring dates–the date of the transaction–was left blank (the other two are described but have no blanks); and therefore the notice  [*6]  was deficient and Melfi has three years to rescind. A number of district court cases, along with two circuit court opinions, support Melfi’s position, n1 although one of the circuit cases also involved more serious substantive flaws.

– – – – – – – – – – – – – – Footnotes – – – – – – – – – – – – – – -1

E.g., Semar v. Platte Valley Fed. Sav. & Loan Ass’n, 791 F.2d 699, 702-03 (9th Cir. 1986); Williamson v. Lafferty, 698 F.2d 767, 768-69 (5th Cir. 1983); Johnson v. Chase Manhattan Bank, USA N.A., No. 07-526, 2007 U.S. Dist. LEXIS 50569, 2007 WL 2033833, at *3 (E.D. Pa. July 11, 2007); Reynolds v. D & N Bank, 792 F. Supp. 1035, 1038 (E.D. Mich. 1992).
– – – – – – – – – – – – End Footnotes- – – – – – – – – – – – – –

The circuit cases are now elderly and may be in tension with later TILA amendments, but the statements that “technical” violations of TILA are fatal has been echoed in other cases. This circuit took a notably different approach in Palmer to determining whether arguable flaws compromised effective disclosure process. See also Santos-Rodriguez v. Doral Mortgage Corp., 485 F.3d 12, 17 (1st Cir. 2007). Following Palmer, district court decisions in this circuit concluded that failing to fill in a blank did not automatically trigger a right to rescind. n2

– – – – – – – – – – – – – – Footnotes – – – – – – – – – – – – – – -2

Bonney v. Wash. Mut. Bank, 596 F. Supp. 2d 173 (D. Mass. 2009); Megitt v. Indymac Bank, F.S.B., 547 F. Supp. 2d 56 (D. Mass. 2008);  [*7]  Carye v. Long Beach Mortgage Co., 470 F. Supp. 2d 3 (D. Mass. 2007).
– – – – – – – – – – – – End Footnotes- – – – – – – – – – – – – –

In Palmer, the plaintiff received a notice of her right to cancel that followed the Federal Reserve’s model form but the form was not received until after the rescission deadline listed on the notice. 465 F.3d at 27. Nonetheless, Palmer held that the notice “was crystal clear” because it included (as in the Federal Reserve’s model form) the alternative deadline (not given as a date but solely in descriptive form) of three business days following the date the notice was received, so the plaintiff still knew that she had three days to act. Id. at 29.

Palmer did not involve the blank date problem. Palmer, 465 F.3d at 29. But the principle on which Palmer rests is broader than the precise facts: technical deficiencies do not matter if the borrower receives a notice that effectively gives him notice as to the final date for rescission and has the three full days to act. Our test is whether any reasonable person, in reading the form provided in this case, would so understand it. Here, the omitted dates made no difference.

The date that Melfi closed on the loan can hardly have been unknown to him and was in fact hand stamped  [*8]  or typed on the form given to him. From that date, it is easy enough to count three days; completing the blank avoids only the risk created by the fact that Saturday counts as a business day under Board regulations, 12 C.F.R. § 226.2(a)(6), and the borrower might think otherwise. Lafferty, 698 F.2d at 769 n.3 (“[T]he precise purpose of requiring the creditor to fill in the date [of the rescission deadline] is to prevent the customer from having to calculate three business days”).

Nor does completing the blank necessarily tell the borrower how long he has to rescind. Where after the closing the borrower is mailed either the notice or certain other required information, the three days runs not from the transaction date but from the last date when the borrower receives the notice and other required documents. Melfi himself says he was given the form on the date of the closing and does not claim that there was any pertinent delay in giving him the other required disclosures. So the blanks in no way misled Melfi in this case.

So the argument for allowing Melfi to extend his deadline from three days to three years depends on this premise: that any flaw or deviation should be penalized automatically  [*9]  in order to deter such errors in the future. If Congress had made such a determination as a matter of policy, a court would respect that determination; possibly, this would also be so if the Board had made the same determination. See Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 844, 104 S. Ct. 2778, 81 L. Ed. 2d 694 (1984). Melfi argues at length that we owe such deference to the Board.

The answer is that there is no evidence in TILA or any Board regulation that either Congress or the Board intended to render the form a nullity because of an uncompleted blank in the form or similar flaw where, as here, it could not possibly have caused Melfi to think that he had months in order to rescind. The central purpose of the disclosure–the short notice period for rescission at will–was plain despite the blanks. Melfi’s argument assumes, rather than establishes, that a penalty was intended.

Some cases finding a blank notice form to be grounds for rescission even though harmless were decided under an earlier version of TILA. In 1995, Congress added a new subsection to TILA, titled “Limitation on Rescission Liability.” It provided that a borrower could not rescind “solely from the form of written notice  [*10]  used by the creditor . . . if the creditor provided the [borrower] the appropriate form of written notice published and adopted by the Board . . . .” Truth in Lending Act Amendments of 1995, Pub L. No. 104-29, § 5, 109 Stat. 271, 274 (1995) (codified at 15 U.S.C. § 1635(h)).

Read literally, this safe harbor may not be available to WMC because, while it used the Board’s form of notice, it did not properly fill in the blanks. But the TILA amendments were aimed in general to guard against widespread rescissions for minor violations. McKenna v. First Horizon Loan Corp., 475 F.3d 418, 424 (1st Cir. 2007). To this extent, Congress has now leaned against a penalty approach and, perhaps, weakened the present force of the older case law favoring extension of the rescission deadline.

In any event, in the absence of some direction from Congress or the Board to impose a penalty, we see no policy basis for such a result. Where, as here, the Board’s form was used and a reasonable borrower cannot have been misled, allowing a windfall and imposing a penalty serves no purpose and, further, is at odds with the general approach already taken by this court in Palmer.

Affirmed.

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Expanding the Making Home Affordable program

Posted on June 21, 2009. Filed under: Finance, Housing, Refinance | Tags: , , , , , |

The Making Home Affordable program may be further expanded to help more underwater homeowners refinance their mortgages.

Though mortgage rates have crept up in recent weeks, current interest rates are more favorable than they have been in the past few years.

However, many homeowners have been unable to take advantage of the low rates thanks to loan-to-value (LTV) constraints, among other things.

The Home Affordable Refinance program currently has a LTV ceiling of 105 percent, meaning even those with no equity or private mortgage insurance can take advantage of the program.

But many borrowers have lost so much equity over the past few years that the FHFA is considering raising that ceiling to as much as 125 percent LTV, according to a Bloombergreport.

http://www.thetruthaboutmortgage.com/making-home-affordable-program-may-help-more-underwater-homeowners/

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