A Guide: Predatory Lending Claims Available to Illinois Borrowers in Foreclosure

A Guide: Predatory Lending Claims Available to Illinois Borrowers in Foreclosure

Last updated: September 2006

Truth in Lending Act (TILA)

Purpose

“It is the purpose of this subchapter to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.”  15 U.S.C. § 1601(a).

Sources of Law

Substantive Requirements

There must be clear, conspicuous, and accurate disclosures of loan terms as set forth in 12 C.F.R. 226.18 (“Content of Disclosures”). In re Ralls, 230 B.R. 508 (Bankr. E.D.Pa. 1999); In re Cook, 76 B.R. 661 (Bankr. C.D.Ill. 1987).

Every loan charge must be properly disclosed as either part of the “amount financed,” which represents “the amount of credit provided to you or on your behalf,” 12 C.F.R. 226.18(b), or as part of the “finance charge,” which represents “the dollar amount the credit will cost you,” 12 C.F.R. 226.18(d). The “annual percentage rate” (APR) combines the interest rate and additional up-front (prepaid) finance charges to yield the total “cost of your credit as a yearly rate.”  12 C.F.R. 226.18(e). In re Hill, 213 B.R. 934 (Bankr. D.Md. 1997).

The finance charge is computed according to the rules set forth in 12 C.F.R. 226.4 (“Finance Charge”). The finance charge includes “any charge payable directly or indirectly by the creditor as an incident to or a condition of the extension of credit,” 12 C.F.R. 226.4(a), unless a charge is specifically excluded. The most pertinent exclusions in the context of real-estate loan transactions are as follows:

Some real-estate related fees are excluded from the finance charge “if the fees are bona fide and reasonable in amount” (e.g., title, document preparation, credit report, appraisal, and escrow fees). 12 C.F.R 226.4(c)(7). Brannam v. Huntingdon Mortgage Co., 287 F.3d 601 (6th Cir. 2002) (document preparation fee).

Practice Tip: This is where most TILA violations occur. If there is a misdisclosure, it is usually because of an understated finance charge, i.e., there was a charge which should have counted as a prepaid finance charge and was not (most common: an arbitrarily inflated appraisal fee [e.g., over $500] or a title insurance charge [e.g., over $600] which was therefore not “bona fide and reasonable.”)

  • In deciding whether a title insurance charge is reasonable, the court should look to the fair market rate, and a refi rate should be cheaper than a purchase-money mortgage rate. Johnson v. Know Fin. Group, 2004 WL 1170335 (E.D. Pa. May 26, 2004);
  • Where information as to reasonability of the rate is more likely to be in the control of the lender, the lender has the burden of proof on that issue. Strong v. Option One Mortgage Corp. (In re Strong), Adv. No. 02-026 (Bankr. E.D. Pa. Aug. 31, 2004);
  • Where a fee is not bona fide or reasonable, the portion which is not bona fide or reasonable (i.e., the “upcharge”) is a finance charge, Guise v. BWM Mortgage, 377 F.3d 795 (7th Cir. 2004);
  • Credit insurance premiums are excluded from the finance charge if they are voluntary, if this fact and other specified information is disclosed to the borrower, and if the borrower signs that, having been given these disclosures, s/he still wants the insurance. 12 C.F.R. 226.4(d). In re Duffy, 32 B.R. 497 (D.R.I. 1983);
  • Taxes and fees “prescribed by law that are or will be paid to public officials,” such as for a release of lien. 12 C.F.R. 226.4(e).

There must be delivery to each borrower of two copies of a 3-day notice of right to rescind the loan transaction (non-purchase money mortgages only). The notice must meet all the requirements specified in 12 C.F.R. 226.23(b)(1), including setting forth the date the rescission period expires, how to exercise the right, how to contact the creditor, and the effects of rescission. The three-day right to rescind is absolute; unless the borrower waives the right as set forth in 12 C.F.R. 226.23(e), the creditor cannot take any action to undermine that right. 12 C.F.R. 226.23(c). Rodash v. AIB Mort. Co., 16 F.3d 1142 (11th Cir. 1994);  Jenkins v. Landmark Mortgage Co., 696 F. Supp. 1089 (W.D.Va. 1988).

The creditor must deliver TILA disclosures to each person whose ownership interest in a dwelling is subject to the security interest, and each such person has the right to rescind. 12 C.F.R. 226.2(a)(11), 226.15(a) and (b), 226.17(d), 226.23(a)(1).  Westbank v. Maurer, 658 N.E.2d 1381 (Ill.App. 2nd Dist. 1995).

Remedies

Failure to deliver a proper 3-day notice of right to rescind triggers an extended right of rescission. 12 C.F.R. 226.23(a)(3). Westbank v. Maurer, 658 N.E.2d 1381 (Ill.App. 2nd Dist. 1995).

Failure to make clear, conspicuous, and accurate material disclosures also triggers an extended right of rescission.  12 C.F.R. 226.23(a)(3). Material disclosures include the: (1) annual percentage rate, (2) finance charge, (3) amount financed, (4) total payments, (5) or payment schedule. 12 C.F.R. 226.23(a)(3) n.48.

There are statutory “tolerances” for the APR and the amount financed and finance charge. Violations are deemed non-material if they fall within these tolerances.

The extended right of rescission lasts 3 years from the date of the closing of the loan.  12 C.F.R. 226.23(a)(3). Semar v. Platte Valley Fed. S&L. Assn., 791 F.2d 699 (9th Cir. 1986)

The rescission remedy runs against any assignee: “Any consumer who has the right to rescind a transaction under section 1635 of this title may rescind the transaction as against any assignee of the obligation.” 15 U.S.C. § 1641(c).  Mount v. LaSalle Bank Lake View, 926 F.Supp. 759 (N.D.Ill. 1996); Stone v. Mehlberg, 728 F.Supp. 1341 (W.D.Mich. 1989).

Practice Tip: It is crucial to comply with the technical TILA rescission procedures in full. First, the notice of rescission must be sent within 3 years of the loan closing--no exceptions. Second, you should send the the notice of rescission both (1) to the (original) creditor whose name is on the 3-Day Right to Rescind and (2) to the current holder of the loan (or to its attorney, if you’re in foreclosure, or to the loan servicer [the current holder’s servicing agent] if you don’t know who the holder is).

Upon rescission, “the security interest giving rise to the right of rescission becomes void and the consumer shall not be liable for any amount, including any finance charge” (step one). 12 C.F.R. 226.23(d)(1).  Within 20 days the creditor must take any action required to cancel the security interest and must return any money paid on the loan (step two).  12 C.F.R. 226.23(d)(2). If and when the creditor does so, the consumer must tender to the creditor the value of the money or property received  (step three). 12 C.F.R. 226.23(d)(3). The tender amount is reduced by any amount paid on the loan (unless previously returned). White v. WMC Mortgage, 2001 U.S. Dist. LEXIS 15907, at * 5 (E.D. Pa. July 31, 2001); Williams v. Gelt, 237 B.R. 590, 598-99 (E.D. Pa. 1999). Courts can modify steps two and three of the above rescission  process. 12 C.F.R. 226.23(d)(4).

Practice Tip: Once the right to rescind is affirmed by the court and amount owed (the “tender”) is determined, borrower must pay tender within time frame set by court. All loan payments previously made by the borrower will reduce the tender amount--so, the more payments made, the better the case. Because tender is inevitable (the borrower doesn’t just get to “walk away from the loan”), you have to start working on your proposed tender strategy from the very beginning of the case.

Creditors are also liable for actual damages, statutory damages in the amount of twice the finance charge, up to $2,000, and attorney’s fees and costs. 15 U.S.C. § 1640(a). Failure to respond to the rescission notice as spelled out above results in another violation and an addition award of statutory damages. White v. WMC Mortgage, 2001 U.S. Dist. LEXIS 15907, at * 5 (E.D. Pa. July 31, 2001); Mayfield v. Vanguard Savings & Loan, 710 F. Supp. 143, 145 (E.D. Pa. 1989).

Liability for TILA claims for monetary damages runs against assignees where the violation is apparent on the face of the loan documents. 15 U.S.C. § 1641(a).

To fulfill the congressional purpose of TILA, material violations, as set forth above, are to be “strictly construed”: there is no such thing as a mere “technical” violation which does not give rise to liability: “[T]he Seventh Circuit, like most courts interpreting TILA, maintains that disclosures made pursuant to the statute should be viewed from the vantage point of an ordinary consumer as opposed to that of a skilled or informed business person. TILA is aimed at deceptive practices by lenders, not the subjective beliefs or actions of borrowers. Moreover, a plaintiff need not show actual harm to recover from technical violations of TILA, as they are strict liability offenses.” Adams v. Nationscredit Financial Services Corp., 351 F. Supp.2d 829 (N.D. Ill. 2004) (citations omitted).

Statute of Limitations

  • 1 year for affirmative claims. 15 U.S.C. § 1640(e);
  • 3 years for rescission. Beach v. Ocwen, 523 U.S. 410 (1998);
  • Unlimited as a defense to foreclosure in the nature of a recoupment or setoff. 735 ILCS 5/13-207. Bank of New York v. Heath, 2001 WL 1771825, at *1 (Ill. Cir. Oct. 26, 2001).

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Home Ownership and Equity Protection Act (HOEPA)

Purpose

“HOEPA, an amendment to TILA, was a congressional response to the substantive abuses of creditors offering alternative, typically high interest rate, home loans to residents in certain geographic areas. The statute was enacted to ensure that consumers most vulnerable to abuse would be afforded a safety net without impeding  the flow of credit altogether. H.R. Rep. No. 103 652, at 159 (1994).” Fluehmann v. Associates Financial Services, 2002 U.S. Dist. LEXIS 5755 (D. Mass. March 29, 2002).

Sources of Law

  • 15 U.S.C. §§ 1602(aa), 1639, and 1641(d)(1);
  • Federal Reserve Board Regulation Z (12 C.F.R. 226), particularly § 226.31 (“General Rules”) and § 226.32 (“Requirements for Certain Closed-End Home Mortgages”);
  • The Federal Reserve Board’s Official Staff Commentary on Regulation Z. Ford Motor Credit v. Milhollin, 444 U.S. 555, 565 (1980) (“Unless demonstrably irrational, Federal Reserve Board staff opinions construing the Act or Regulation should be dispositive”).

Triggers for HOEPA Coverage

  • APR more than 10% above comparable Treasury security rate (8% on first-lien loans closing on or after October 1, 2002) on the 15th day of the month before the lender received the loan application. 12 C.F.R. 226.32(a)(1)(i); 66 Fed. Reg. 65,617 (2001). (For Treasury rates, see U.S. Goverment Securities);
  • “Points and fees” exceeding 8% of the “total loan amount.” 12 C.F.R. 226.32(a)(1)(ii).

“Points and fees” include:

  • All prepaid finance charges. 12 C.F.R. 226.32(b)(1)(i);
  • All compensation paid to mortgage brokers. 12 C.F.R. 226.32(b)(1)(ii);
  • All items paid to the lender or to a lender affiliate. 12 C.F.R. 226.32(b)(1)(iii);
  • “Total loan amount” is defined as the amount financed (principal minus prepaid finance charges) minus any additional HOEPA fees not already included in the finance charge, e.g., a bona fide and reasonable appraisal fee paid to the lender. Official Staff Commentary 12 C.F.R. 226.32(a)(1)(ii)-1. Lopez v. Delta Funding Corp., 1998 U.S. Dist. LEXIS 23318 (E.D.N.Y. Dec. 23, 1998).

Disclosure Requirements

A special HOEPA disclosure notice must be delivered to the consumer at least three business days prior to the closing of the loan. 15 U.S.C. § 1639(b); 12 C.F.R. 226.31(c). A signed statement to the effect that the consumer received the HOEPA notice creates a rebuttable presumption only. 15 U.S.C. § 1635(c). Bryant v. Mortgage Capital Resource Corp., 2002 U.S. Dist. LEXIS1566, at **11-17 (N.D. Ga. Jan. 14 ,2002); Williams v. Gelt, 237 B.R. 590 (E.D. Pa. 1999), Newton v. United Companies Financial Corp., 24 F. Supp. 2d 444, 448-51 (E.D. Pa. 1998).

The notice must inform the consumer that he need not enter into the loan, and that if he does enter the loan, he could lose his home and any money he has put in it. 15 U.S.C. § 1639(a); 12 C.F.R. 226.32(c)(1).

The notice must also include an accurate statement of APR, monthly payment and balloon payment amount, and maximum payment amount on a variable-rate loan. 15 U.S.C. § 1639(a)(2); 12 C.F.R. 226.32(c)(2)-(4); Official Staff Commentary 12 C.F.R. 226.32(c)(3)-2.

As of October 1, 2002, the notice must also state the total amount borrowed.  66 Fed. Reg. 65,618 (2001).

Prohibited Terms

The following terms are prohibited (or limited) by the statute and Regulation Z: prepayment penalties, default interest rate, balloon payments, negative amortization, prepaid payments, improvident lending, direct payments to home improvement contractors. 15 U.S.C. § 1639(c)-(h); 12 C.F.R. 226.32(d). Lopez v. Delta Funding Corp., 1998 U.S. Dist. LEXIS 23318 (E.D.N.Y. Dec. 23, 1998) (default interest rate); Newton v. United Companies Financial Corp., 24 F. Supp. 2d 444, 451-57 (E.D. Pa. 1998) (improvident lending).

Remedies

Failure to deliver the required HOEPA notice or inclusion of a prohibited term triggers an extended (three-year) right of rescission (described above). 15 U.S.C. § 1639(j); 12 C.F.R. 226.23(a)(3) n.48.; Bryant v. Mortgage Capital Resource Corp., 2002 U.S. Dist. LEXIS1566 (N.D. Ga. Jan. 14 ,2002); In re Barber, 266 B.R. 309 (Bankr. E.D. Pa. 2001); In re Jackson, 245 B.R. 23 (Bankr. E.D. Pa. 2000); In re Murray, 239 B.R. 728, 733 (Bankr. E.D. Pa. 1999).

In addition to regular TILA monetary damage remedies (see above), HOEPA violations give rise to “enhanced” monetary damages under 15 U.S.C. § 1640(a)(4), namely, all payments made by the borrower. In re Williams, 291 B.R. 636, 663-64 (Bankr. E.D. Pa. 2003).

Practice Tip: Remember that if you have a HOEPA rescission case, this effectively gives you “two bites at the apple”--you get to deduct all payments made twice before getting to your “HOEPA-adjusted” tender amount (once in calculating the “plain vanilla TILA” tender amount, and once in calculating “enhanced” HOEPA damages). Also, if you’re beyond three years and can’t rescind, you can still raise a HOEPA claim and deduct all payments made in the nature of defensive recoupment.

As with any TILA violation (see above), the rescission remedy runs against any assignee of the loan. 15 U.S.C. § 1641(c). In addition, where the loan documents demonstrate that the loan is covered by HOEPA coverage, assignees “shall be subject to all claims and defenses with respect to that mortgage that the consumer could assert against the creditor.” 15 U.S.C. § 1641(d)(1). This provision mirrors the FTC Holder Rule and creates assignee liability for all state and federal claims and defenses. For monetary damages claims under TILA, it provides an exception to general rule that violations must appear on the face of the documents. Pulphus v. Sullivan, No. 02 C 5794, 2003 U.S. Dist. LEXIS 7080, at *64 n.11 (N.D. Ill. April 25, 2003); Dash v. Firstplus Home Loan Trust 1996-2, 248 F. Supp. 2d 489 (M.D.N.C. 2003); Cooper v. First Gov't Mortgage & Investors Corp., 238 F. Supp. 2d 50 (D.D.C. 2002); Bryant v.  Mortgage Capital Resource Corp., 2002 U.S. Dist. LEXIS1566, at **17-22 (N.D. Ga. Jan. 14, 2002); Mason v. Fieldstone Mortgage Co., U.S. Dist. LEXIS 16415 (N.D. Ill. 2001); Vandenbroeck v. ContiMortgage Corp., 53 F.Supp. 965, 968 (W.D. Mich. 1999); In re Rodrigues, 278 B.R. 683 (Bankr. D.R.I. 2002); In re Jackson, 245 B.R. 23 (Bankr. E.D. Pa. 2000); In re Barber, 266 B.R. 309 (Bankr. E.D. Pa. 2001); In re Murray, 239 B.R. 728, 733 (Bankr. E.D. Pa. 1999).

Statute of Limitations

  • 1 year for affirmative claims. 15 U.S.C. § 1640(e);
  • 3 years for rescission. Beach v. Ocwen, 523 U.S. 410 (1998);
  • Unlimited as a defense to foreclosure in the nature of a recoupment or setoff. 735 ILCS 5/13-207.  Bank of New York v. Heath, 2001 WL 1771825, at *1 (Ill. Cir. Oct. 26, 2001).

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Real Estate Settlement Procedures Act (RESPA)

Purpose

To “effect certain changes in the settlement process for residential real estate that will result: 1) in more effective advance disclosure to home buyers and sellers of settlement costs; 2) in the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services; 3) in a reduction in the amounts home buyers are required to place in escrow accounts established to insure the payment of real estate taxes and insurance; and 4) in significant reform and modernization of local recordkeeping of land title information.” 12 U.S.C. § 2601(b).

Sources of Law

Coverage

RESPA covers all federally related mortgages, including loans (both purchase-money mortgages and others) secured by the family home. 12 U.S.C. § 2602(1); 24 C.F.R. § 3500.2.

Prohibition Against Kickbacks and Referral Fees

12 U.S.C. §2607(a); 24 C.F.R. § 3500.14(b). RESPA prohibits the giving or receiving of any fee, kickback or other thing of value for the referral of a “settlement service” (defined at 12 U.S.C. § 2602(3) and 24 C.F.R. § 3500.2).

One court has stated that, in order to state a claim alleging a violation of this section, one must demonstrate: 1) an agreement between the parties to refer settlement service business, 2) the transfer of a thing of value, and 3) the referral of settlement service business. Shah v. Chicago Title and Trust Co., 102 Ill. App. 3d 787, 789; 430 N.E.2d 342, 344 (1st Dist. 1981). “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.” 24 C.F.R. § 3500.14(e).

Yield-spread premiums: A yield spread premium is a fee paid by a mortgage lender to a mortgage broker for arranging a loan with an interest rate at a higher amount than the par rate. Payment of a yield spread premium is not a per se violation of this section, but may be illegal under RESPA based on a factual inquiry into the circumstances surrounding the payment. Vargas v. Universal Mortgage Corp., 2001 U.S. Dist. LEXIS 6696, 6 (N. Dist. Ill.  2001); Culpepper v. Inland Mortgage Corp., 132 F.3d 692 (11th Cir. 1998).

HUD (the agency charged with interpretative, investigative and enforcement powers under RESPA) recommends a two-step inquiry to determine whether a yield spread premium is illegal. First, one determines whether the payment of the yield spread premium was for services actually performed; if it is not, then the payment is an illegal kickback. If the payment was for services actually performed, then one looks at whether the total compensation paid to the broker reasonably related to the value of the services; if the compensation does not reasonably relate to the value of the services, the payment is a violation of this section. 64 Fed. Reg. 10080 (1999).

Recently, the Illinois Appellate Court fashioned a five-part pleading standard for alleging a YSP-based violation of RESPA, based on Shah’s three-part test and on HUD statements: "(1) the existence of an agreement between the lender and broker whereby the broker promises to refer settlement service business to the lender; (2) the transfer of a thing of value between the lender and broker based upon that agreement; (3) the referral of settlement service business by the broker to the lender (see Shah at 789), and either that (4) the broker received a YSP without providing any goods or services of the kind typically associated with a mortgage transaction or (5) if the broker did provide such goods or services, the total compensation paid to the broker was not reasonably related to the total value of the goods or services actually provided." Johnson v. Matrix Financial, 820 N.E.2d 1094, 1103-04 (Ill. App. Ct. 2004).  As part of pleading (4) or (5), a borrower must plead what services were offered, the reasonable value of those services, and the fact that total broker compensation exceeded that value.  Also, a borrower alleging a YSP-based violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, or a YSP-based breach of fiduciary duty, can only do so by (also) meeting the RESPA pleading standard.

Prohibition Against Unearned Fees and Fee Splitting

12 U.S.C. §2607(b); 24 C.F.R. §3500.14(c). RESPA prohibits the giving or receiving of “any portion, split or percentage of any charge made or received for the rendering of a settlement services in connection with a transaction involving a federally related mortgage loan other than for services performed.” The regulations further state that, “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.”

Recently, the Seventh Circuit issued a decision holding that a fee for which no service was performed does not violate section 2607(b) unless the unearned fee is shared with a third party. Echevarria v. Chicago Title & Trust Co., 256 F. 3d 623 (7th Cir. 2001). However, following the Echevarria decision, HUD issued a policy statement clarifying its interpretation of Section 2607(b) in which it stated, “HUD believes that Section 8(b) [12 U.S.C. § 2607(b)] of the statute and the legislative history make clear that no person is allowed to receive any portion of charges for settlement services, except for services actually performed.”  66 Fed. Reg. 53052, 53058.

Remedies

There is a private right of action for violation of § 2607 (Illegal referral fee or kickback and fee splitting). Statutory damages: person charged for the settlement service can recover an amount equal to “three times the amount of any charge paid for such settlement service,” plus attorney’s fees and costs. 12 U.S.C. § 2607(d). 

Practice Tip: The bottom line is that any payment by the lender to the broker is illegal if it is not for the reasonable value of services actually performed. So if you see a high up-front broker’s fee plus a yield-spread premium or other broker fee paid by the lender, there’s a good chance the lender-paid is fee is “unearned gravy” and constitutes a violation.

There is a private right of action for violation of § 2605 (Servicing requirements and administration of escrow accounts). Actual damages for each failure to comply, additional damages for a pattern and practice of noncompliance, plus attorney’s fees and costs. 12 U.S.C. § 2605(f).

Statute of Limitations

  • 1 year for affirmative (kickback and fee-splitting) claims. 12 U.S.C. § 2614;
  • Unlimited as a defense to foreclosure in the nature of a recoupment or setoff. 735 ILCS 5/13-207. Bank of New York v. Heath, 2001 WL 1771825, at *1 (Ill. Cir. Oct. 26, 2001).

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Consumer Fraud and Deceptive Business Practices Act (CFA)

Purpose

“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, in the conduct of any trade or commerce are hereby declared unlawful whether any person has in fact been misled, deceived or damaged thereby.” 815 ILCS 505/1. 

Sources of Law

  • 815 ILCS 505/1 et seq.;
  • In construing ICFA § 2, “consideration shall be given Section 5(a) of the Federal Trade Commission Act [15 U.S.C. § 45] and the federal courts relating to Section 5(a) of the Federal Trade Commission Act.” 815 ILCS 505/2.

Substantive Requirements

Prohibits commercial deception, requiring proof of: (1) a deceptive act or practice; (2) an intent by the defendant that plaintiff rely on the deception; and (3) that the deception occurred in the course of conduct involving trade or commerce. Martin v. Heinold Commodities, Inc., 163 Ill. 2d 33, 75, 643 N.E.2d 734 (1994). Plaintiff must also allege that he suffered some harm which was proximately caused by the deception. Id.

Prohibits commercial unfairness, requiring proof that: (1) the challenged practice offends public policy; (2) is immoral, unethical, oppressive, or unscrupulous; or (3) causes substantial injury to consumers. Robinson v. Toyota Motor Credit Corp., 201 Ill. 2d. 403, 417-18 (2002).

CFA can be used to challenge a wide range of predatory lending practices, including improvident lending, see, e.g., Fidelity Financial Services v. Hicks, 214 Ill. App. 3d 398 (1st Dist. 1991), and “bait-and switch” practices, see, e.g., Chandler v. American General Finance, 329 Ill. App. 3d 729 (1st Dist. 2002).

Knowing violations of a number of other consumer protection statutes constitute automatic violations of ICFA. 815 ILCS 505/2Z.

Remedies

Remedies include actual damages, punitive damages, equitable relief, attorney’s fees and costs.  815 ILCS 505/10a.

Trial courts (both state and federal), have applied the decision by the Illinois Supreme Court in Zekman v. Direct American Marketers, 182 Ill. 2d 359 (1998), to hold that there cannot be assignee liability under the CFA, even though Zekman was dealing with the issue of direct liability, not the issue of the assignee liability of a party which acquires a negotiable instrument. See, e.g., Bank of New York v. Heath, 2001 WL 1771825, at *1 (Ill. Cir. Oct. 26, 2001) (no assignee liability under CFA), and Pulphus v. Sullivan, 2003 WL 1964333, at *21 (N.D. Ill. Apr. 28, 2003) (no assignee liability under CFA unless loan is covered by HOEPA). The problem with these rulings is that they ignore the long-standing principle of law, now codified in the Uniform Commercial Code, that, when one buys commercial paper (like a mortgage-backed note) and tries to enforce it against a borrower, the subsequent holder “stands in the shoes” of the original lender, and is subject to the same claims and defenses the borrower could have raised against the original lender. 810 ILCS 5/3-305(a). The subsequent holder can limit this liability only by proving that it is a “holder in due course,” 810 ILCS 5/3-305(b), which means proving the elements set forth at 810 ILCS 5/3-302(a). So, for instance, because lack of notice of the claim at issue is one element of proving holder-in-due-course status, 810 ILCS 5/3-302(a)(2)(vi), a lender who acquires the note during litigation of a claim cannot be a holder-in-due-course vis-à-vis that claim.

Practice Tip: Always try to establish active involement by the assignee in the loan origination process. For example, sometimes the original lender is just a “table-funder” or “correspondent lender” who is lending according to the assignee’s underwriting guidelines with the knowledge they’d immediately be selling the loan to the assignee.

Statute of Limitations

  • 3 years for affirmative claims. 815 ILCS 505/10a(e);
  • Unlimited as a defense to foreclosure in the nature of a recoupment or setoff. 735 ILCS 5/13-207. Bank of New York v. Heath, 2001 WL 1771825, at *1 (Ill. Cir. Oct. 26, 2001).

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OBRE (Office of Banks and Real Estate) Regulations

Purpose

The OBRE regs, modeled after HOEPA, were promulgated to attack the problem of predatory lending by regulating “high risk” home loans in the state of Illinois. Companion regs were promulgated by the Department of Financial Institutions (DFI), which regulates some home lenders.

Source of Law

Substantive Requirements

  • Covers loans made by OBRE/DFI licensees (most lenders) where loans closed between May 17, 2001, and December 31, 2003;
  • Covers high-risk loans defined (more liberally than in HOEPA) as loans exceeding 5% points and fees or with an APR exceeding 6% above the comparable Treasury rate (8% for loans secured by junior liens);
  • Prohibits specified predatory lending practices for high-cost loans;
  • No private right of action, but brokering or funding loans in violation of the OBRE regs may violate the “unfairness” half of the CFA’s prohibition against “unfair or deceptive acts or practices.” Robinson v. Toyota Motor Credit Corp., 201 Ill. 2d. 403, 417-18 (2002).

Remedies

Actual and punitive damages and equitable relief if enforced through the CFA.

Statute of Limitations

Three years, if enforced through the CFA.

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High Risk Home Loan Act

Purpose

This new statute was passed to attack the problem of predatory lending by building on and codifying the OBRE regs, giving aggrieved homeowners a private right of action and the Attorney General enforcement power.

Source of Law

Coverage

This statute is effective for loans closing on or after January 1, 2004.

It covers high-risk loans as per the definition set forth in the OBRE regs, i.e., loans exceeding 5% points and fees or with an APR exceeding 6% above the comparable Treasury rate (8% for loans secured by junior liens).

Substantive Requirements

Sec. 15 Ability to repay: Lender must believe borrower can repay (presumed affordable if debt-to-income ratio below 50%);
Sec. 20 Verification of ability to repay loan: Lender must document ability to repay;
Sec. 25 Good faith dealings: Lender must act in good faith in all relations with a borrower;
Sec. 30 Prepayment penalty: PPP limited to 3% of the total loan amount in the first year, 2% in the second, 1% in the third, 0% thereafter;
Sec. 40 Pre-paid insurance products: No single-premium credit insurance;
Sec. 45 Refinancing prohibited in certain cases: No refi within 12 months unless tangible net benefit to borrower;
Sec. 55 Financing of points and fees: No financed points and fees in excess of 6% of the total loan amount;
Sec. 60 Payments to contractors: No direct payments solely to contractors;
Sec. 65 Negative amortization: No planned increase in principal balance;
Sec. 70 Negative equity: No loans over 100% loan-to-value ratio;
Sec. 80 Late payment fee: No late payment fee over 5% and no compounding of late fees;
Sec. 85 Payment compounding: No loan with more than 2 months’ payments paid up-front;
Sec. 90 Call provision: No discretionary lender call provision;
Sec. 95 Disclosure prior to making a high risk home loan: Advance cautionary notice of high-risk status of loan;
Sec. 100 Counseling prior to perfecting foreclosure proceedings: Required notice of counseling opportunity if loan in default more than 30 days;
Sec. 105 Right to cure: Required notice of 30-day right to cure;
Sec. 110 Mortgage Awareness Program: Required notice of (waivable) opportunity for borrower to attend OBRE/DFI-sponsored counseling program before executing high risk home loan;
Sec. 130 Circumstances voiding mandatory arbitration provisions: No oppresive or unfair mandatory arbitration clause.

Remedies

Violation of any of the above renders term unenforceable and gives private right of action through the CFA (with actual, punitive, and equitable relief).

There is assignee liability for individual claims, and in limited cases for class action claims (if the assignee does not establish a “safe harbor” defense).

Statutes of Limitations

  • 3 years for affirmative claims (but 5 years for individual affirmative claims seeking only to reduce or eliminate remaining debt)
  • Unlimited for claims to defend or fend off foreclosure

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Illinois Fairness in Lending Act

Purpose

This is a fair housing law, but at the same time the High Risk Home Loan Act was passed, this law was amended to target two types of predatory lending, “equity stripping” and “loan flipping.”

Source of Law

Substantive Provisions

Prohibits “equity stripping,” which means “to assist a person in obtaining a loan secured by the person’s principal residence for the primary purpose of receiving fees related to the financing when (i) the loan decreased the person’s equity in the principal residence and (ii) at the time the loan is made, the financial institution does not reasonably believe that the person will be able to make the scheduled payments to repay the loan.” 815 ILCS 120/2(d).

Prohibits “loan flipping,” which means “to assist a person in refinancing a loan secured by the person's principal residence for the primary purpose of receiving fees related to the refinancing when (i) the refinancing of the loan results in no tangible benefit to the person and (ii) at the time the loan is made, the financial institution does not reasonably believe that the refinancing of the loan will result in a tangible benefit to the person.” 815 ILCS 120/2(e).

Practice Tip: A borrower can sue for actual damages under this law but cannot simultaneously seek damages under another law (e.g., the CFA) for the same wrongdoing.

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Illinois Interest Act (IIA)

Substantive Requirements

Section 4, 815 ILCS 205/4(2)(a) prevents the imposition of any prepayment penalty on loans bearing more than 8% interest.

Practice Tip: Until recently, this section did not apply to AMTs (“Alternative Mortgage Transactions”), namely, adjustable-rate or balloon mortgages. However, as of July 1, 2003, this section does apply to those loans, so be on the look-out for claims of this type.

Remedies

Statutory damages in “an amount equal to twice the total of all interest, discount and charges determined by the loan contract or paid by the obligor, whichever is greater,” plus attorney’s fees and costs. 815 ILCS 205/6.

Statute of Limitations

  • For affirmative actions, 2 years after the earlier of the last scheduled payment date or the date the loan is fully paid off;
  • Unlimited as a defense to foreclosure. 815 ILCS 205/6.

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Common Law Fraud

Substantive Requirements

Unlike CFA, common law fraud requires proof of reliance. Specifically, to prove common law fraud, you must show: (1) a false statement of material fact; (2) the party making the statement knew or believed it to be untrue; (3) the party to whom the statement was made had a right to rely on the statement; (4) the party to whom the statement was made did rely on the statement; (5) the statement was made for the purpose of inducing the other party to act; and (6) the reliance by the person to whom the statement was made led to that person's injury. Siegel v. Levy Organization Development Co., 153 Ill. 2d 534, 542 43, 180 Ill. Dec. 300, 607 N.E.2d 194 (1992). 

In many predatory lending cases, borrowers can allege common law fraud against the party with whom they dealt directly (the contractor, broker, or loan officer). In the foreclosure context, this is usually done via a third-party claim.

In addition, liability for common law fraud can be extended, e.g., from the broker to the lender, if the lender knowingly accepted the “fruits of the fraud.” Moore v. Pinkert, 28 Ill. App. 2d 320, 333, 171 N.E. 73 (1960); Pulphus v. Sullivan, No. 02 C 5794, 2003 U.S. Dist. LEXIS 7080, at **61-62 (N.D. Ill. April 25, 2003). This distinguishes common law fraud from an ICFA claim, which cannot be brought against a third party merely because that third party knowingly accepts the benefits of another’s fraud.  Zekman v. Direct American Marketers, Inc. 182 Ill. 2d 359 (1998).

Remedies

Actual damages, punitive damages, equitable relief. Lucas v. Downtown Greenville Investors Limited Partnership, 284 Ill. App. 3d 37 (2nd Dist. 1996).

Statute of Limitations

  • 5 years for affirmative claims. 735 ILCS 5/13-205;
  • Unlimited as a defense to foreclosure in the nature of a recoupment or setoff. 735 ILCS 5/13-207. Bank of New York v. Heath, 2001 WL 1771825, at *1 (Ill. Cir. Oct. 26, 2001). 

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Breach of Fiduciary Duty

Substantive Requirements

The specific elements here are: (1) a fiduciary duty was created; (2) the fiduciary duty was breached; and (3) the breach proximately caused the injury of which the plaintiff complains. Martin v. Heinold Commodities, Inc., 163 Ill. 2d 33, 53, 205 Ill. Dec. 443, 643 N.E.2d 734 (1994). Did the broker establish a position of trust to act in the best interest of the borrower (even if it tried to disclaim its duty through a standard-form document)? Did the broker subsequently violate that duty? For example, brokers often secure a loan at a higher-than-par rate and pocket a yield-spread premium (a commission on the higher rate) from the lender. Though the borrower may see the term “yield-spread premium” on the loan documents, the borrower has no idea what this means. Such facts may give rise to a claim of breach of fiduciary duty (see discussion supre re YSP claims pled as violations of RESPA).

Remedies

Remedies include actual damages, equitable relief.

Statute of Limitations

5 years for affirmative claims.  735 ILCS 5/13-205. (This claim runs against the broker, so you won't be pleading it defensively vis-a-vis the foreclosing lender).

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Breach of Contract

Substantive Requirements

The parties to a contract have a duty to honor their obligations thereunder, and they also have an implied duty of good faith and fair dealing. Saunders v. Michigan Avenue National Bank, 278 Ill. App. 3d 307, 315, 662 N.E.2d 602 (1st Dist. 1996). Did the broker or lender fail to live up to its contractual duty? Did it frustrate the borrower’s ability to perform on (or reinstate) the contract? If so, it may have breached the contract or its duty of good faith and fair dealing, which is implied in every contract.  Hill v. Harris Bank, 329 Ill. App.3d 705, 710 (1st Dist. 2002).

These types of claims are often based on the acts of the loan servicer (the holder’s loan servicing agent), and you can bring in the servicer as a third-party if it provides an advantage, but you don’t have to, because the acts of the servicing agent can be held against the holder (the plaintiff in the foreclosure case).

Remedies

Remedies include actual damages, specific performance.

Statute of Limitations

  • 10 years for affirmative claims. 735 ILCS 5/13-206;
  • Unlimited as a defense to foreclosure in the nature of a recoupment or setoff. 735 ILCS 5/13-207. Bank of New York v. Heath, 2001 WL 1771825, at *1 (Ill. Cir. Oct. 26, 2001).

Also helpful is the Predatory Lending Claims Document Review Checklist.

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