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 5/13-207Bank 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)-1Lopez 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 5/13-207Bank 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 r

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