Predatory Lending Claims Document Review Checklist

Predatory Lending Claims Document Review Checklist

Last updated: December 2004

1. What documents do you need?  In most cases you can get all of the information you need from the following five or six loan documents:

   ___   Truth in Lending Disclosure Statement
   ___   (3-Day) Notice of Right to Cancel
   ___   HUD-1 (or HUD-1A) Settlement Statement
   ___   Mortgage and Note (with any riders or attachments)
   ___   Uniform Residential Loan Application
   ___   HOEPA (or “Section 32”) Notice (if lender treated loan as a HOEPA loan)

2. What do you need to look for?  Violations of the following federal and state laws may entitle the borrower to a reduction in the amount they owe on a refinance or home equity loan.

Federal laws

Truth in Lending Act (TILA):

Does the TILA Disclosure Statement clearly and conspicuously display each of the following?

   ___   Annual Percentage Rate (APR)
   ___   Finance Charge
   ___   Amount Financed
   ___   Total of Payments
   ___   Payment Schedule

Are the disclosures accurate on their own terms (i.e., are they internally consistent)?

   ___   APR (use APR calculator/software)
   ___   Total of Payments (based on the Payment Schedule and total of Amount Financed plus Finance Charge)

Are the disclosures accurate given an independent analysis of the charges?

   ___   Amount Financed (i.e., do we think the lender left out something that should have been included in the prepaid finance charge and thereby understated the Finance Charge/overstated the Amount Financed by more than $35 (for rescission) or $100 (for $2,000 statutory damages?))

(If any of above disclosures were not made conspicuously and accurately, the borrower has a 3-year right to rescind the loan, meaning the security interest is void and the lender is owed an unsecured “tender” amount corresponding to the Amount Financed minus all payments made on the loan.)

Did the borrower receive a proper (3-Day) Notice of Right to Cancel?  Notice must disclose:

   ___   That the lender has a security interest in the borrower's’s dwelling
   ___   That the consumer has a right to rescind the transaction
   ___   The scope of the consumer’s right to rescind (i.e., if refinanced by the same lender, only the new advance of funds is rescindable)
   ___   How to exercise the right to rescind, with a form for that purpose, designating the lender’s place of business
   ___   The effect of rescission
   ___   The date the rescission period expires (loan date plus three calendar days, excluding Sundays and federal legal holidays)
   ___   Also: there can be no disbursement by lender of funds within the 3 days (e.g., to a home improvement contractor), since that abrogates 3-day right to rescind

(If the borrower did not receive a proper Right to Rescind, the borrower has a 3-year right to rescind the loan, plus $2,000 statutory damages.)

Home Ownership and Equity Protection Act (HOEPA):

   ___   APR trigger: is the APR more than 10% above the comparable T-bill rate for the 15th day of the month previous to the date the loan application was received by the lender (or more than 8%, for mortgages in first position closed on or after October 1, 2002)?

(or)

   ___   Fees trigger: are HOEPA points and fees more than 8% of the “total loan amount” (i.e., the Amount Financed or slightly less)?

If covered by HOEPA, did the lender provide an adequate HOEPA Notice?

   ___   Received by the borrower 3 business days before closing
   ___   Tells borrower s/he does not have to go through with the loan, and that if s/he does, s/he could lose the home
   ___   Sets forth APR
   ___   Sets forth initial monthly payment
   ___   If ARM, sets forth maximum monthly payment
   ___   Sets forth balloon payment, if any
   ___   Sets forth the “total amount borrowed,” for loans closing on or after October 1, 2002

(If the HOEPA Notice is defective, the borrower has a 3-year right to rescind and is entitled to statutory damages of $2,000 per violation, plus all amounts paid on the loan.)

If covered by HOEPA, does the loan contain any terms or practices prohibited by HOEPA?

   ___   Balloon payment on loan of less than five years
   ___   Negative amortization (payments that cause the principal balance to increase)
   ___   Advance payments of more than two periodic (usually monthly) payments
   ___   Increased interest rate after default
   ___   Refund calculated by method less favorable than the actuarial method
   ___   Prepayment penalties after five years, or in absent verification (through signed financial statement, credit report, and employment income records) that borrower’s debt-to-income ratio does not exceed 50%
   ___   Improvident lending
   ___   Direct payments to home improvement contractors

(If the HOEPA loans contains any of the above prohibited terms, the borrower has a 3-year right to rescind and is entitled to statutory damages of $2,000 per violation, plus all amounts paid on the loan.)

Real Estate Settlement Procedures Act (RESPA):

   ___   Yield-spread premium (YSP) paid to broker (listed on HUD-1)
   ___   Separate broker fee listed
   ___   Is three times the YSP enough to offset the amount the borrower was in default when sued?

(If answer is yes to all three you may have a good RESPA claim.)

Equal Credit Opportunity Act (ECOA):

   ___   Loan application sets forth requested terms (interest rate, loan amount, fixed-rate)
   ___   No written counter-offer (within 30 days) to terms requested
   ___   Loan includes terms worse than those requested in loan application

(If answer is yes to all three, you may have a good ECOA claim, entitling borrower to the more favorable terms requested by the borrower, plus up to $10,000 in punitive damages.)

State laws

Illinois anti-predatory lending regulations:

   ___   Was the loan closed on or after May 17, 2001?
   ___   Is lender license by OBRE or DFI?

If yes to each of the above, is either of the following two triggers met?

   ___   APR trigger: is the APR more than 6% (8% for junior liens) above the comparable T-bill rate on the 15th day of the month previous to the date the loan application was received by the lender?

(or)

   ___   Fees trigger: are points and fees (including YSP and single-premium credit insurance) more than 5% of the “total loan amount” (i.e., the Amount Financed or slightly less)?

If either trigger is met, does the loan contain any of the following prohibited terms or practices?

   ___   Improvident lending (presumed if debt-to-income ratio exceeds 50%)
   ___   Prepayment penalty (of > 3% in 1st yr, >2% in 2nd yr, >1% in 3rd yr, or anything thereafter)
   ___   Single-premium credit insurance
   ___   Refi of covered loan within 12 months, with added points and fees, absent financial benefit to borrower
   ___   Balloon payment on loan of less than fifteen years
   ___   Financed points and fees (including YSP and single-premium credit insurance) in excess of 6%
   ___   No direct payments to contractors
   ___   Negative amortization (payments that cause the principal balance to increase)
   ___   No loan in excess of 105% of the value of the home
   ___   Failure to provide notice of consumer credit counseling prior to foreclosure
   ___   Failure to provide notice of right to participate in Mortgage Awareness Program prior to issuing the loan

(If any of the above prohibited terms or practices are included in a loan covered by the Illinois regs, you may be able to sue for relief under the Illinois Consumer Fraud Act.)

Illinois Interest Act:

   ___   Is the loan a junior lien?
   ___   If so, does the loan have an interest rate higher than 8%, and loan origination fees (or other fees paid to the lender--not broker’s fees or smaller transaction fees, e.g., appraisal fee, closing fee)  in excess of 3% of the principal amount?

(If so, the borrower may be entitled to twice the interest on the loan, which should more than offset the full amount owed.)
 

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