Truth-in-Lending Disclosure Failure Leads to Mortgage Becoming "Unsecured"

[Moe Bedard]

Source http://seekingalpha.com/article/4540...ming-unsecured

It is a fascinating tale that I suspect won't be ignored for long. For those few people familiar with the Federal Truth-in-Lending Act [TILA], this won't be much of a surprise. To everyone else, read on.

What happens if a lender fails to comply with the TILA rules? The borrowers are allowed to RESCIND THE LOANS AND VOID THE MORTGAGES ON THEIR HOMES. The mortgage lender is then just another unsecured creditor, who must get in line behind everyone else who may have filed a lien on the property. Whoever files first (Credit card, auto finance, doctors, etc.) has first priority.

That makes the mortgage loan itself unsecuritized -- and worth a lot less -- due to the increased risk of loss of collateral:

"Some consumers burdened by escalating subprime mortgage payments are finding a way out. A growing number are suing lenders over inaccurate disclosure papers, and if they win they get to rescind the loans.

While that's good news for individuals, it's a potential problem for investors exposed to subprime mortgages. These investors, already buffeted by the subprime mortgage meltdown, are facing a new risk - the mortgages supporting some of their investments may not be enforceable because of violations of state and federal consumer protection laws.

It's not clear yet how widespread or successful these lawsuits may become. "Depending on how widespread, this could be a minor bump in the road or this could be a very significant factor," says Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics.

The subprime market has been known for its lax standards in documentation and the proliferation of these loans in recent years is now fueling significantly more complaints. The subprime share of first mortgages rose to 13.4% in the first quarter of 2007 from 10.9% in the first quarter of 2004."

Let me put on my lawyer hat for a moment: The Truth-in-Lending Act requires "clear and conspicuous" disclosure to borrowers of the key provisions of their mortgages. This includes such details as the eventually reset interest rate, specific loan terms, and the total dollar amount the mortgage will cost over time:

§ 129. Requirements for certain mortgages
(1) SPECIFIC DISCLOSURES.--In addition to other disclosures required under this title, for each mortgage referred to in section 103(aa), the creditor shall provide the following disclosures in conspicuous type size:
(2) ANNUAL PERCENTAGE RATE.--In addition to the disclosures required under paragraph (1), the creditor shall disclose

(A) in the case of a credit transaction with a fixed rate of interest, the annual percentage rate and the amount of the regular monthly payment; or
(B) in the case of any other credit transaction, the annual percentage rate of the loan, the amount of the regular monthly payment, a statement that the interest rate and monthly payment may increase, and the amount of the maximum monthly payment, based on the maximum interest rate allowed pursuant to section 1204 of the Competitive Equality Banking Act of 1987.
(emphasis added)

This seems to be where many of the subprime 2/28 ARMs ran afoul: They failed to meet the disclosure laws regarding actual interest amounts and payments.

Who has gotten tagged with these cases so far? Subprime lender NovaStar Financial Inc. (NFI) in Kansas City settled a class action suit for $5.1 million. And, consumers in Wisconsin recently won a class-action TILA suit (its under appeal).

Between 1998 and 2006, approximately 2.2 million (nominal) home owners with subprime loans are expected to lose their homes, according to the Center for Responsible Lending. The consumers in this group who a) could not afford those loans and b) did not receive the proper disclosures are "talking with lawyers in an effort to prevent foreclosures."
~~~
Anyone who has worked in a corporate environment has used or heard the phrase "Send it to Legal," or "What did Legal say about that?" Of course, "Legal" being the internal corporate legal department.

Didn't the legal departments of the mortgage underwriters prepare these loan forms? Aren't these standardized? WTF did the various legal departments involved actually do, other than go to lunch and wear ugly ties ?

Astounding!

And, here's the real rub: This kinda makes you wonder what sort of due diligence the secondary market actually did on these basic non-compliant loan errors in the sub-prime market. How about the CDO banking underwriters -- didn't their Legal review these docs for compliance with existing laws prior to purchasing trillions of dollars worth of the stuff? Was their fraud involved, or did these guys just miss it?

This is basic stuff, and it's amazing that in the headlong rush to write these garbage loans, no one caught very basic, banking 101 type rule. It just shows how little oversight by the regulators there was in this space. Hard to imagine, but the Central Bankers either never reviewed these loan documents, or never caught these basic disclosure errors.
And yes, I place some of the blame on the Greenspan Federal Reserve -- they were the regulatory authority in charge of bank mortgage lending when these junk mortgages were written . . .

[Andrew]

Good info Moe!!!

[6wolverines]

I LOVE IT......!!!!!!

Just tell the lender...."Go ahead, send me to collection, just get in line behind Dillard's!!!"

Moe, you are, indeed, a wealth of info that makes us stronger every day!

Char

[NicoleC]

Moe,

I have a question regarding the TILA. If the lender issues another application to you, with different information, do they have to provide new disclosures BEFORE the closing?

Also, they stated my income, and I am a commission only employee, does that constitute a violation of TILA?

I am in danger of losing my home and need to get some GOOD advice.

[Moe Bedard]

Nicole,
Welcome to the forum and thank you for posting.........

We need some more information regarding your situation to offer some assistance to you. Could you please start your own thread in the "Tell us your story" section of the forum and give as much detail as you can about your loan, lender, rate adjustable or not, one or two loans, loan balance, house value now type of loan, state that you are in, what is causing you to lose the home, are you behind in payments/taxes, foreclosure, just to name a few things.........
If you could do that it would give us a starting point....
Thank you,

Welcome to the forum and thank you for joining...

The first TIL is an estimate only, after they application is taken the TIL that is issued with the application is not replaced until closing, at closing you get the final TIL for the actual program and product that you are closing to. The lender is not required to issue interim TIL's. There is no violation if there is no interim TIL issued. There must be an initial TIL and a Final TIL.

No it is not a violation of TIL to use Stated Income regardless of the way the income is derived...income and documentation does not fall under RESPA, Reg Z or Truth in Lending Regulations.

Without a qualified forensic review of the documents it would be impossible to determine if the Lender had violated RESPA or Reg Z which are the regulations surrounding Truth In Lending.

[NicoleC]

Poppy,

There are several things that this company did, as well as not being licensed to write loans in this state. I am in MA. I hired an attorney, who then proceeded to not file the 93A Demand letter as required by the state, and it was denied in the courts.

They pulled the old bait and switch, and waited until the closing( 2hours before) to change everything, leaving me no alternative, for various reasons. They forged the dates on the statement of non rescission, and forged the loan officers signatures on the applications (I have a sworn notarized affidavit) and still they get away with it.

Did the attorney that you hired retain a qualified forensic review of the documents in order to determine these issues with a qualified professional? The Loan Officer's Signatures are often signed by other than the LO on the final application, this is done with great regularity on the final 1003, either the processor or another party at the Lender/Broker commonly does it and it has no bearing on the issues in the file. We see it regularly that the Final 1003 is either not signed or that another party has executed the affidavit of interview on the 1003 and to date and in my experience it does not provide adequate teeth to compel resolution or claims against the lender. I am speaking from a Lender perspective, and as such you again may wish to speak to an attorney, however as a lender it is not a problem in the world of compliance on the final application.

The dates on the Right to Cancel can be changed, ie.. the document was printed on the 15th, but the loan did not close until the 20th, the dates are marked out and then changed with the 20th and initialed by the borrower at closing....this also is common, however I am not looking at your documents and can not ascertain your situation and would be unable to unless the documents were in front of me. You need to retain qualified assistance to review the documents for violations.

The issues with the last minute change in program and product, rate, terms and conditions are common and a major complaint that we see in these transactions. The issues there and the possible "claims" that you may have due to this again must be addressed by legal counsel.

[NicoleC]

Poppy,

The attorney did not do a forensic review. The attorney did nothing properly. I just received an email from him stating that the Chapter 13 will not fly because we don't make enough money.

If I made enough money, why would I need the Chapter 13. UGH....its a vicious cycle.

The lender forged the dates on the statement of non rescission. It is not our writing. The loan officer that started the loan, did not know, and was never told, that the loan was, according to the lender's attorneys, denied. We were never informed of this either. We never received a statement of denial, and they cannot show proof that we were denied.

Nicole

The dates in the body of the ROR/Notice of Cancellation are never completed by the borrower, they are either completed at the lender level by computer, or at the closing table by the closer predicated on the date of closing and the 3 day window of cancellation from that date forward.

We have never allowed the borrower to complete those dates, that is a function of the Lender or the Closing Agent so that there are no errors in the dating functions of Cancellation.

[caddear]

Our recission page was blank except for the name of the lender. Our lawyer filed a recission letter which the lender did not answer. Lender started foreclosure proceeding which is illegal as recission should have voided the security interest. Waiting to hear if the lawyer is going to file a TRO.

[tiffany]

I was going through our paperwork again and I noticed that what is on our TILA is not what is on our Adjustable Rate Note. We have a broker who is willing to look at our paperwork for us and note charge us(he has already told us that we can refinance FHA for awhile due to our credit, so I trust that he is not going to be taking advantage of us). We are finally getting back on track financially, but we still need to get out of this high intereste rate that we just adjusted to in July. Thank you in advance!

Tiffany