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Patrick Pulatie is the CEO for Loan Fraud Investigations (LFI). LFI is a Forensic/Predatory Lending Audit company in Antioch CA, and has been doing homeowner audits since Nov 07. LFI works daily with Attorneys throughout California, assisting homeowners in the fight to save their homes. He and Attorneys are constantly developing new strategies to counter foreclosure efforts by lenders.

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TILA and RESPA Rescission Ineffective In Real-World Foreclosure Defense

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When facing foreclosure, the homeowner is always confronted with the difficult task of researching information to acquaint him or her with what to expect in the coming months. This research will include a number of different subjects covering such issues as the foreclosure process, loan modification, legal statutes, and current trends. Somewhere in the process of researching this information, the homeowner will come across the subject of forensic loan audits and TILA and RESPA. The question then becomes, “What is TILA and RESPA and how can it help me?”

TILA and RESPA are the two main pieces of Federal Legislation that govern certain processes regarding lending, and especially so in the mortgage lending arena. TILA stands for the Truth In Lending Act, and RESPA stands for the Real Estate Settlement Procedures Act. These are specific legislative acts designed to protect the borrower.

TILA is the main effort of Congress to ensure fair lending and to protect the borrower. Its purpose is to promote the informed use of consumer credit, the costs of borrowing money, the terms of the loan and other much needed information. It requires the providing of certain disclosures of relevant information for each transaction that is considered, and it provides the legal remedies for each violation of the Act.

RESPA is the “other” main effort of Congress to regulate lending. RESPA is designed to protect the borrower by ensuring (1) fair settlement proceedings through early disclosure of settlement costs, (2) the prevention of “kickbacks” and “illegal referral fees” that increase borrowing costs to the consumer, and (3) the prohibition of certain acts that increase borrowing costs.

There is much more detail to these acts, but the purpose of this article is to provide a basic understanding of the Acts and how courts and lenders are responding to various challenges. It will focus primarily on TILA, so that the reader will better understand the legal options of any TILA violation. (Most foreclosure defenses will be based upon TILA violations.)

Under TILA, when a mortgage transaction is considered, the lender must provide a borrower within three days of receiving a loan application a number of disclosures, of which the main disclosure is the Truth In Lending Disclosure. This disclosure identifies the terms of the loan, APR, Amount Financed, Finance Charge, Total Payments, and the Payment Schedule. These disclosures are to be as accurate as possible. The purpose of providing the disclosures is so that the borrower will be better able to compare loans from different lenders.

When the loan is ready to close, and you have the “final signing”, the lender is required to provide the borrower with a Final Truth In Lending Disclosure. This disclosure, along with the final settlement statement and the Right to Cancel Notice, are the key elements in foreclose defense, when arguing a TILA violation

TILA is a technical statute. This simply means that any “material violation” can invoke the remedies as provide for in the Act. The “material” violations that most frequently invoke potential remedies are:

  • APR
  • Finance Charge
  • Amount Financed
  • Total Payments
  • Payment Schedule
  • Right to cancel violations.

Common Remedies for violations of TILA are

  • Attorneys’ fees and court costs for successful enforcement and rescission actions.
  • Statutory damages, a minimum of $200 but no more that $2,000
  • Actual damages
  • Double the correctly calculated finance charge (but not less than $100 or more than $1,000 for individual actions).
  • Rescission

For the homeowner in foreclosure trouble, the most important of the offered remedies is Rescission, and this article will pay particular attention to it. The other remedies do not offer any ability to stop a foreclosure as Rescission can, but Rescission is entirely misunderstood and is often used in the wrong situation.

Rescission is the process of legally canceling a loan. If a violation of material disclosures is severe enough, and the threshold for severity is quite low, then the borrower has the opportunity to “rescind” or “cancel” the loan. At that point, the confusion comes in.

In theory, this is the process of rescission:

  1. Borrower finds violations of the TILA that offer rescission as a remedy.
  2. Borrower notifies lender of rescission by letter.
  3. The security interest (the Note and Deed of Trust) automatically becomes void and the lender has 20 days within which to take any and all actions necessary to reflect the termination of the security interest. The lender is obligated to return any money or property given as earnest money or down payment within those twenty days. The borrower is not liable for any finance or other charges and is entitled to recover all fees incurred in the transaction.
  4. The borrower is obligated to return to the lender any money or property the borrower received as part of the credit transaction within twenty days, as their part of the rescission.
  5. If the lender does not take possession of the property or money within 20 days, then the property is retained by the borrower and is held

Wow! You may get your home free and clear… at least that is what many scandalous loan modification companies and auditor firms say.

But here is the reality of rescission:

  • In California, since homes are underwater and the borrowers owe more than the home is worth, they cannot tender back to the lender the money that was borrowed, so rescission is not an effective course of action in California, and for that matter, most other states as well.
  • Courts have the ability to “change the order” in which rescission is tendered, meaning that the borrower must show the ability to make a valid tender, before the security interest in the loan is cancelled.
  • No ability to tender the amount due means that there is no valid rescission.

In other words, rescission does not do what the homeowner probably wants the most – to remove any financial obligation connected to the house (as before they purchased it) – since the lender is only obligated to take back the original money lent, minus fees, and tear up the contract.

What to Expect when you rescind a loan

When you go to rescind a loan, you need to be aware of what will actually happen. What I write is based upon the experience of having done over 1000 audits, and working with attorneys who do attempt loan rescissions. (In this period of time, I have seen one offer of rescission, and a number of “talks” with lenders about rescission, always after a Restraining Order is granted to a homeowner trying to stop an auction. These “talks” have usually gone nowhere.)

When you and your attorney rescind a loan, here is the actual process:

  1. Your attorney will usually send a “Demand Letter” to the lender. The purpose of the letter is to notify the lender that violations of the TILA have been found in your loan and you are invoking rescission rights as remedy.
  2. The lender will respond in one of two ways: (a) ignore the letter altogether, or (b), send a reply where they deny that there are any violations of TILA and that they refuse to honor rescission.
  3. At this point, the homeowner has only one real option left. That will be to file for a Temporary Restraining Order to stop the sale of the property, and to request a Preliminary Injunction to be granted stopping the sale on a more permanent basis, until the lawsuit that has been filed at the same time can be heard.
  4. When the lawsuit is filed, and prior to the Preliminary Junction Hearing, if there is one Federal Charge alleged in the complaint, the lender will usually have the lawsuit remanded to Federal Court and away from State Court. The purpose will be to request a dismissal of all charges. They have a simple reason for doing this. The lenders know that Federal Court judges tend to be more receptive to the lender’s side and often will dismiss the case. This appears to happen more often than not. As a result, it is beneficial for lenders to have the case remanded to Federal Court.
  5. If the lawsuit is not dismissed, then the Preliminary Injunction Hearing will be held. This is actually a “mini-hearing” of the case before a judge. Based upon what is presented as evidence, the judge will determine the likelihood of the homeowner prevailing at trial, and if he finds that there is a likelihood of the borrower winning the case, he grants the injunction. Once the Injunction is granted, the lender will usually begin to talk seriously with the homeowner and attorney about resolving the issue.
  6. If talks do not work out, then the homeowner is going to trial. This is a process that will take months to years to reach a conclusion and will become very expensive, especially to the homeowner. (I currently have one client that has been in settlement hearings over a year, and her lawsuit began in Dec 07.)

The homeowner must understand that the lender has a very specific goal in mind during this phase of the lawsuit. The lender wants to stall the entire process, causing extensive costs to the homeowner. It is hoped that the homeowner will simply run out of money or give up and let the home be foreclosed upon, which happens quite often.

It should also be noted that Truth In Lending and RESPA lawsuits have been regularly filed since the mid 1990’s. Case Law is extensive and often contradictory. The lenders know the cases and the rulings and taper their arguments to fit those rulings. Most of the attorneys who are taking on cases do not know these cases, so many of the arguments that they make, the lenders already have the counter arguments ready.

The way to take on the lenders is to use different plans of attack, using statutes other than TILA and RESPA. The problem is that often a lender will attempt to raise the defense of Federal Preemption, whereby Federal Law takes precedent over state law.

Federal Preemption can be fought. In most states, the statutes exist to counter Federal Preemption claims. These statutes are versions of the Federal Trade Commission Act, Section 5, which identifies Unfair and Deceptive Acts and Practices (UDAP). Lenders will claim that that these are not applicable, however, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the FDIC have all at one time or another, in guidance letters, have asserted that even National Banks could be subject to such state statutes. Case law does indeed support such actions in many instances.

Conclusion

I hope that this article has provided much needed information regarding TILA/RESPA and what can be expected when one uses them to attempt rescission and then the likelihood of court action after rescission is denied and has cleared up misconceptions about the rescission process. My next article will provide information into the audit process and what a “true” audit is designed to accomplish.

Disclaimer:  Pulatie and LFI are not attorneys and do not dispense legal advice. The purpose of LFI is to assist attorneys and homeowners in their fight.

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There Are 6 Responses So Far. »

  1. Very good article. I actually do the trench work of appearing at the TROs/OSC Re Preliminary Injunctions in an attempt to preclude or otherwise forestall trustee’ sales and I know, first hand, that what you claim is absolutely correct. Dealing effectively with mortgage foreclosures is very difficult and in most cases, an attorney cannot really do much. Your choices are limited to either uncovering sufficient actionable conduct on the part of the lender and/or mortgage servicer and taking the lenders/servicers head on or having your client file for Chapter 13 bankruptcy protection and if the mortgage is an 80/20 or 80/10/10, to strip the wholly unsecured mortgages.

    These clown who advertise to be able to modify homeowner’s loans and reduce the monthly mortgage payment by thousands of dollars and to reduce the principal balance of your mortgage by hundreds of thousands of dollars are the same clowns who were pushing these toxic loans a couple of years ago. Only now, they have leased an attorney’s name and charge thousands for doing nothing more than having the lender agree to tack the arrearages onto the back end of the mortgage and reducing the monthly mortgage payment – which is offset by a substantial balloon payment that will be due and owing in 30 years.

    It is criminal that an entire generation’s “golden years” are going up in smoke (or more commonly referred to as “being under water”) before our very eyes and the perpetrators are not being punished.

    Perhaps you should offer to engage in a joint venture with “implode-meter” since the advent of “MendelsonMatters” (or whatever he calls that blog of his) is an obvious cry that they are hurting for serious and informative material. Better yet, keep up the good work and eventually people like me will not have to work so hard to come across people like you. Your site is definitely going into “My Favorites” and I will be visiting you every night.

    Regards,
    Boomer55

  2. [...] The problem with rescission of a loan is that to cancel the loan, the borrower must be able to “tender an offer” of all money borrowed from the lender, minus all costs of the loan and all payments.  The outcome is to “restore” all parties to a state of being prior to the loan being taken out.  In California (as in most other “bubble locales”), most homeowners, for various reasons, have no ability to tender this offer.  Most often, the lack of ability to tender the offer is that the homeowner cannot find the financing to replace the loan. Therefore, rescission is ineffective, and lenders know this.  (See more in my earlier IamFacingForeclosure article, TILA and RESPA Ineffective In Real-World Foreclosure Defense). [...]

  3. I don’t totally agree with this, although it offers some good information. TILA is intended as a consumer protection law to remedy the lender’s bad actions. I don’t know if you have specific cases on this issue, but I would be surprised to see any courts of appeal not allowing the consumer to rescind based on the value of the loan. While I understand the argument you have made, it would undermine the consumer’s ability to benefit from the law if market situations (partly created by the lenders) prevented rescission. If you do have a particular case in mind, I would look at the jurisdiction it came from and not assume the courts would view the issue the same in other areas of the country.

    Also, RESPA requires the 3-day application disclosures, not TILA, and RESPA does not offer damages for failing to provide them or rescission. TILA is the only federal law that specifically allows rescission (and HOEPA, which is a subset in Reg. Z). However, while it RESPA does not allow for rescission, RESPA helps a rescission case due to its language of what fees are bona fide, etc.

    Best,

    T Doucet
    Author, 23 Legal Defenses to Foreclosure


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