Contributed by Kevin Chern, Total Attorneys, Inc.

Homeowners facing foreclosure are, understandably, looking for hope. News reports of homeowners successfully asserting the “produce the note” defense to stop foreclosure have sparked that hope in many. It seems only logical that a company commencing a foreclosure action should be required to demonstrate that it is the real party in interest before that action can move forward. But simply demanding that a mortgage servicer produce the note or establish itself as the real party in interest isn’t the magic bullet it sometimes appears in the popular press.

We know mortgage documentation is rife with errors, misrepresentations and missing links. Various studies have estimated the percentage of mortgage claims containing substantial errors between 57% and 80%. Katherine Porter’s 2007 study of mortgage proofs of claim in bankruptcy cases revealed that 52.77% of proofs of claim lacked at least one clearly-required document. What those errors mean for the homeowner depends not only on the nature of the error, but also on the state and jurisdiction in which the claims are prosecuted.

Success Stories

Attorneys in some states have had tremendous success with the defense. In September of 2008, the First District Court of Appeals in Ohio ruled on a case in which Wells Fargo Bank had commenced a foreclosure action based on a mortgage it did not own. (Wells Fargo Bank, N.A. v. Byrd, 178 Ohio App.3d 285, 2008-Ohio-4603.)

Although Wells Fargo subsequently acquired the mortgage by assignment, the trial court ruled that this later acquisition did not cure the jurisdictional defect and dismissed with prejudice. The trial court also ordered that the law firm filing the case on behalf of Wells Fargo submit proof that its client was the real party in interest in all future foreclosure actions filed by that firm.

Publicity surrounding Wells Fargo and a handful of other similar cases produced a flurry of real party in interest defenses and optimistic news coverage. A year later, the Ohio Supreme Court declined to review a similar case in Wells Fargo Bank, N.A. v. Jordan, leaving stand an Eighth District Court of Appeals ruling that “If plaintiff has offered no evidence that it owned the note and mortgage when the complaint was filed, it would not be entitled to judgment as a matter of law.”

At the same time, Florida legal aid attorney April Charney and a handful of others began challenging claims supported by affidavits of lost notes. It seemed that in the frenzy to slice, dice, flip and securitize the high-risk loans of the 1990s and early 2000s, many lenders and mortgage servicers had dropped the ball when it came to keeping accurate records. In many cases, the paper trail was broken, non-existent, or simply didn’t conform to legal requirements. Some plaintiffs in mortgage foreclosure cases found their claims dismissed outright for lack of documentation, and some homeowners found themselves in a better position than they’d ever imagined: enormous mortgage debt simply disappeared as it became clear that no proof of ownership of the debt could be produced.

It was heartening to see mortgage servicers taken to task and forced to follow the rules, but even in the oft-cited Byrd case, the real victory was scaled back considerably by the appellate court. While the dismissal was affirmed, the appellate court ruled that it should have been without prejudice; the order that the law firm submit additional documentation in subsequent cases was reversed. Those cases in which demanding the note and dissecting the paper trail resulted in a windfall for the homeowner were few and far between.

The State-by-State Difference

To a layperson, common sense dictates that a plaintiff would have to own the note and mortgage in order to file a complaint based on it; the big surprise is probably not the Ohio rulings above but the fact that the question ever arose. However, that question is far from settled in many states. Consumer attorneys in some states report that their courts are simply declining to entertain defenses like the one successfully raised in Byrd. The most likely explanation for this pattern is simple economy: a case dismissed without prejudice may be re-filed as soon as the defect has been cured, so many courts are apparently reluctant to go through the motions of dismissing a claim on procedural grounds only to have it filed as a new case soon after.

But disparate treatment of this issue by the courts isn’t the only—or even the most significant—difference from state to state. More than half of U.S. states allow for some form of non-judicial foreclosure. That means that the foreclosing party doesn’t have to file a court case in order to foreclose on the property. Non-judicial foreclosure doesn’t render true ownership of the mortgage irrelevant, but it does make it more difficult for the homeowner to pursue the issue.

While the defendant in a judicial foreclosure can simply raise the issue as a defense, the homeowner in a non-judicial foreclosure will typically have to file suit himself to get the issue of mortgage ownership and documentation before the court. That means not only filing fees and service of process, but also a host of procedural hoops unfamiliar to most homeowners. Few will be able to successfully prepare and argue such a claim without an attorney. That isn’t to say that the claim won’t succeed or isn’t worth pursuing in a non-judicial foreclosure state, but the process is far more complex, time-consuming and potentially expensive than the victory stories on television and in news reports might seem to suggest.

The Real Value of Demanding the Note / Questioning the Real Party in Interest

While demanding that the claimant produce the note / arguing that the claimant isn’t the real party in interest and doesn’t have standing to pursue a foreclosure action only occasionally results in a decision that effectively forgives the mortgage debt, the challenge can be a valuable tool for homeowners facing foreclosure. If a claim is dismissed and re-filed, that may buy the homeowner valuable time in which to negotiate or assemble funds to cure the default; the added procedural complications and the possibility that the mortgage servicer or alleged note holder may not be able to establish its claim provide an incentive for the claimant to compromise. Likewise, in a non-judicial foreclosure state, initiating a suit against the claimant may only rarely put an end to a foreclosure action altogether, but may still benefit the homeowner by slowing the proceedings and creating an incentive for the mortgage holder to negotiate a workable settlement.

– Kevin Chern
Total Attorneys, Inc.
25 East Washington Street, Suite 400
Chicago, IL 60602

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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.