Predatory Lending Litigation Update

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1 For homeowners facing foreclosure, many of whom have been the victim of a predatory loan, up until recently, the Federal Truth In Lending Act ( TILA ) served as the primary legal vehicle to help families obtain new loans and stay in their homes. This article examines challenges the practitioner faces under TILA and looks at recently enacted legislation, Civil Code and , which should make it easier to obtain loan modifications for worthy borrowers. The Truth in Lending Act TILA is primarily a federal disclosure statute, located at 15 USC 1601 and promulgated by Regulation Z, 12 CFR 226, et seq. TILA s purpose is to assure a meaningful disclosure of credit terms so that borrowers will be able to compare more readily the various options available to them and avoid the uninformed use of credit. When a borrower enters into a home mortgage, TILA requires the lender to disclose the material terms of the loan in a clear and conspicuous manner and in a way which accurately reflects the legal obligation the borrower has on the loan. 12 CFR (c)(1). Material terms include the annual percentage rate ( APR ), finance charge and the borrower s three-day right to cancel, among others. If the material terms are not disclosed in compliance with TILA, the borrower is entitled to rescind their mortgage for up to three years. OCTLA Gavel Predatory Lending Litigation Update Rescission is available with respect to any loan held by an assignee lender if the originating lender failed to make the required disclosures. A rescission under TILA entitles the borrower to a reduction in the principal amount owed on their loan. The principal reduction is equal to all closing costs and all interest paid to date on the loan.15 USC 1635(b), Regulation Z, 12 CFR (d) (2), (d)(2). For many borrowers, the potential reduction in principal can be in the tens or hundreds of thousands of dollars. Statutory damages and attorneys fees are also available. 15 USC 1635(g), 1640(a)(3), 1640(g). The problem with the rescission remedy is that after the lender reduces the principal, the borrower is then required to tender. Tender under TILA usually means that the borrower must refinance and obtain a new loan to pay off the old predatory loan, albeit at the reduced TILA payoff amount. 8 In other words, the borrower cannot just simply start making payments to the existing lender, but instead must pay off the old loan by getting a new one. For example, if the original loan amount is $500,000 and the borrower has paid $100,000 in closing costs and interest-only payments, then the lender is required to reduce the principal balance on the loan to $400,000. Unfortunately, it is nearly impossible for most borrowers to tender, given that fair market values of their homes have dropped precipitously. In the example above, if the borrower s home is now worth $350,000, the borrower will be unable to find a lender willing to loan them the required $400,000. There is a glimmer of hope for the borrower under TILA s equitable discretion provision that empowers a judge to modify the rescission process. Regulation Z, 12 CFR (d)(4), (d)(4). Many plaintiffs counsel, however, have tried unsuccessfully to persuade a judge to allow the borrower to tender by making payments over time to the existing lender. Enter loan modifications. Practically speaking, loan modifications have proven to be the most effective way to settle TILA claims for those borrowers who These codes do not make it mandatory for lenders to offer loan modifications to eligible borrowers.... In-Depth Analysis Damian J. Nassiri, esq. can afford to make a monthly mortgage payment, but who have been derailed by a temporary hardship or a predatory loan whose interest-only or pay- option periods have concluded. Although many lenders will try to get a TILA case dismissed for inability to tender, many judges have been reluctant to dismiss such cases based solely on the tender issue, because remaining claims of fraud or negligence survive.

2 Tips for Loan Modification ( Loan Mod ) Negotiations Although TILA violations provide great leverage when negotiating a loan modification, even borrowers without legal claims can bargain for a loan mod due to the current economic crisis. If you have a client who needs a loan mod, the following tips may assist you. The first thing you will want to do is gather pertinent financial documents to show the lender. As a starting point, have the client fill out a financial statement that details the client s income and expenses. Lenders will want to see that your clients are earning enough to afford the modification, but are not making too much money or are wasting their money at Pechanga. In addition to the financial statement, you should be prepared to furnish the lender with your client s two most recent 9 bank statements as well as the last two years tax returns. Although lenders loan modification criteria vary, most lenders will only give a loan modification to someone who has experienced a hardship. A hardship letter is imperative. Examples of hardships include loss of job, decrease in income, severe medical issues, disability, death of a spouse, divorce, or an adjustable rate loan which is set to adjust upward in the near future. Your client s hardship letter should explain the hardship, how and when it started and if it is temporary or permanent. If the client is still in the hardship, you may be able to negotiate for a special forbearance. Lenders who offer special forbearances will allow your client to stay in the home and not make a payment, sometimes for several months and without any negative credit reporting. Once the financial package is prepared, you can then contact the lender s servicer and ask to speak with the loss mitigation department. Be prepared to stay on hold, get shuffled around and sometimes get hung up on. There are hundreds of thousands of people vying for the attention of only a handful of loss mitigation representatives, and many times it can depend on whether you get a representative who is in a good mood or has a soft heart. It is recommended that you remain very pleasant, but stern, and do not take no for an answer. You will likely spend hours on the phone trying to convince the lender of the obvious: some money is better than no money. Loan Mod Challenges Some have criticized loan mods as being an ineffective solution citing the high re-default rates. However, the problem, as I see it, is that at this point, voluntary mortgage modifications are not consistently reducing monthly payment burdens. In fact, according to DataQuick, only 35% of November 2008 modifications reduced (Continued, see Predatory, page 10)

3 Predatory monthly payments below the initial payment, 20% left the payment the same, and a whopping 45% actually increased the monthly mortgage payment. This is because many loan mods are really just repayment plans in disguise. Clients frequently complain of having their lenders offer them a loan mod in which the modified monthly payment actually increases. This is because lenders are often capitalizing unpaid interest, fees, taxes and re-amor - tizing the loan. In fact, at this time, only about 10% of loan mods involve principal reductions. Another issue which stymies many loan mod efforts is mortgage securitization. Many of the subprime loans were originated and then bought and sold several times before finally making their way into trust pools which are then sliced and diced on OCTLA Gavel Wall Street as mortgage-backed securities. These securities are then sold and resold repeatedly, by the very same Wall Street banks that are now benefiting from the Troubled Assets Relief Program ( TARP ) at taxpayers expense. This is further complicated because there are different tranches of investors some investors make money when the loan is current and others make money when the loan is in default similar to stock derivatives. This dynamic makes it more difficult to obtain a loan modification because the servicer will often tell you the investors cannot agree on a loan mod proposal and some will tell you that there is no program available for your borrower. This usually means that it is time to move to litigation. These cases will then last months in a stalemate position. Then, strangely enough, on the eve of trial, the defense attorney will inform you that a loan modification is now available. In fact, I ve actually been in a settlement conference with the lender s attorney telling me there is no program available, only to receive a call from one of my paralegals with the investor on the line offering a loan mod. The left hand truly does not know what the right hand is doing sometimes. Civil Code and On September 8, 2008, the California legislature passed into law Civil Code and In enacting these code sections, the Legislature declared, It is essential to the economic health of California for the state to ameliorate the deleterious effects on the state economy and local economies and the California housing market that will result from the continued foreclosures of residential properties in unprecedented numbers by modifying the foreclosure process to require mortgagees, benefici - aries, or authorized agents to contact borrowers and explore options that could avoid foreclosure. (Continued, see Predatory, page 30) Settle for More Traci Kaas STRUCTURED SETTLEMENT CONSULTANT tkaas@msettlements.com No cost for services Specializing in personal injury, med-mal, employment and workers compensation cases Our strict standards for quality professional service cover every aspect of our dedication to your clients. From initial interview and consultation through settlement negotiation and charting an appropriate lifetime payment plan, Traci will provide the highest level of service. Millennium Settlements 9210 Irvine Center Drive, Irvine, California Millennium is regarded as the benchmark of quality in the Structured Settlement industry, epitomizing promptness, comprehensive services and professional aptitude. CA LIC #0E

4 Predatory The statutes cover loans initiated between January 1, 2003, and December 31, 2007, and require lenders to attempt to contact borrowers by phone on three different times on three different days in an effort to try and explore options to avoid foreclose prior to filing a Notice of Default or Sale. If the borrower does not respond within two weeks after the telephone calls, the lender is required to send a certified letter, with return receipt requested, advising the borrower to contact the lender to discuss alternatives to foreclosure. Pursuant to California Civil Code (c), as part of the filing of the Notice of Default, the lender is also required to file a declaration attesting to compliance with the due diligence requirements listed above. entering into a loan modification which does not comport with their pooling and servicing agreements. At this point, with little case law available, we just let the judge be the judge of that. Either way, the definite downside to these two code sections is that they do not make it mandatory for the lenders to offer loan modifications to eligible borrowers. Instead, the lenders are only required to discuss options with the borrowers, such as repayment plans, forbearance agreements or loan modification. It appears that many lenders are not contacting the borrowers at all and are filing the declarations with the Notices of Default. In those instances, complaints should be filed alleging that the foreclosure process was procedurally flawed because of the failure to discuss alternatives to foreclosure. Some judges Pursuant to Civil Code (a), The Legislature finds and declares that any duty servicers may have to maximize net present value under their pooling and servicing agreements is owed to all parties in a loan pool, not to any particular parties, and that a servicer acts in the best interests of all parties if it agrees to or implements a loan modification or workout plan for which both of the following apply: (1) The loan is in payment default, or payment default is reasonably foreseeable, and (2) The anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis. In essence the Legislature is encouraging servicers to modify loans but is not making loan modification mandatory. Some defense counsel have argued that these two statutes do not provide a private right of action for borrowers, but there is no case law that they can cite to support their position. Other critics of these code sections say that they do little for a homeowner and merely provide a safe harbor for servicers to avoid liability from investors who sue them for Don t play the waiting game! Get the right answers when you need them. MEA Forensic Engineers and Scientists work with clients to investigate a wide range of transportation, injury, product, and property and premises cases. Our 25 years of experience combined with our highly-qualified staff, working either individually or in multidisciplinary teams, brings an unprecedented amount of expertise to each case. TRANSPORTATION Collision reconstruction Vehicle component failures Human factors INJURY Impact biomechanics Slip, trip & fall Sports, recreation & playgrounds Human performance PRODUCT Material and mechanical failures Design adequacy and appropriate use Product performance 30 PROPERTY & PREMISES Flood, fire, failure and defects Code compliance Lighting, warnings and signage Safety analysis AVIATION Maintenance procedures Component Failure Laboratory analysis Manufacturing/Design defects Let the evidence speak MEA Forensic Engineeers & Scientists Inc Vista Grande Drive, Suite A, Laguna Hills, CA T: F:

5 have found these arguments persuasive and have ordered the foreclosure sale postponed. Other judges have found that the code section has been satisfied by borrowers who have initiated the foreclosure mitigation discussions with their lenders, and those judges do not stop the sale. Some lenders are contacting the borrowers to discuss options but are offering unaffordable loan modifications, many of which actually increase the monthly payments due to accrued interest, penalties and late fees. In this instance, it should be argued to the court that the spirit and intent of the emergency statutes has been flouted, based on the premise that the client s loan is in payment default, or that payment default is reasonably foreseeable. In addition, the anticipated recovery of the proposed loan modification in which the interest rate is reduced and the term is extended will likely result in a modification which is affordable to the client and which exceeds the anticipated recovery through a foreclosure sale, especially in instances no request is made for a reduction in the principal amount owed. The upside to the two code sections is that it does provide a chance for the borrower to file an action in the event the foreclosure process was not strictly followed. Success has been had in obtaining temporary restraining orders to stop foreclosure sales based on the allegations that the lender never contacted the borrower in violation of or that the lender denied a loan mod request that was compliant with that is, a loan mod in which the anticipated recovery to the lender was greater than the fair market value the lender could expect to receive through a foreclosure sale. Whatever the case may be, a lawsuit which identifies potential violations of these two Civil Code sections can be an effective way of bringing the lender to the bargaining table to discuss a loan modification, as the lenders are starting to realize that receiving some money is better than receiving no money at all. Your case is always stronger if you can identify potential Truth in Lending Act violations or other foreclosure procedural violations, which will be the topic of a future article. However, even if you have nothing other than violations of these two new civil code sections, your bargaining power is increased as you can argue, pursuant to the statutes, that these changes in accessing the state s foreclosure process are essential to ensure that the process does not exacerbate the current crisis by adding more foreclosures to the glut of foreclosed properties already on the market when a foreclosure could have been avoided. 31