Skip to main content

Search

Mortgage Servicing and Loan Modifications: 11.7.6 Res Judicata and Collateral Estoppel

Younger abstention, the Anti-Injunction Act, Colorado River abstention, and the Rooker-Feldman doctrine all apply only in federal court (although state courts may have similar doctrines). But even if an action gets beyond those obstacles, or is filed in state court, the plaintiff may still have to contend with res judicata or collateral estoppel if there is a prior state foreclosure or post-foreclosure eviction judgment.

Mortgage Servicing and Loan Modifications: 11.7.7 The Bankruptcy Automatic Stay as an Alternative

If an eviction or foreclosure case or some other type of collection action is pending against the homeowner, the consumer should consider bankruptcy court as a forum. In most cases, as soon as a bankruptcy case is filed, all such actions are automatically stayed without the need to consider the impediments to relief discussed above. Using bankruptcy to prevent foreclosure is discussed in detail in NCLC’s Home Foreclosures.645

Mortgage Servicing and Loan Modifications: 11.9.1 Introduction

Because of a federal law prohibiting mandatory arbitration in mortgage loans, arbitration requirements are rarely found in mortgage transactions today. This section provides an overview of this federal requirement, and then briefly summarizes other approaches where a defendant seeks to enforce an arbitration requirement. Far more detail on these other approaches is found in NCLC’s Consumer Arbitration Agreements treatise.646

Mortgage Servicing and Loan Modifications: 11.9.2.1 Scope

The Truth in Lending Act (TILA), as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), effectively prohibits forced arbitration of disputes involving closed-end loans secured by a dwelling and open-end loans secured by a consumer’s principal dwelling.647 TILA defines a residential mortgage loan as “a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against the co

Mortgage Servicing and Loan Modifications: 11.9.2.2 Two Separate TILA Provisions Limit Arbitration

In covered mortgage loans, TILA prohibits any terms that require arbitration or any other non-judicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction (hereinafter referred to as the “(e)(1) provision”).657 The parties can agree to arbitration or a similar procedure at any time after a dispute or claim under the transaction arises.658

Mortgage Servicing and Loan Modifications: 11.9.2.4 Effective Date and Retroactive Application

There is no question that the TILA limitation on arbitration agreements in mortgage loans applies to any arbitration agreement entered into after June 1, 2013. This subsection considers the enforceability of arbitration agreements entered into before that date. Two issues are examined. First, whether the TILA requirement was effective as of June 1, 2013, or July 22, 2010. Second, whichever date is used, does the provision prevent the current enforcement of arbitration agreements entered into before the effective date?

Mortgage Servicing and Loan Modifications: 11.9.3a.2 Does the Court or Arbitrator Decide Whether a Clause Is Enforceable?

A preliminary matter in any challenge to the enforceability of an arbitration clause is whether the enforceability determination is to be made by a court or by the arbitrator. In Rent-A-Center, West, Inc. v. Jackson,689 the Supreme Court held that, “ordinarily,” issues about whether parties have agreed to a valid arbitration clause are for a court—not an arbitrator—to decide.

Mortgage Servicing and Loan Modifications: 11.9.3a.5.1 Individual arbitration

Where an enforceable arbitration agreement forecloses class arbitration, class action litigation in court, and individual court litigation, adequate client representation may require raising the consumer’s claims in an individual arbitration proceeding. Even if an arbitration agreement is not enforceable, it can take years to resolve this issue before even reaching the merits.

Mortgage Servicing and Loan Modifications: 11.10.1 Introduction

Under the tax code, gross income is broadly construed as income in any form (money, property, or services), from any source, unless specifically excluded by law.739 Generally, the amount of gross income minus applicable deductions is taxable.740 Consequently, money damages and loan forgiveness or “cancellation of debt” resulting from a court award or settlement is generally considered taxable income.

Mortgage Servicing and Loan Modifications: 11.10.2 Pain and Suffering Damages

The tax code excludes from gross income damages (other than punitive damages) received on account of personal physical injuries or physical sickness.747 In general, emotional distress is not treated as a physical injury or physical sickness.748 Usually compensation for purely emotional distress (other than medical expenses) is taxable, even when that emotional distress is accompanied by such physical symp

Mortgage Servicing and Loan Modifications: 11.10.5 Damages Relating to Overpayment

Capital returned to the homeowner, whether by cash payment or cancellation of debt, is not taxable income.756 In home defense cases, there may be compensation for amounts improperly overcharged or taken from the homeowner, routine out-of-pocket expenses, including medical bills, transportation costs, or property damage. Homeowners may also be entitled to a return of other monies wrongfully paid, including a refund of excess interest.

Mortgage Servicing and Loan Modifications: 11.11.2 Confidentiality

Settling defendants often request that the settlement prohibit the parties from disclosing the terms of the settlement to anyone. A second, less extreme clause does not prohibit disclosure altogether, but prohibits publicity. Such clauses raise a host of concerns. They enable defendants to cover up massive wrongdoing, and create procedural obstacles if judicial enforcement of the settlement becomes necessary.