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Home Foreclosures: 7.13 Unconscionability

The common law contract defense of unconscionability may be applied to stop a foreclosure when either the mortgage terms are unreasonably favorable to the lender or other aspects of the transaction render it unconscionable.217 The doctrine of unconscionability is embodied in common law as well as Article 2 of the Uniform Commercial Code and some non-UCC state statutes.218 In addition, a number of state UDAP statutes prohibit unconscionability in the transactions that fall within their scope.

Home Foreclosures: 7.14 Usury

Federal preemption of state usury laws has limited usury as a possible defense to foreclosure actions. Depending on the circumstances, state usury laws may be preempted by one of several federal laws.224 However, there are still circumstances when usury may provide a viable defense. Examples are second mortgages, lenders not covered by any of the federal preemption laws, or when the state has opted out of the federal preemption provisions.

Home Foreclosures: 7.15.1 Negligence

In general, for plaintiffs to prevail on a negligence claim, they must show: (1) a duty of care owed by the defendant to the plaintiff; (2) breach of that duty by the defendant; (3) injury to the plaintiff; and (4) that the defendant’s breach caused the plaintiff’s injury.

Home Foreclosures: 7.15.2 Estoppel

When various and conflicting promises in the loan origination process were made by a lender, a court may find that the effect of some of the promises is to estop the lender from enforcing others.235 The elements of equitable estoppel generally are: (1) a statement or action by the party against whom estoppel is claimed designed to induce reliance on that statement or action and (2) a changed position by the second party in reliance on the act or statement of the first that results in loss or injury to the second party.

Home Foreclosures: 7.15.3 Unjust Enrichment

Unjust enrichment (or alternatively “money had and received”) is a theory of legal liability based not on contract or statute, but upon equity and justice.237 The elements of an unjust enrichment claim vary by state, but generally are (1) a benefit conferred on the defendant by the plaintiff; (2) an appreciation or knowledge by the defendant of the benefit; and (3) the acceptance or retention by the defendant of the benefit under such circumstances as to make it inequitable for the defendant to retain the benefit without making restitution.

Home Foreclosures: 7.15.4 Incompetence

Contracts entered into by persons who are deemed incompetent are generally voidable.238 This basic principle of contract law may be used to invalidate mortgage contracts made by persons who are too young to form valid contracts, or who suffer from temporary or permanent mental incapacity at the time the mortgage is made.239 Mental incapacity can also be grounds for tolling a statute of limitations.240

Home Foreclosures: 7.15.5 Invalid Security Instruments

If the mortgage (or deed of trust) is not a legally enforceable instrument then there can be no valid foreclosure.245 A deed or mortgage that is forged is void ab initio.246 As a result, forgery of a mortgage is generally an absolute defense to foreclosure.247 Similarly, where a deed has been forged and the new title holder then encumbers the property, courts have held both the deed and the mortgages are nullities.

Home Foreclosures: 7.16.1 Assignees of HOEPA Loans

The Home Ownership and Equity Protection Act (HOEPA) allows consumers to raise all claims and defenses against assignees that they could against the original lender of a HOEPA loan, whether or not the HOEPA notice on assignee liability is included in the note.253 This right is not limited to HOEPA claims or to TILA claims, but applies to any claim or defense the consumer has against the originating lender.

Home Foreclosures: 7.2.5 Broker Originated Loans

Mortgage brokers have contributed mightily to the growth of unfair lending practices.43 The classic image of a mortgage broker is of someone, either a firm or an individual, who serves as an intermediary between a prospective borrower and prospective lenders.44 Mortgage brokers market themselves as “knowledgeable professionals” who help consumers navigate “the complex mortgage lending process.” According to one association of mortgage brokers, this may include assisting with the loan applica

Home Foreclosures: 7.2.8 Foreclosure Rescue and Loan Modification Scams

Foreclosure rescue scams revolve around various types of schemes targeted at homeowners already facing foreclosure or who are in financial distress.79 Foreclosure rescue scams typically come in three varieties. The first might be called “phantom help,” in which a rescuer charges outrageous fees for little or no assistance. A common form of this scam is to falsely promise assistance in obtaining a mortgage loan modification for a hefty up-front fee.

Home Foreclosures: 7.4 Unfair and Deceptive Acts and Practices (UDAP) Statutes

Abusive mortgage origination practices can often be challenged under state unfair and deceptive acts and practices (UDAP) statutes.87 Under these statutes, unfairness is typically broader than deception, and the deception standard is broader than affirmative misrepresentation. For example, the failure to disclose the disadvantageous cost or nature of the loan may be a deceptive practice.

Home Foreclosures: 7.5.1 Introduction

The Truth in Lending Act (TILA) is designed to provide consumers with accurate information about loan transactions in order to facilitate informed use of credit. TILA requires a creditor to disclose certain important information about the credit terms to the consumer in writing before consummating a credit transaction. More recently TILA has been amended to include a variety of substantive protections that seek to protect mortgage loan borrowers from abusive lending.

Home Foreclosures: 7.5.2 Truth in Lending Act Rescission Rights

The provision of TILA that is most relevant to foreclosure defense is the right of rescission.94 TILA rescission can be a powerful tool. Once a valid notice of rescission is given, the lien on the consumer’s home becomes void,95 taking away the creditor’s foreclosure remedy and its leverage.

Home Foreclosures: 7.5.3 Truth in Lending Act Damages Claims

Nearly all home mortgages are subject to the disclosure requirements of the Truth in Lending Act when the lender is in the business of making loans to consumers. TILA requires a creditor to disclose certain important information about the credit terms to the consumer in writing prior to consummation of a credit transaction, and TILA also provides more substantive protections.

Home Foreclosures: 7.5.4 Substantive Protections for Residential Mortgage Loans

As part of the sweeping changes in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress amended TILA to include a variety of substantive provisions related to mortgage lending.115 These protections, which are described briefly below, generally apply to “residential mortgage loans” which are closed-end mortgages secured by a dwelling (but not necessarily a principal dwelling).116 Violations of these provisions lead to TILA private remedies of actual damages, statutory damag

Home Foreclosures: 7.16.3 The FDIC and Assignees

The wave of bank failures that began in 2008 brings with it a set of additional hurdles to borrowers who are attempting to defend against a foreclosure. First is the requirement that persons with claims against a failed bank exhaust an administrative claims process as a precondition of any litigation.272 If a litigant does not exhaust the administrative claims process, the court lacks subject matter jurisdiction over the claim.

Home Foreclosures: 2.2.4.4 When a Mortgage Note Is Not a Negotiable Note

A negotiable note must establish an obligation to pay a sum certain or be payable on demand or at a definite time.42 A note obligating the promisor to pay for open-end credit would thus not be a negotiable instrument.43 With limited exceptions a note cannot contain undertakings beyond payment of money.44 For any of these reasons, the note may not qualify as a negotiable instrument.

Home Foreclosures: 2.2.5.3 The Holder’s Possession Through an Agent or Custodian

A holder may retain possession of a note through an agent.60 Transfers of possession of a note can occur directly or through the holder’s agent.61 If a party claims to have what is referred to as “constructive” possession of a note that is physically kept by a designated custodian, the party claiming the benefit of this agency relationship has the burden of producing evidence to establish that the agency relationship exists and that it applies in the given context.

Home Foreclosures: 2.2.5.7 A Key Litigation Issue for Holder Status—Timing of Indorsements

The UCC does not require that an indorsement be dated, and the industry practice is to leave indorsements undated.109 As a result, it is usually impossible to verify from the face of a note whether an indorsement was in place when a party took certain actions in the past to enforce the note.110 For example, state law may require that a party be a holder in order to record a document that initiates foreclosure, file a complaint, or obtain judgment at trial or through a dispositive motion.

Home Foreclosures: 2.2.5.8.2 A non-holder in possession who has the rights of a holder

A “nonholder in possession of an instrument who has the rights of the holder” typically refers to an entity that has physical possession of a note that is indorsed to some other entity. While this entity is in possession of the note, it cannot be a holder. However, the nonholder in possession can claim the rights of a holder based on a contractual or statutory right that is not apparent on the face of the note. As a transferee, the nonholder may assert the rights of a holder based on the terms of a contract with its transferor.

Home Foreclosures: 2.2.1 Overview

The securitization of mortgage debt has created significant new issues for advocates to consider in defending a foreclosure. Before the rise of securitization, homeowners’ counsel seldom raised questions about the foreclosing party’s authority to proceed. The familiar name of the loan originator routinely appeared on the face of foreclosure documents.

Home Foreclosures: 2.2.4.1 Generally

The Uniform Commercial Code defines a negotiable instrument, determines how it is transferred, and limits who may enforce it. Some familiarity with basic UCC concepts is essential in fashioning an appropriate response to a servicer’s or assignee’s claim that it has the right to foreclose based on a note and mortgage originated by someone else.20