Mortgage Lending: 8.4.10 Alternatives to RESPA for Challenging Unearned and Illegal Fees
Aside from RESPA, there are other ways practitioners can successfully attack overcharges and markups as well as duplicative, illegal, and other unearned fees.
Aside from RESPA, there are other ways practitioners can successfully attack overcharges and markups as well as duplicative, illegal, and other unearned fees.
There has been extensive litigation over claims that homeowners were wrongly charged the higher rate for a new title insurance policy rather than the discounted re-issue or refinancing rate that is normally available to eligible homeowners under most rate plans.565 The difference in price may be hundreds of dollars but will depend on the size of the mortgage and the value of the property.
In addition to RESPA’s general prohibition on referral fees and fee splitting, Congress specifically prohibited anyone selling property that will be purchased with a mortgage subject to RESPA from directly or indirectly requiring the buyer to obtain title insurance from a particular title company, regardless of whether any referral fees are paid.580 This restriction applies only to sellers and not to lenders.
The Flood Disaster Protection Act of 1973595 generally prohibits federally regulated lenders from making, increasing, extending, or renewing mortgages that will be secured by buildings subject to flooding—unless the building is covered by flood insurance.596 Flood insurance is also required for flood-prone buildings if an owner of the building receives federal disaster relief funds.597 The Act applies to financial institutions regulated by th
Credit insurance and debt cancellation products have been particularly lucrative for many types of creditors, including mortgage lenders. Like mortgage insurance, the borrower pays a fee for credit insurance or debt cancellation in addition to any other charges associated with the loan. But credit insurance and debt cancellation should otherwise be distinguished from mortgage insurance.
Eight years after the D’Oench decision, Congress enacted the Federal Deposit Insurance Act of 1950 (FDIA). The new law included a section, 12 U.S.C. § 1823(e), which added a new dimension to the limited immunity afforded by the equitable estoppel doctrine created in D’Oench. Section 1823(e) was reenacted in substantially similar language as part of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)501 in response to the dramatic series of bank and thrift failures in the 1980s.
Violating TILA’s rules for disclosing finance charges and the limits on originator compensation can lead to an award of actual and statutory damages, attorney fees, and costs. In some circumstances borrowers may also have the right to rescind their mortgage. The availability of TILA remedies varies by type of loan, and the use of rescission, in particular, can be complex. TILA’s remedies are discussed in greater detail in NCLC’s Truth in Lending.693
Another limitation on the applicability of section 1823(e) is that the agreement must be one that “tends to diminish or defeat” the FDIC’s interest in an asset that it acquires under section 1823 and the statute, 12 U.S.C. § 1821, that governs the insurance fund and receivership. Courts have analyzed this requirement closely and have often refused to apply section 1823(e) because of failure to meet this criterion.546
Federal bank regulators have long recognized that lenders’ reliance on third parties carries significant risks. Consequently, banking agencies have repeatedly required lenders to monitor the riskiness of loans they acquire and the performance of third parties with whom the creditors contract.
Many sellers of manufactured homes and modular homes offer or arrange installment loans that use precomputed interest. Home improvement loans from sources other than traditional banks often use precomputed interest as well. In a precomputed loan the borrower is considered to owe the entire amount of the loan—plus all the interest—as of the day the loan is made. If the loan is paid off before maturity, there is a recalculation of the amount due that will reflect a rebate of unearned interest. In general, both precomputed loans and conventional mortgages produce the same results.
Foreclosure rescue scams target homeowners already facing foreclosure or who are in financial distress. These 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.
There are other purchase assistance methods that do not directly share equity in a property; instead they restrict the consumer’s ability to access the equity, in return for making the purchase more affordable, and keeping it affordable for future purchasers.74 One version is a deed restriction that limits the resale price of the home to ensure that it remains affordable. Nonprofit organizations and local governments have used this method when purchasing or building affordable housing.
Shared equity products carry unusual risks for consumers. While consumers may think of these products as a type of loan, some courts have found versions of them to be option purchase contracts rather than credit.
Property Assessed Clean Energy (PACE) is a loan program for homeowners to finance energy efficiency, water conservation, hurricane hardening, and renewable energy home improvements. Property owners finance specific improvements by contracting for the loan amount to become an assessment on the property’s tax bill.
The PACE industry claims that the super-priority position of PACE liens translates into lower costs for homeowners, by limiting risk to investors and avoiding underwriting costs. But this has not proven to be true, as some PACE loans are more costly than comparable loan products available in the private mortgage market. The PACE financing structure, involving multiple entities that participate in the municipal bond and securitization process, has resulted in above-market interest rates and high costs and fees being imposed on borrowers.
Industry participants in PACE lending take the view that the loans are exempt from the consumer credit protections provided by the Truth in Lending Act (TILA) and Regulation Z, as well as other state and federal laws dealing with credit transactions. While PACE lenders typically provide some form of loan disclosures, they do not provide the TILA-RESPA integrated disclosure (TRID) disclosures relevant to home-secured transactions or comply with relevant TILA substantive protections.
The consequences of the lack of regulation of PACE loans are predictable.
Manufactured homes are an important source of housing, particularly for lower-income Americans. Financing the purchase of these homes presents some unique legal issues. New manufactured homes are typically sold by a dealer and then later sited either on land owned by the consumer or in a manufactured home community where the consumer pays rent for a lease of the site.
Dealers may sell new manufactured homes by originating a credit sale that is then assigned to a lender, often one that specializes in manufactured home financing.
Federal first mortgage interest rate preemption applies to residential manufactured-home loans,471 but only if the creditor complies with certain consumer protections set forth in a federal banking agency rule.472 Two key requirements of the rule are that there can be no prepayment penalties in such credit,473 and all rebates must be computed by the actuarial method.474
Despite being considered personalty for purposes of state law, manufactured home installment sales are covered not only by the Truth in Lending Act (TILA)’s disclosure requirements, but also by TILA’s substantive provisions dealing with mortgage loans.163 These substantive mortgage provisions apply to “residential mortgage loans,” which are closed-end mortgages secured by a dwelling.164 TILA defines a “dwelling” to include manufactured homes.165
(a) Disclosure for mortgage loan transactions
(a) Statutory terms. All terms defined in RESPA (12 U.S.C. § 2602) are used in accordance with their statutory meaning unless otherwise defined in paragraph (b) of this section or elsewhere in this part.
(b) Other terms. As used in this part:
[78 Fed. Reg. 10,876 (Feb. 14, 2013).]
1. Official status. This commentary is the primary vehicle by which the Bureau of Consumer Financial Protection issues official interpretations of Regulation X. Good faith compliance with this commentary affords protection from liability under section 19(b) of the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. 2617(b).