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Mortgage Lending: 9.10.5 HOEPA Loans

The Home Ownership and Equity Protection Act (HOEPA), enacted to curb equity-skimming in high-cost home equity lending, prohibits prepayment penalties.452 As originally enacted, its protections applied only to closed-end home equity loans that met one of two alternative cost thresholds, one based on the APR and the other on the total amounts of points and fees charged in the transaction.453

Mortgage Lending: 9.10.1 Background

A prepayment penalty is a fee that a borrower is contractually obligated to pay if a debt is paid off prior to its scheduled retirement date.

Mortgage Lending: 11.2.2 Comparison to Lease with an Option to Buy

A lease with an option to buy can look very similar to a land installment contract, but the rights of the prospective homeowner will vary greatly depending on whether the agreement is a lease with an option to buy at some future date or a land installment contract. For example, prospective homeowners under a lease with an option to buy usually will not have the right to cure a default or insist that the seller foreclose rather than utilize a summary eviction proceeding.

Mortgage Lending: 11.2.4 Is a Land Installment Contract a Mortgage? The Restatement Approach

Although, historically, the courts routinely enforced forfeiture clauses in favor of the seller,62 courts have more recently viewed such forfeiture clauses with skepticism. Partially due to that change, as well as the use of mortgage law as a more common analytic framework and the uncertainty engendered by land installment contracts, the Restatement (Third) of Property (Mortgages) takes the position that a contract for deed creates a mortgage.63

Mortgage Lending: 11.3.1 Recording the Contract

The typical land installment contract is silent on the issue of whether the contract can or should be recorded in the local land records office. Although some contracts forbid recording, these provisions may be void as against public policy. Sellers typically prefer not to record the contract: a recorded contract can be a cloud on the title in the event of a forfeiture, and it may hinder the seller’s ability to refinance any outstanding mortgages for the duration of the land installment contract.

Mortgage Lending: 11.2.1 Comparison to Short-Term Executory Contracts for Sale

The most common method of selling real property is when a buyer and seller enter into an executory contract for the sale of land in order to establish their rights and liabilities during the (usually) short period of time between the date of the bargain and the date of the closing. The buyer will often make a down payment on the purchase price to the seller, with the balance due at closing.

Mortgage Lending: 11.3.4 Prepayment by Purchaser

In some states, courts have held that the land installment contract buyer has no right to prepay the full purchase price unless the contract or statute permits prepayment.86 The justification for this rule is that the limitation on prepayment “provide[s] vendors with a fixed cash flow over a certain period of time ‘with minimal taxation and with interest.’ ”87

Mortgage Lending: 11.7.6.3 Recordation

A number of states require that land installment contracts be recorded.241 Of these, Illinois, Maine, North Carolina, Ohio, and Texas specifically provide that the seller is responsible for recording the contract.242 In Texas the seller is required to record the contract within thirty days after the contract’s execution, and failure to comply makes the seller liable to the buyer for $500 per year in liquidated damages plus the buyer’s reasonable attorney fees.

Mortgage Lending: 11.4.5 Condition of the Property

Land installment contract buyers often purchase properties that contain serious defects of which they were unaware. Even worse, the seller may misrepresent the condition of the property, perform cosmetic “repairs” before the contract is executed, or lie about the existence of city inspection reports revealing housing code violations.121 As a result, buyers are shackled to properties worth less than the sales price and in need of expensive repairs to make the homes safe and livable.

Mortgage Lending: 11.6.2 Rescission

Rescission, like forfeiture, allows the seller to regain possession of the property and retain a portion of the payments made. Rescission differs from forfeiture, however, in that the seller is restricted to retaining that portion of the buyer’s payments equal to the fair rental value of the property, a fact question likely to be hotly disputed, particularly when, as is often the case, the initial condition of the property is substandard.

Mortgage Lending: 11.7.8 Annual or Periodic Statements

A few states require that sellers under land installment contracts provide purchasers with annual or periodic statements that include certain information.276 In Maryland, the seller has an obligation to provide a periodic account statement in certain circumstances.277 Minnesota and Pennsylvania mandate that a seller is obliged to provide a statement only if the buyer requests it.278 Illinois provides that the seller must provide the buyer wit

Mortgage Lending: 13.6.2.1 Overview

Whether courts can exercise personal jurisdiction over a securitization trust that is located in another state is a significant question given how often mortgage obligations are securitized.160 In analyzing the question, it is important to separate the question of general jurisdiction from specific jurisdiction.161 In many cases against securitization trusts, it will be more fruitful to pursue specific jurisdiction than general jurisdiction.

Mortgage Lending: 13.8.1.2 The Elements of Holder-in-Due-Course Status

An assignee attains holder-in-due-course status, and thereby avoids most defenses the consumer could raise against the assignor, if it is: (1) assigned a negotiable instrument and (2) is a holder for value, who takes the instrument in good faith and without notice of various items listed in UCC § 3-302(a)(2).

Mortgage Lending: 5.10.4 Home Improvement Fraud

Home improvement fraud can be doubly harmful to consumers. Not only can they be cheated on the credit terms, but in addition they are often left with incomplete or incompetent repairs to their home. Properly handled, such cases have resulted in significant verdicts for consumers. Baker v. Harper437 resulted in a $9 million jury award against a second mortgage company and a contractor in a home improvement scam targeted against low-income, uneducated homeowners.

Mortgage Lending: 13.8.2.3 When the Contractor Refers the Consumer to a Lender

A holder of a note cannot be a holder in due course even when the home improvement contractor does not originate the credit, if the contractor refers the consumer to the lender or has a business relationship with the lender. In that situation, the FTC Holder Rule requires that the contractor arrange for the Holder Notice to be included in the note.327

Mortgage Lending: 13.8.9.1 Notice of Defenses

To be a holder in due course the holder must take the instrument without notice that the note lacks an authorized signature or has been altered;373 that someone else has a claim to the instrument; or that any party has a defense or a “claim in recoupment.”374

Mortgage Lending: 13.8.9.2 Bad Faith

The transferee must take the instrument in good faith,381 defined as “honesty in fact and the observance of reasonable commercial standards of fair dealing.”382 Subjective good faith is not enough. The holder must act in a way that is fair according to commercial standards that are reasonable.383

Mortgage Lending: 3.2.3 Storing and Organizing the Documents

Documents in mortgage lending cases may come from a number of different sources. In addition, what is not included in a set of documents may be more important than what is included. For this reason document handling procedures and chain of custody issues will be important if a case goes to trial.

Mortgage Lending: 13.8.2.2.1 Generally

When a home improvement contractor or any other seller of goods or services originates the credit, the Federal Trade Commission’s Trade Regulation Rule Concerning the Preservation of Consumers’ Claims and Defenses (the FTC Holder Rule) voids any claim of holder-in-due-course status for any assignee of that credit obligation.313 This rule applies even if the obligation takes the consumer’s home as security.