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Mortgage Servicing and Loan Modifications: 1.4.2 Errors and Abuses During the Life of a Mortgage Loan

Servicing errors and abuses can occur at any time during the life of the loan including before default. Many times, pre-default abuses such as the misapplication of payments or improper force-placed insurance, if not corrected by the servicer, can lead the borrower down the path to default. While these abuses may be common before default, they can occur at any time. As a result, advocates are encouraged to engage in a rolling analysis of the potential errors and abuses regardless of the borrower’s exact situation.

Mortgage Servicing and Loan Modifications: 1.4.3 First Steps

When borrowers seek assistance with mortgage related problems it is important to perform an initial review of the case to determine any immediate needs before moving onto a more thorough analysis. Borrowers present cases in many different stages: some seek legal guidance prior to default, and others may not seek assistance until after a foreclosure sale has been completed. Some borrowers have detailed records, including loan documents, evidence of payments, and notes of telephone conversations with the servicer.

Mortgage Servicing and Loan Modifications: 1.4.5 Analyze for Servicing Claims

The servicer’s actions can lead to a number of potential legal claims. These may provide a basis for affirmative claims, for opposing a nonjudicial sale or for defending against a judicial foreclosure. Claims against servicers can also result in monetary relief when raised in a complaint or counterclaim. Mortgage servicers are more heavily regulated today than they were before the foreclosure crisis. Federal and state laws now provide concrete remedies when servicers fail to comply with many basic servicing obligations, including obligations pertaining to the conduct of foreclosures.

Mortgage Servicing and Loan Modifications: 3.2.2 Applicability to Servicers

The servicing requirements of RESPA apply to “servicers.”48 A servicer is defined as the “person”49 responsible for the servicing of the loan, which can be the maker or holder of the loan if such entity also services the loan.50 The term “servicing” is defined as “receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts . . .

Truth in Lending: 10.6.2.2.2 Addressing tender issues in the rescission letter

The cancellation letter should include a request for an itemized statement of what is owing, including the payment record, to facilitate the consumer’s tender obligations.924 Without the lender’s records, the consumer is unlikely to be able to calculate exactly what loan balance (after eliminating finance and other charges) or property (or reasonable value thereof) must be tendered when the time comes.

Truth in Lending: 10.6.2.4.3 Miguel and the role of notice to a servicer

Whether notice to the loan servicer can be effective to rescind a transaction is an unfortunately complex question because of a 2002 decision from the Ninth Circuit, Miguel v. Country Funding Corp.988 That decision holds that sending notice to a servicer is not effective as notice to the holder of the obligation.

Truth in Lending: 10.6.2.5 Can a Complaint Serve as the Consumer’s Notice of Cancellation?

Although courts are not unanimous, a number of courts have held that the filing of a complaint for rescission is sufficient as a “written communication” of the consumer’s election to cancel.1001 Allowing a complaint to serve as the consumer’s rescission letter is consistent with the Act, which merely requires the borrower to “notify” the creditor of rescission.1002 It is also consistent with the official interpretations, which state that the consumer must exercise the right of rescission

Truth in Lending: 10.6.3.1.1 Generally

The first step triggered by a consumer’s rescission is a powerful one: the security interest or lien on the property is automatically void.1012 This is evident from the plain language of the Act,1013 Regulation Z,1014 and TILA’s legislative history.1015 It is also the official position of the CFPB and the FRB.1016 Nevertheless, as exp

Truth in Lending: 10.6.3.1.3 Litigation over automatic termination

Disputes over whether TILA’s rescission is effective automatically are increasingly common when the creditor ignores or rejects the consumer’s rescission letter. Strict construction of the statute, Regulation Z, and the official interpretations dictate that the automatic voiding is absolute.

Truth in Lending: 10.6.3.2 Cancellation of Consumer’s Liability for Finance Charges or Other Charges

The second automatic consequence of rescission is that the consumer’s liability to pay “any finance or other charge” is canceled by operation of law.1063 If the charges have not been paid, they cannot be collected from the consumer.1064 If the charges have already been paid, they must be refunded or credited to the consumer.1065 This prong of Step One has specifically been held immune from courts’ equitable modification authority.

Truth in Lending: 10.6.4.2 Return of “Any Amount” or Property

After rescission, the consumer

cannot be required to pay any amount in the form of money or property either to the creditor or to a third party as part of the credit transaction. . . . ‘Any amount’ includes finance charges already accrued, as well as other charges, such as broker fees, application and commitment fees, or fees for a title search or appraisal, whether paid to the creditor, paid directly to a third party, or passed on from the creditor to the third party.1076

Truth in Lending: 10.6.4.3 Action to Reflect Termination of Security Interest

The creditor’s other task is to take any necessary or appropriate action to reflect the fact that the security interest was automatically terminated by the rescission.1091 This requires canceling documents creating the security interest and filing release or termination statements in the public record.1092 If subcontractors or suppliers holding security interests were involved, the creditor also must assure that the cancellation of those security interests is properly documented.

Truth in Lending: 10.6.4.4 Effect of Creditor’s Erroneous Payment of Proceeds After Rescission

Occasionally a creditor will mistakenly pay out the proceeds of the credit transaction, only to realize shortly thereafter that the consumer had already rescinded. In one case, after mistakenly disbursing the proceeds, the creditor treated the loan, which refinanced an earlier loan from a different creditor, as rescinded.1098 It did not demand payment from the consumer on the new loan. Instead, it purchased the original lender’s rights under the earlier loan.

Truth in Lending: 10.6.5.2 Return of Money

Money given to the consumer must be tendered at the creditor’s place of business. Of course, any amount which the consumer must tender does not include any of the “finance or other charges” for which the consumer’s liability was automatically erased by the exercise of the rescission right.1109 Any sums falling within that category are not part of the consumer’s tender obligation, even if they were included in the loan principal.

Truth in Lending: 10.6.5.4 Circumstances in Which the Consumer Need Not Tender

Occasionally, in the event the creditor does not properly perform the consumer’s obligations as described herein do not arise.1123

In some circumstances, a consumer who is a co-owner of the property may not have any tender obligation whatsoever. Since co-owners who are not co-obligors on the loan are entitled to notice of right to cancel and TILA disclosures, they may have no tender obligation where they never received the benefit of the proceeds from the loan.

Truth in Lending: 10.7.1 Overview

After the proceeds of the transaction have already been disbursed, creditors are often reluctant to follow the law in responding to a notice of the right to cancel received from a homeowner.

Truth in Lending: 10.7.2.1 Basic Provisions and History

Both the statute and Regulation Z make clear that, if the consumer has the extended right and chooses to exercise it, the security interest and obligation to pay charges are automatically voided—period.1132 The statute, section 1635(b), states: “When an obligor exercises his right to cancel, . . . any security interest given by the obligor . . .