Skip to main content

Search

Mortgage Lending: 9.11.4 Dodd-Frank Act Definition of “Qualified” Mortgage

The Dodd-Frank Act includes a definition of “qualified” mortgages for which there is a presumption that the borrower meets the law’s requirements regarding repayment ability. A “qualified” mortgage may not include a balloon payment and must meet other requirements.556 Notwithstanding the statute, the CFPB regulations permit a qualified mortgage to contain a balloon payment in certain limited circumstances.557

Mortgage Lending: 9.11.5 Manufactured-Home First Lien Loans

Federal first mortgage interest rate preemption applies to residential manufactured-home loans,560 but only if the creditor complies with certain consumer protections set forth in a federal banking agency rule.561 The regulation was formerly an Office of Thrift Supervision (OTS) regulation562 but was incorporated into Office of the Comptroller of the Currency (OCC) regulations563 when the OTS

Mortgage Lending: 9.11.6.1 State Law

Some states have laws, applicable to a broad range of mortgage loans, that either ban balloon payments or require that the loan be repayable in substantially equal installments.568 Requiring substantially equal installments has the effect of banning balloon payments.

Mortgage Lending: 9.11.6.2 Federal Banking Agency Preemption

OCC regulations (and former OTS regulations) preempt state laws regarding payment schedules for mortgage loans originated by national banks and federal savings associations.571 Through the operation of state parity laws, this preemption may also apply to state-chartered banks and savings associations.

Mortgage Lending: 9.11.6.3 AMTPA Preemption

The Alternative Mortgage Transaction Parity Act (AMTPA) applies to housing creditors, broadly defined to include virtually any lender, except in states that have opted out.573 For mortgages originated prior to July 21, 2011, AMTPA broadly preempted state law regarding balloon payments.574

Mortgage Lending: 9.13.1 FHA, VA, and RHS Loans

Late charges on Federal Housing Administration (FHA) Title I loans (for property improvement or purchase of a manufactured home or lot) allow late charges only for installments that are in arrears for fifteen days or the number of days required by state law, whichever is greater.588 The amount cannot exceed the lesser of: five percent of the installment; $10 per installment for a property improvement loan and $15 per installment for manufactured-home loans; or the maximum amount permitted by state law.

Mortgage Lending: 9.13.3 Manufactured-Home Loans

Federal first mortgage interest rate preemption applies to residential manufactured-home loans,602 but only if the creditor complies with certain consumer protections set forth in a federal banking agency rule.603 The regulation was formerly an Office of Thrift Supervision (OTS) regulation604 but was incorporated into Office of the Comptroller of the Currency (OCC) regulations605 when the OTS

Mortgage Lending: 5.8.5 Unconscionability As a Restriction on Interest Rates

In the absence of legislatively prescribed usury ceilings, unconscionability can serve as an outer limit on the price of credit.260 Many courts recognize excessive price as an indication of substantive unconscionability.261 But most case law addressing unconscionable interest-rate claims shows that courts will consider the totality of the transaction and not just the rate.262 Although there are not a large number of decisions applyin

Mortgage Lending: 5.8.7 Examples of Unconscionability in Lending

Because unconscionability claims are so fact intensive, it can be useful to look at examples of how courts have used the indicia described in § 5.8.2, supra. This subsection discusses a number of examples in which courts have found that certain provisions were unconscionable. Practitioners should remember, however, that there can be notable variation between jurisdictions.

Mortgage Lending: 5.8.8 Remedies for Unconscionability

The remedy for unconscionability under the common law and the Uniform Commercial Code (UCC) is usually limited to a defense (including claims in recoupment) against the enforcement of the unconscionable contract or terms, and may not support an affirmative claim for restitutionary damages.297 Despite this general rule, courts have allowed affirmative common law unconscionability claims for declaratory judgment in which the consumer seeks to delete or limit the application of unconscionable contract provisions and does not seek to recover da

Mortgage Lending: 5.9.2 Formal Fiduciary, Quasi-Fiduciary, and Special Relationships

Some fiduciary relationships are well established, such as the attorney-client, trustee-beneficiary, and guardian-ward relationships. These have been called “formal” or “technical” fiduciary relationships.305 But in other areas the existence of a fiduciary relationship is not automatic, or the nature of the parties’ relationship is less clear. Outside these well-established fiduciary relationships, special circumstances can lead a court to impose a fiduciary duty on one of the parties to an otherwise ordinary transaction.

Mortgage Lending: 9.2.4 RHS Direct and Guaranteed Loans

The Rural Housing Service (RHS), an agency of the United States Department of Agriculture, administers two different loan programs: direct loans and guaranteed loans.48 Section 502 direct single family housing loans provide for direct loans from the RHS to low-income individuals for the purchase, construction, or rehabilitation of single family homes located in rural areas.

Mortgage Lending: 5.9.4 Principal-Agent Relationship

The relationship of agent to principal is recognized as a fiduciary relationship.335 According to the common law doctrine of agency, principals are liable for an agent’s misconduct when the agent acts with the principal’s actual or apparent authority, the principal ratifies the agent’s conduct, or the principal is negligent in selecting, supervising,336 or otherwise controlling the agent.337

Mortgage Lending: 5.9.5 Duties of a Fiduciary

A fiduciary “duty” is a duty of loyalty to a beneficiary.369 A fiduciary must avoid conflicts of interest and put the beneficiary’s interests first.370 A fiduciary must also fairly and honestly disclose all facts that might influence the beneficiary’s decision making (such as any fees or commission the fiduciary may earn).

Mortgage Lending: 5.10.2 Misrepresentation of Loan Terms

A fraud theory can be used to challenge a creditor’s misrepresentation of loan terms. The common law, as a general rule, does not support a fraud claim arising solely due to a willful breach of contract. A contractual relationship between the parties, however, does not automatically prevent one party’s conduct from the being the basis of a fraud claim. Rather, there must be a showing that, at the time of contract execution, the party making the representation did so knowingly or recklessly and intending to induce harmful reliance.406

Mortgage Lending: 5.10.5 Fraud in Home Sales and Refinancing

In Peoples Trust & Savings Bank v. Humphrey,447 the consumers went to their own bank for a home construction loan. The bank promised them a “good loan” at a 9.5% rate. However, that was merely the initial rate. The permanent financing (after two temporary construction loans) was actually a variable rate loan and contained a demand clause allowing the bank to demand payment of the balance of the loan at its discretion.

Mortgage Lending: 5.10.6 Falsification and Forgery

Complaints by consumers and homeowners about mortgage brokers inflating their income, falsifying credit applications, and procuring inflated appraisals are common.458 In addition to fraud, this conduct may violate federal or state credit repair statutes.459 Furthermore, falsifying a loan application or inflating an appraisal is a federal criminal offense.460

Mortgage Lending: 5.12.3 Conversion

Conversion is the wrongful exercise of dominion or control over personal property.547 As a general rule, conversion involves a specific chattel rather than money.548 However courts have recognized an exception to this rule when money is specifically identifiable and subject to an obligation to be returned or treated in a particular manner.

Mortgage Lending: 5.12.4 Estoppel

When a lender makes inconsistent promises in the loan origination process, it may be estopped from enforcing promises that conflict with other promises. The elements of an estoppel claim include that the party estopped must have engaged in conduct that amounted to a false representation or concealment of material facts, must have had an intention that such conduct would be acted upon by the other party, and must have known the real facts.

Mortgage Lending: 5.12.5 Incompetence of Borrower

Contracts entered into by persons who are deemed incompetent are generally voidable.556 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.557 A bankruptcy court in Massachusetts, for example, allowed a debtor to put on evidence as to whether she was entitled to rescind a note and mortgage based on incompetence.

Mortgage Lending: 5.12.6 State Fair Lending Laws

The federal Equal Credit Opportunity Act (ECOA)560 and Fair Housing Act561 are discussed briefly in the preceding chapter. In addition, almost every state has its own fair lending law. Many states have a fair lending law that, like the ECOA, applies broadly to all types of credit transactions, but in some states the state fair lending law is confined to real estate transactions. State fair lending laws may define more protected classes than the ECOA or the Fair Housing Act.

Mortgage Lending: 5.12.7 Financial Abuse of Older Consumers

California’s broad Elder Abuse Act563 applies to persons sixty-five years of age or older.564 It covers financial abuse as well as other types of abuse,565 and provides a private cause of action to redress violations.566 A loan broker violates this statute when it brokers a loan for an older consumer and obtains a fee by misrepresenting the terms of the loan.

Mortgage Lending: 5.12.8.2 Contract Claims in Option ARM Cases

Option adjustable rate mortgage loans (option ARMs) that were originated in the years leading up to the subprime mortgage collapse often include a term requiring the borrower to “pay principal and interest by making a payment every month.” Such a loan term is arguably inconsistent with a loan that is structured so that the borrower’s monthly payments are applied only to interest, and not to principal, during the negative amortization period.