Mortgage Lending: 11.7.10.2 Limits on Forfeiture Remedy; Requiring Sellers to Foreclose
A number of states require that land installment contracts be terminated in the same way as a mortgage loan: through judicial foreclosure.
A number of states require that land installment contracts be terminated in the same way as a mortgage loan: through judicial foreclosure.
Two state statutes addressing land installment sale contracts contain a remedy provision that applies to a violation of any provision of the statute.305 In most states, the remedy available to a buyer will depend upon the particular kind of violation at issue. This section describes the types of violations covered and the related remedies.
In addition to checking relevant state and federal statutes, practitioners should determine if local laws apply. This subsection briefly describes several local ordinances.
The federal Truth in Lending Act’s (TILA) disclosure rules apply to land installment contracts if the seller meets the definition of a creditor and if the contract is offered to purchase the property primarily for personal, family, or household purposes.328 The land installment contract is considered “credit” because it creates a debt (the purchase price) and defers its payment or because the contract defers payment of debt (the purchase price).329 The seller meets the definition of a credit
TILA’s substantive protections for closed-end mortgages secured by a dwelling should apply to land installment contracts. The scope of these protections is described in NCLC’s Truth in Lending.350 This subsection focuses on whether sellers of land installment contracts must comply with these rules.
TILA’s substantive protections governing higher-priced mortgage loans apply to consumer credit transactions secured by the consumers’ principal dwelling with an annual percentage rate (APR) that exceeds a defined threshold.373 The same assessment regarding applicability to land installment contracts described in §§ 11.8.1.1 and
TILA’s final set of mortgage-loan-related protections govern the most expensive end of the market: high cost loans or Home Ownership and Equity Protection Act (HOEPA) loans.
NCLC’s Credit Discrimination discusses the Fair Housing Act (FHA) in detail.395 The FHA bans discrimination on the basis of race, color, religion, national origin, sex, familial status, and disability or handicap.396 This section provides a short overview of the two different provisions applicable to credit discrimination in the housing context and addresses how they cover land installment contracts.
NCLC’s Credit Discrimination discusses the Equal Credit Opportunity Act (ECOA) in detail.406 This subsection briefly summarizes the scope of the Act’s two types of protections—its rules against discrimination and its procedural requirements—and the extent to which the ECOA governs land installment contracts.
The first step to advising a consumer regarding their rights in a rent-to-own transaction is determining whether the contract in question is most accurately categorized as a land installment contract or a lease with an option to buy. As discussed above, the name given to the instrument by the seller/landlord is not dispositive.423 Instead, the practitioner should carefully review the text of the agreement to determine what the substance of the agreement is, based on the rights and obligations of the parties.
Consumers sometimes seek advice from an attorney while in an existing land installment contract, before the seller has taken any action to terminate the contract or evict the buyer. Some consumers may not realize they are party to a land installment contract and may actually describe their contract as a mortgage. They may be motivated to seek advice because of a payment application dispute, a refusal by the seller/lender to provide an accurate payoff quote, a property tax escrow problem, or some other issue entirely unrelated to the nature of the contract.
Consumers who are paying on a lease with an option to buy should consider two major questions: (1) is the monthly rent amount excessive if the option is never exercised? and (2) is the option price fair in light of the fair market value of the home, making it likely that the consumer may be able to (and would want to) exercise the option through independent financing or seller financing with reasonable terms?
Quite often an individual consumer seeks legal help when they have already been served with a forfeiture or eviction lawsuit. The good news is that it is not too late to raise claims and defenses that could dramatically change the outcome of the case.
Most litigation involving leases with an option to buy will be defensive, after the landlord files an eviction action. In theory, some of the same claims that were discussed as affirmative claims arising out of contracts for deed could apply to a lease with an option to buy. However, a true lease with an option to buy (remember that some are land contracts in disguise) may not be “credit” for purposes of the Truth in Lending Act, because the consumer has not become obligated for the purchase price (until the option is exercised).
When a consumer is in default on either a land contract or a lease with an option to buy and wishes to remain in the contract and cure the default, a chapter 13 bankruptcy may provide the opportunity to do so.454
In a case in which both state and federal courts will have subject matter jurisdiction, the plaintiff may be able to select either forum. When the plaintiff files in state court, the defendant may have the right to remove the case to federal court, if it wishes to do so and there is a basis for federal jurisdiction.1
A number of doctrines may limit the ability of federal courts to decide or revisit certain matters. In particular, the homeowner’s ability to challenge a mortgage transaction or foreclosure in federal court is complicated when there is a related state court proceeding. These issues may arise when the homeowner files an action in federal court to rescind or challenge a mortgage transaction and there is a threatened, pending, or concluded action in state court to foreclose on the home or to evict the homeowner.
The Younger abstention doctrine prevents a federal court from issuing declaratory or injunctive relief that would interfere with certain types of pending state proceedings. This doctrine grows out of the 1971 Supreme Court decision, Younger v.
The Anti-Injunction Act is another potential impediment to federal court relief when there is an ongoing state court proceeding.
Under the Rooker-Feldman doctrine, a federal court lacks subject matter jurisdiction over a claim that is the functional equivalent of an appeal from a state court judgment.506 The doctrine arose from two cases. In Rooker v. Fidelity Trust Co.,507 the plaintiff’s federal suit asked for a declaration that a state court judgment was null and void.
The mere existence of a parallel state proceeding is not ordinarily a reason for a federal court to refuse to reach the merits of a Truth in Lending Act action.449 However, several issues complicate federal courts’ ability to issue declaratory and injunctive relief when there is a related state proceeding.
One important consideration is whether the federal court will be able to grant the relief sought.
There are circumstances under which a homeowner will not have the choice of having a claim heard in federal or state court. When the homeowner is the defendant in a foreclosure or eviction action filed in state court, there will usually be no basis for removal to federal court, whatever the homeowner’s preference. Foreclosure and subsequent eviction actions typically involve only questions of state law.
In foreclosure and mortgage servicing cases, homeowners may raise a combination of federal and state claims (e.g., RESPA, TILA, FDCPA, state UDAP and breach of contract). In addition to asserting a federal claim or diversity jurisdiction, borrowers wanting to maintain an action in federal court must demonstrate that an actual case or controversy exists.337 Standing is fundamental to this case or controversy requirement.
This section addresses general issues related to the identity of the person raising a TILA claim. This includes issues involving co-obligors and forgery victims. The last subsection describes standing and judicial estoppel issues in bankruptcy court.