Mortgage Lending: 6.11.3 HOLA and “Field” Preemption; Presumption Against Preemption
Congress originally granted the federal savings association regulator broad authority to regulate the lending practices of federal savings associations.
Congress originally granted the federal savings association regulator broad authority to regulate the lending practices of federal savings associations.
This chapter surveys state law claims that may be applicable to mortgage origination problems.
Consider also the case of payment option ARMs, popular with lenders between 2004 and 2007.235 The following is a description of the mechanics of a typical payment option ARM:
Almost half the states have laws related to reverse mortgages.172 These laws are summarized in Appendix M, infra. However, these statutes vary dramatically. Some states merely define reverse mortgages, while others provide more substantive protections. Some of the more common substantive requirements include:
The Electronic Signatures in Global and National Commerce Act (E-Sign)586 provides that neither a signature nor a contract can be denied legal effect, validity, or enforceability solely because it is in electronic form.587 It also provides that “if a statute, regulation, or other rule of law requires that information relating to a transaction . . . affecting interstate . . .
The Act transferred the authority to issue regulations implementing what are called the “enumerated statutes” from the Federal Reserve Board, the Department of Housing and Urban Development, and other agencies to the CFPB. Most of these rules, although related to mortgage loans, are analyzed in more detail in other NCLC treatises:
Title insurance protects against loss related to defects in the title for a specific parcel of real property.505 Unlike other types of insurance, title insurance only covers losses arising from events that occurred prior to the date of the policy.506 Losses typically covered by title insurance include claims against the homeowner’s title caused by forged deeds, recording errors in legal documents, undisclosed heirs to previous owners, unpaid taxes or liens, and unrecorded easements.
For loans subject to the integrated disclosure rules that became effective in October 2015,522 the disclosure of title insurance and related charges is described in NCLC’s Truth in Lending.523 For other loans, the cost of title insurance, and any related services not included in the premium, must be disclosed on the HUD-1 settlement statement on lines 1100–1108 (labeled “Title Charges”).524 RESPA specifically requires the settlement
It is common for mortgage closings to include a charge for attorney fees. Creditors usually require borrowers to pay for the creditor’s attorney. It is less common for borrowers to hire their own attorney. The borrower’s failure (or inability) to have a loan transaction reviewed in advance by a qualified advisor (whether an attorney or housing counselor) likely plays a factor in predatory lending.648
Transactions that let homeowners share or sell part of the equity in their home are difficult to categorize because they are so varied. Such a transaction can be used to help purchase a home, for loss mitigation, or to convert equity to cash. They can take the form of a forward mortgage, a reverse mortgage, a loan modification, a deed restriction, or an option contract. Some are offered by non-profit agencies and government entities to promote or preserve homeownership, while others are offered by private companies outside the traditional lending industry.
A common form of credit is an installment contract, in which a seller sells goods or services on credit and then assigns the contract to a financing entity. The seller itself is named as the original payee of the installment contract. An example is an installment sale of a car in which a Toyota dealer assigns the obligation to Toyota Motor Credit.
Often the consumer will obtain credit from a lender instead of a seller. The consumer may have claims against the lender that arise from the nature of the loan origination or the terms of the loan. Examples include payday loans, home equity loans, loans to purchase a home, installment loans, or auto title loans. If the lender assigns the loan, the consumer may wish to raise against the assignee claims and defenses the consumer has against the originating lender.
Importantly, the rule does not apply to the sale of real estate because real estate is not a good or service.
The common law rule is that an assignee is subject to all defenses that the consumer could raise against the assignor.259 But the Uniform Commercial Code (UCC) generally allows the assignee of the promissory note or other negotiable instrument to be free from those claims and defenses, if it has attained the status of a holder in due course or acquired the rights of a holder in due course. This section provides a brief overview of the holder-in-due-course doctrine as it applies to foreclosure defenses.
In what we loosely refer to as a “mortgage” transaction there are typically two distinct documents: (1) the borrower’s obligation to pay the debt in the form of a promissory note, and (2) the security interest in the borrower’s property as evidenced by the mortgage or deed of trust.3 The latter document is often referred to generically as the “security instrument.” The transfer of the security instrument is a transfer of an interest in land, which is generally governed by the law of conveyances and real property law.
When a note is negotiable, Article 3 not only creates enforcement rights in section 3-301 but it also protects certain holders of these notes.
The ability of assignees under the Uniform Commercial Code to take even fraudulently originated mortgages free from the borrowers’ claims and defenses991 has facilitated predatory lending. Since many mortgage originators are insolvent or disappear at the first hint of litigation, homeowners may be left paying a fraudulent mortgage without recourse.
To calculate an assignee’s maximum liability in HOEPA cases and to apply the constraints of section 1641(d), the following road map should be helpful:
State high-cost loan statutes generally do not cover servicer misconduct. A loan servicer who acquires servicing rights from the originating lender cannot generally be held liable under state high-cost home loan statutes.147
Any search for case law involving mortgage brokers unearths a seemingly endless list of misconduct that one judge described, nearly sixty years ago, as a “cancer which gnaws at and sometimes devours the necessitous borrower.”90 Asserting claims against a mortgage broker may be useful to collect damages from the broker’s employer,91 the broker’s personal assets, or from the surety bond that many brokers must post as a condition of obtaining a state license.
The Federal Housing Administration (FHA) is authorized to guarantee a version of a shared appreciation mortgage.77 In return for a lower interest rate on a forward or reverse mortgage, the mortgagor agrees to pay back a share of the net appreciated property value when the loan matures, is refinanced, or the property is sold. The statute authorizing this program preempts all state laws that prohibit shared appreciation mortgages or that prohibit an increase in the loan balance.
Sometimes homeowners take out mortgages to pay for home improvements. Some of these mortgages are traditional transactions initiated by a consumer applying directly to their chosen bank. But other approaches are more commonly subject to problems. In such transactions a home improvement contract or other sale of goods or services takes the home as security for the loan. Such transactions are often initiated by the seller or service provider.
As a result of the dramatic bank failures of the Great Depression of the 1930s, the federal government created the Federal Deposit Insurance Corp. (FDIC).2 In creating the FDIC, Congress sought to promote stability and confidence in the banking system, insure deposits, and keep open the channels of trade and commerce.3