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Mortgage Lending: 2.4.1.2.4 Recapture clauses

An important issue regarding the interpretation of caps is what happens when interest rates decline after the rate cap or the monthly maximum payment has been reached. Some credit contracts authorize the creditor to recapture or “carry over” any interest that it would have earned or collected but for the cap, by refusing to lower the borrower’s payments when market interest rates decline. The precise recapture mechanism will depend on the type of cap in the contract.

Mortgage Lending: 5.4.3.5 Negative Amortization

Many high-cost loan statutes ban negative amortization in loans they cover. While most statutes that address negative amortization impose an absolute prohibition on it,113 some statutes are conditional.

Truth in Lending: 5.13.4.4.3 Is negative amortization included in the finance charge?

Some courts struggling with the disclosure of negative amortization in payment option adjustable-rate mortgages (POARMs) have looked to the official staff commentary (now “official interpretations”) on graduated payment mortgages for additional guidance.1407 The negative amortization predicted on the basis of the application of the fully-indexed rate must be included in the finance charge for graduated payment mortgages.1408

Truth in Lending: 5.13.4.4.1 For loans made prior to February 1, 2011

Originally, the disclosure of negative amortization was only required for loans with a variable rate feature.1389 Prior to 2011, Regulation Z required the disclosure of negative amortization to appear only in the loan program disclosure, not on the TILA disclosure statement.1390 The required disclosure was only a basic warning of the possibility of negative amortization be given, if applicable.1391 The official interpretations, however, exten

Mortgage Lending: 2.4.5.2 Payment-Option Adjustable Rate Mortgages

Payment-option adjustable rate mortgages (known as “POARMs” and “pick-a-payment” loans) are adjustable rate loans that allow the borrower to choose from several different payment options—at least one of which is too small to pay the interest accrued since the last payment. The contract for these loans calls for unpaid interest to be added to the unpaid principal balance,258 which results in compound interest. As a result, the balance goes up and is said to negatively amortize until a “reset” point defined in contract.

Mortgage Lending: 2.4.6 Balloon Notes

A balloon payment is a large payment, usually more than twice the regular payment,262 due at the end of the loan term. A balloon payment will be required whenever the regular payments are not fully amortizing, meaning they are not sufficient to repay both the principal borrowed and the interest earned by the end of the loan term. Balloon mortgages are marketed as providing lower monthly payments with the promise (often unfulfilled) that the loan can be refinanced when the balloon payment is due.

Mortgage Lending: 2.4.7.2 Methods of Calculating Interest on Open-End Credit

The rules for calculating interest and balances on open-end credit are the same for secured and non-secured credit. (However, the federal protections against abuse by credit card providers do not apply to HELOCs.266) For interest calculation purposes, four of the most commonly used methods of computing the balance on an open-end credit account are listed in Regulation Z, as follows:267

Mortgage Lending: 14.3.19 Prohibition of Relief in Nature of a Penalty

When acting as receiver, the FDIC also enjoys statutory protection against liability for “any amounts in the nature of penalties or fines.”411 This section has been construed to protect the FDIC from punitive damages claims.412 It may not bar claims for attorney fees under fee-shifting statutes.413 However, at least one court held that an award of fees against the FDIC based on a fee-shifting statute as opposed to a contractual clause is inco

Mortgage Lending: 14.3.20 Navigating the Claims Process Minefield

The requirement to exhaust the claims process described in the previous subsections is draconian, and there is no guaranteed way to navigate the minefield it creates. This subsection attempts to sketch out the considerations that should inform decisions about how to approach the claims process on behalf of ordinary consumers who borrowed money from a bank that then failed. Given the number of unresolved issues, practitioners will not be able to offer clear answers to clients, but will have to make them aware of the risks of the various courses of action.

Mortgage Lending: 14.3.21 Practical Concern: Likelihood of Recovery from Failed Bank Assets

Congress has explicitly limited the liability of the FDIC to the assets of the receivership estate.432 As a result, a creditor can expect to recover no more than the amount it would have received upon liquidation of the failed bank.433 “General” creditors, as one might expect, are in a precarious position because depositors and the FDIC have priority in the payment pecking order over general creditors.434 Thus, “[p]ayments on claims in each p

Mortgage Lending: 14.6.1 Overview of the Doctrine

Because the United States Supreme Court has not yet definitively ruled whether the judge-made D’Oench doctrine remains viable in light of the adoption of section 1823(e), it is important to understand its origins and contours. In 1942, in D’Oench, Duhme & Co. v. Federal Deposit Insurance Corp.,464 the Court crafted a federal common law doctrine of equitable estoppel to prevent a borrower from asserting a “secret side agreement” with bank officers as a defense against an obligation being administered by the FDIC.

Mortgage Lending: 14.6.3 Treatment of Innocent Borrowers

The party seeking to invoke D’Oench need not show that the borrower intended to deceive anyone.492 Nonetheless, in 1974, in Federal Deposit Insurance Corp. v. Meo,493 the Ninth Circuit recognized an “innocent borrower” defense to D’Oench, rejecting the broad application of D’Oench after carefully analyzing the borrower’s conduct to determine whether that conduct created an estoppel.

Mortgage Lending: 14.7.3 What Is an “Agreement” Under Section 1823(e)?

One limitation on section 1823(e) is that, by its terms, it applies only to “agreements.”531 The United States Supreme Court has interpreted the term “agreement” broadly to mean the entire bargain between the parties, including the statements or warranties the bank made to induce the parties to enter into the transaction.532 The term is not limited to agreements to perform acts in the future.533 Therefore section 1823(e) barred a fraudulent i

Mortgage Lending: 14.7.6 Equitable Considerations

In Langley v. Federal Deposit Insurance Corp.,563 the United States Supreme Court declined to “engraft an equitable exception” upon section 1823(e). Nonetheless, common sense and equity have appeared in decisions.

Mortgage Lending: 14.7.7 Comparison of Section 1823(e) and D’Oench

The differences between section 1823(e) and the D’Oench doctrine become important in light of the United States Supreme Court’s decision in O’Melveny & Myers v. Federal Deposit Insurance Corp.,568 which many lower courts have read as obliterating D’Oench.569 If D’Oench is no longer viable, then any claim or defense raised against the receiver that fails to meet section 1823(e)’s criteria would be allowed to stand, regardless of D’Oench.

Mortgage Lending: 14.9.2 Subsidiaries, Institutions That Are Not Federally Insured

D’Oench does not apply to institutions other than banking institutions.603 For example, it did not apply to a nonbank financial institution that was in the equity receivership of the Securities and Exchange Commission: “[I]t would be fundamentally unfair to apply the D’Oench, Duhme doctrine to [the borrower] given that it had no expectation or forewarning that it could be penalized for not adhering to the strictures of the doctrine.”604

Mortgage Lending: 14.9.3 Assignees

In general, courts have allowed D’Oench and related doctrines to be asserted by institutions that purchase the assets of failed banks or thrifts from the FDIC or similar federal agencies and then seek to enforce an obligation against a borrower.607 The rationale for these doctrines has far less force, however, when applied to these assignees, for once the obligation has been transferred into private commerce it no longer burdens or benefits the federal government.

Mortgage Lending: 14.9.4 Whether Assignees Benefit from FIRREA’s Limitations Period

In addition to seeking the benefits of D’Oench, assignees seeking to enforce instruments they have acquired from the FDIC often assert the benefit of the six-year limitations period that FIRREA grants to the FDIC (but not specifically to any other entity) to bring suit on debts.612 Prior to O’Melveny, most courts simply extended FIRREA to assignees by reasoning that, under federal common law, assignees stepped into the shoes of their assignors.613 Only one court ruled that

Mortgage Lending: 14.10 Effect of the FTC Holder Rule and the Assignee Liability Provisions of HOEPA

Most cases applying D’Oench and its related doctrines involve sophisticated borrowers such as developers, investors, and higher-level dealmakers. But for ordinary consumer transactions there are federal protections that counteract the harshness of these doctrines. There are strong arguments that the D’Oench doctrines do not nullify these protections when an obligation is held by a federal receiver or its assignee.

Mortgage Lending: 14.12.1 Introduction

This section sketches out an analysis of the effect of D’Oench and its related doctrines on some common consumer claims, and arguments that consumers might present. Practitioners should, however, consult the preceding sections carefully and research their own jurisdiction’s law thoroughly.

Mortgage Lending: 14.12.2 Loan Servicing Abuses

Abuses in servicing loans are common. For example, servicers may impose unjustified fees, wrongly declare a borrower in default, or fail to credit payments properly.663

Some banks service their own loans, but more commonly the servicing rights are assigned or sold to another entity. It is important to undertake detailed factual discovery on this question, as the entity that appears to the consumer to own the loan may actually be merely a servicer.