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Mortgage Lending: 12.1 Overview

Most mortgages in the United States are structured as closed-end loans with fully amortizing monthly payments, as described elsewhere in this treatise. See § 2.2, supra. But there are many other ways to structure a mortgage loan. These can be called “nontraditional” loans, for lack of a better name.

Mortgage Lending: 10.6 Other Applicable Federal Laws

In addition to the Truth in Lending Act, reverse mortgages are generally subject to other federal statutes that govern mortgage lending.132 For example, the Real Estate Settlement Procedures Act (RESPA) governs the settlement process and the servicing for most home-secured mortgage loans. Several of RESPA’s origination and servicing provisions, however, do not apply to reverse mortgages.

Consumer Credit Regulation: 2.4.4.4 Falsification and Forgery

Complaints by consumers and homeowners about car dealers and mortgage brokers inflating their income and falsifying credit applications or other documents are common.488 Courts may be reluctant to believe the consumer that these parties perpetrated the fraud, instead of blaming the consumer.

Consumer Credit Regulation: 2.4.4.5 Constitutional and Statutory Restrictions on Punitive Damages

One of the benefits of a fraud claim is that punitive damages are available in most jurisdictions. In a number of states, however, punitive damages for some or most torts are capped by statute either at a fixed multiple of compensatory damages or at a dollar amount.496

In addition, the U.S. Supreme Court has held that the Due Process Clause prohibits a state from imposing grossly excessive punitive damages on a tortfeasor. The Court has identified three guideposts for determining whether a punitive damage award is grossly excessive:

Consumer Credit Regulation: 2.4.5 Negligent Misrepresentation

Negligent misrepresentation, which does not require proof of intent to deceive, has also been held to apply in some instances to the debtor-creditor relationship.503 The Restatement defines this tort as the provision of false information to guide others in their business transactions by someone “in the course of his business, profession, or employment, or in any other transaction in which he has a pecuniary interest” who fails to exercise reasonable care or competence in obtaining or communicating the information.

Mortgage Lending: 7.2.4.4 Residual Income Standards

Residual income is an essential component of an affordability analysis, especially among lower-income families.224 A high total debt-to-income ratio loan may be perfectly affordable for a higher-income family, but a loan with that same debt-to-income ratio may be unaffordable for a family who is left with insufficient residual income to cover basic life necessities.

Consumer Credit Regulation: 2.4.6.1 Overview

Many business transactions are presumed to be at arm’s length. The parties are on equal footing, with no obligation to show concern for the other’s best interests. But that presumption changes dramatically if one of the parties owes the other a fiduciary duty.

Consumer Credit Regulation: 2.4.6.2 Existence of a Fiduciary Relationship; 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.519 In other contexts, the existence of a fiduciary relationship is not automatic, or the nature of the parties’ relationship is less clear. Outside of the 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.

Consumer Credit Regulation: 2.4.6.3 When a Creditor Is a Fiduciary

A traditional debtor-creditor or lender-borrower relationship is usually considered an arm’s length transaction.525 Nonetheless, a majority of courts have held that, given the right circumstances, a creditor may owe a fiduciary duty to a borrower.526 Such a duty may arise if the creditor acts as the borrower’s agent (a principal-agent relationship);527 if the borrower places a significant amount of trust and confidence in the other party;

Mortgage Lending: 7.2.4.1 Overview

The basic presumption of residential lending is that the homeowner will be able to repay the loan from current income.191 Asset-based lending, sometimes acceptable in the commercial context, has always been suspect in the residential context.192 In order to determine the homeowner’s ability to repay from income and not assets, the lender must compare the homeowner’s income to the homeowner’s anticipated expenses after the mortgage loan is made.193

Consumer Credit Regulation: 2.4.6.4 Principal-Agent Relationship

The relationship of agent to principal is recognized as a fiduciary relationship.548 The parties must consent to an agency relationship, but consent may be found either in an express agreement or by inference from the parties’ acts.549

The factors used by several appellate courts indicate the range of considerations at issue when consumers assert the existence of a principal-agent relationship (and, consequently, whether someone owes the consumer a fiduciary duty):

Consumer Credit Regulation: 2.4.6.5 Duties of a Fiduciary

A fiduciary “duty” is a duty of loyalty to a beneficiary.565 As a result, a fiduciary must avoid conflicts of interest and put the beneficiary’s interests first.566 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.

Consumer Credit Regulation: 2.4.7 Breach of Duty of Due Care As Negligence

In some circumstances, a negligence claim will be possible if the plaintiff can identify a duty of care owed by the defendant.576 Some courts hold that a financial institution generally owes no duty of care to a borrower, but they recognize that this rule does not apply if the financial institution exceeds the scope of its conventional role as a mere lender.577 Falsifying a borrower’s income and the value of the collateral goes beyond a lender’s conventional role and may amount to a breach of a

Consumer Credit Regulation: 2.4.8.2 Elements of a Claim of Unconscionability

There are two forms of unconscionability: procedural and substantive.590 Procedural unconscionability involves the bargaining process when the contract was made, while substantive unconscionability focuses on the content of the contract.591 Some courts hold that both procedural and substantive unconscionability must be shown to invalidate a contract term.592 However, the greater the degree of substantive unconscionability, the lesser the degree of

Consumer Credit Regulation: 2.4.8.3 Unconscionable Inducement

An interesting issue is whether there is a cause of action (or defense)614 of unconscionable inducement that is separate from the cause of action (or defense) of unconscionability. This separate claim or defense should be viable in states that incorporated the common law unconscionability doctrine into a state statute that contains specific language related to inducement.

Consumer Credit Regulation: 2.4.8.5 Improvident Lending As Unconscionable

Improvident lending may also be attacked using unconscionability theories. In Connecticut, a court found both substantive and procedural unconscionability in a second mortgage loan. The loan terms required a monthly payment of $733.33 for a borrower with a monthly income of $1,126.67 and a first mortgage payment of $1,011.00.