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Home Foreclosures: 17.4.4.5.2.2 Federal authority

Two courts have addressed whether the CFPB and FTC are authorized to apply the MARS rule to attorneys. The first, Consumer Financial Protection Bureau v. The Mortgage Law Group,384 invalidated some of the requirements for the attorney exemption and thereby limited the CFPB’s authority to enforce the regulation against attorneys.385 The second, Federal Trade Commission v.

Home Foreclosures: 17.4.4.6 No Private Right of Action

Like other FTC rules, the MARS rule lacks a private right of action.412 It does, however, authorize state officials to enforce the rule.413 Additionally, in authorizing the FTC (now CFPB) to embark on this rulemaking, Congress specified that the rule “shall relate to unfair or deceptive acts or practices regarding mortgage loans, which may include unfair or deceptive acts or practices involving loan modification and foreclosure rescue services.”414

Home Foreclosures: 17.4.5.1 Overview of State UDAP Statutes

Foreclosure rescue scams can often be challenged under state unfair and deceptive acts and practices (UDAP) laws.418 All fifty states, the District of Columbia, Puerto Rico, Guam, and the Virgin Islands have at least one statute with broad applicability that addresses deception and abuse in the marketplace.419 All UDAP statutes offer a private right of action to consumers, and the typical statute allows enhanced remedies such as statutory damages, treble damages, punitive damages, and/or attorne

Home Foreclosures: 17.4.5.2 Comparison of UDAP and Fraud Claims

UDAP claims have a number of advantages when compared to other claims. In contrast to common law fraud, proof of the seller’s fraudulent intent or knowledge is not required for a claim under a state UDAP statute. In some cases, consumer reliance, damage, or even actual deception is not a prerequisite to a UDAP action.424 The standard of proof is typically a preponderance of the evidence, compared with clear and convincing evidence for a fraud claim. Thus, a UDAP claim is a far easier cause of action to prove than common law fraud.

Home Foreclosures: 17.4.5.3 Comparison to TILA and HOEPA

UDAP claims are much less technical than Truth in Lending or HOEPA claims. This can be an advantage and a disadvantage. Once an equitable mortgage is established (an intensely factual determination), whether a defendant violated the TILA or HOEPA is usually a very objective determination, suitable for summary judgment. The surrounding circumstances and the underlying fairness or unfairness of the transaction will be only marginally relevant. By contrast, whether a defendant violated a UDAP statute is much more dependent on the facts and nuances of those facts.

Home Foreclosures: 17.4.5.4 Application of Substantive UDAP Standards to Foreclosure Rescue Scams

Most UDAP statutes combine a series of specific prohibitions with a broad, general prohibition of unfair, unconscionable, and/or deceptive practices. Often the rescuer will have violated one of the specific, more clearly defined prohibitions, and in addition the facts will show a violation of the general prohibitions. The broad, flexible prohibitions of most UDAP statutes make them ideal as a way to challenge creative, new forms of abusive business schemes.438

Home Foreclosures: 17.4.5.5 UDAP Remedies

The typical UDAP statute offers actual damages plus statutory, multiple, or punitive damages. Actual damages can be substantial. Several decisions have awarded the lost equity in the home as actual damages, and then trebled this amount, when the homeowner was unable to regain the home.457 Even a homeowner who regains the home may have lost wages and suffered substantial expenses for moving, rent, interest, closing costs, and advice.

Home Foreclosures: 17.4.6.1 Introduction

A number of states have special laws aimed specifically at foreclosure rescue scams.464 In addition, the Massachusetts Attorney General has issued a regulation under the state’s UDAP authority targeting the scams.465 Michigan has a credit repair statute that is broad enough to encompass foreclosure rescue scams.466 Florida began by passing a statute that regulated only those offering to purchase the surplus at a foreclosure sale, and then adopted a

Home Foreclosures: 17.4.6.2 Coverage

The typical statute covers “foreclosure consultants” or some similar term.473 Most statutes define this term broadly to include anyone who makes an offer, representation, or solicitation to perform, or actually performs any service for compensation that is represented to:

Home Foreclosures: 17.4.6.3 Right to Cancel

Almost all of the state statutes afford a right to cancel. The typical statute affords the homeowner a three- to ten-day right to cancel any contract with a rescuer and requires the rescuer to give the homeowner written notice of this right.492 Failure to provide the notice can—like in TILA—trigger a right to cancel the transaction.

Home Foreclosures: 17.4.6.4 Substantive Prohibitions

The typical foreclosure rescue statute prohibits an array of deceptive, unfair, and abusive practices, so practitioners should check their own statutes carefully. Many prohibit unconscionable contract terms. Some of the statutes prohibit deception in broad terms. Another common provision is a cap on fees or interest rates, or a requirement that a rescuer who purchases the property must pay at least a certain percentage of its fair market value. Massachusetts and the District of Columbia completely ban all foreclosure rescue transactions entered into for profit or gain.

Home Foreclosures: 17.4.6.5 Remedies

Most of the statutes provide a special private cause of action.505 Most authorize double or treble damages or punitive damages in addition to actual damages.506 The typical statute also authorizes attorney fees.507 Some specifically authorize injunctive relief.

Home Foreclosures: 17.4.7.1 Introduction

Claims of fraud and civil conspiracy should always be considered in foreclosure rescue cases. Rescuers commonly rely on false representations to induce homeowners to deed over their homes.

Common law doctrines allow fraud claims to be asserted not only against those who dealt directly with the homeowner, but also against parties who conspired with the rescuer, knowingly accepted the benefits of the fraud, or aided and abetted the rescuer’s fraud.512

Home Foreclosures: 17.4.7.2 Elements of a Fraud Claim

The traditional elements of fraud are a false representation, scienter (that is, that the defendant made the representation recklessly or with knowledge of its falsity), the defendant’s intent that the representation be relied upon, reasonable reliance, and damages resulting from the reliance.513 These elements make fraud more difficult to establish than a deception claim under a UDAP statute.

Home Foreclosures: 17.4.7.3 Fraud by Silence

Affirmative misrepresentations are not the only type of fraud that is actionable. Fraud by silence or fraudulent concealment is also recognized as tortious. In general, a party’s nondisclosure of material facts is fraudulent if:

Home Foreclosures: 17.4.7.4 Overcoming Exculpatory Contract Clauses

In many foreclosure rescue cases, the homeowners are unaware that the documents they have signed transfer the home to the rescuer. The Nebraska Supreme Court held that the fact that the documents the homeowners signed were clearly labeled sales to the rescuer rather than loans did not undercut their fraud claims.

Home Foreclosures: 17.4.7.5 The Importance of Pattern Evidence

Evidence that the rescuer defrauded other homeowners in the same way is powerful. It can confirm in the jury’s mind that the defendant is a scoundrel who needs to be punished. Evidence that the rescuer made similar misrepresentations to other people will also make it clearer to the trier of fact that the homeowner is telling the truth. Joining several homeowners in one case was very effective in Eicher v.

Home Foreclosures: 17.4.7.6 Remedies for Fraud

A homeowner who proves fraud may recover actual damages. Actual damages may consist of the homeowner’s lost equity, plus any “rental” payments the homeowner made to the rescuer that exceeded what the homeowner would have had to pay on the mortgage.529 Although an independent appraisal is likely to be more persuasive, the homeowner’s opinion as to the value of the home is admissible.530

Home Foreclosures: 17.4.8.1 Introduction

Common law claims such as unconscionability and breach of fiduciary duty or duty of good faith and fair dealing are often useful in attacking foreclosure rescue scams.549 These claims offer both advantages and disadvantages over the statutory claims discussed in this section.

Home Foreclosures: 17.4.8.2 Unconscionability

The doctrine of unconscionability can be useful in attacking foreclosure rescue agreements, especially when the remedies under a state statute are not adequate or the transaction is not covered by the UDAP statute. The remedy for unconscionability is usually limited to a defense against the enforcement of the unconscionable contract or terms and does not normally include restitution or the tort damages available for a fraud claim.

Home Foreclosures: 17.4.8.3 Breach of Duty of Good Faith and Fair Dealing

The duty of good faith and fair dealing between parties to a contract is based both in common law and the UCC.565 Unlike unconscionability, which is ordinarily determined by looking at contract terms at the time the contract was made, the duty of good faith is imposed on parties to an existing contract. It prevents overreaching in the later stages of the relationship “to prohibit improper behavior in the performance and enforcement” of that contract.566

Home Foreclosures: 17.4.8.4 Breach of Fiduciary Duty

The existence of a fiduciary or quasi-fiduciary duty gives rise to a duty of fair and honest disclosure of all facts that might influence the consumer’s decisions. Fiduciary relationships may be express or implied. An implied duty can arise when the weaker party places trust and confidence in another, who is aware of this trust and takes on the role of advisor.

Breach of a fiduciary duty by failing to disclose all relevant information gives rise to a tort action, which may permit repudiation of the contract as well as damages.568

Home Foreclosures: 17.4.8.5 Intentional Infliction of Emotional Distress

The elements of the tort of intentional infliction of emotional distress are: (1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiff’s suffering severe or extreme emotional distress; and (3) actual and proximate causation.579 A California court reversed the dismissal of a homeowner’s claim for intentional infliction of emotional distress against foreclosure rescuers.580 The cour

Home Foreclosures: 17.4.8.6 Other Common Law Claims

Courts have also upheld a claim for conversion against a defendant for exercising unauthorized dominion over the plaintiff’s personal property (the proceeds of the sale).581 Slander of title is another claim that has been allowed to proceed.582