Home Foreclosures: 12.4.1 General Principles
The Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) apply broadly to residential mortgage loans.
The Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) apply broadly to residential mortgage loans.
Investors buy and sell second mortgages that have remained inactive for extended periods. The failure to inform borrowers of these transfers of ownership contributes to borrowers’ expectations that there is no need to take action regarding an ongoing payment obligation. During long periods while a loan remains dormant, borrowers may try to contact someone for information about the loan’s status, yet find themselves in the dark.
The Dodd-Frank Act created important obligations under the Truth in Lending Act (TILA) for mortgage servicers to provide periodic account statements to borrowers.70 In 2013, the CFPB issued rules under Regulation Z that implemented this TILA requirement.71 The rules apply to a first or second mortgage loan secured by a dwelling.
Truth in Lending Act rescission claims can be a particularly effective response to a mortgage foreclosure. The second mortgage context can present both opportunities and obstacles for such claims.
Federal and state laws impose affirmative obligations on owners of second mortgages and their servicers to disclose to borrowers important facts about their accounts, and to do so on a regular basis. These include disclosures of changes of loan ownership and servicing rights, as well as details about the current status of an account. If loan owners and servicers provided the ongoing disclosures required by TILA and RESPA, borrowers would rarely find themselves blindsided and overwhelmed by the sudden appearance of a zombie second mortgage.
Every state has passed at least one law protecting consumers from deceptive sales practices.390 These statutes, most of which were passed in the late 1960s and early 1970s, are typically referred to as “Little FTC Acts,” “Consumer Protection Acts,” or “UDAP” (unfair and deceptive acts and practices) statutes. They are often interpreted to prohibit unfair or deceptive practices by debt collectors.
The Fair Debt Collection Practices Act (“FDCPA”) prohibits a wide range of unfair and deceptive practices by debt collectors.112 NCLC’s manual Fair Debt Collection provides a comprehensive analysis of practices prohibited and remedies available under the FDCPA.113 The Fair Debt Collection manual also analyzes related state
The important set of Regulation X rules132 applicable to a wide range of mortgage servicer activities that went into effect in January 2014 apply to junior mortgages as long as they secure loans for closed-end credit.133 These include the rules requiring mortgage servicers to adhere to general standards in their operations.134 The standards require, inter alia, that servicers adopt policies and procedures to ensure that borrowers receive t
Fannie Mae and Freddie Mac have created extensive loss mitigation guidelines that servicers of GSE loans must follow.142 If a mortgage loan is owned or guaranteed by a GSE, the servicer must review the borrower for the GSE loss mitigation options when the loan is in default. However, some of the major GSE options do not apply to junior mortgages. Advocates need to check the applicable GSE servicing guide to determine the extent to which each option is limited to first lien mortgages.
Three federal agencies insure home loans, FHA, VA, and RHS.160 These agencies insure junior mortgages in limited circumstances.161 Typically they insure certain home improvements loans and loans originated by nonprofits that can take a second lien position.162 The agencies’ major modification programs typically require that the modified loan retain a first-lien position.163 This is true, for example,
Efforts to resurrect long-dormant second mortgages can be opposed with contract-based defenses and claims. One approach is to focus on the requirement of most mortgages that the foreclosing party comply with applicable law as a condition to enforcement of the obligation. As discussed in NCLC’s Mortgage Servicing and Loan Modifications treatise,172 the GSE standard security instrument contains such a requirement. TILA and RESPA are applicable laws.
Equitable defenses to foreclosure may be available when a second mortgage has lain dormant with no communication to the borrower for years. The borrower may be able to raise equitable claims against a servicer who emerges as housing values increase to try to collect on the mortgage after failing to provide periodic statements or any notifications regarding the debt for several years.
The laches doctrine recognizes that foreclosure is an equitable remedy.187 The defense applies when protracted inaction in enforcing the equitable remedy of foreclosure has worked to the disadvantage of the borrower who acted in reliance on that inaction.188 Laches focuses on the inequity of enforcement of the mortgage in view of the particular circumstances of the borrower and the property.189 Two elements must coalesce for laches to apply.
In the case of a foreclosure of a zombie second mortgage, it is often not difficult to establish the delay element. The doctrine of laches does not assume that there is a fixed time that is appropriate for bringing a claim. Rather, it looks at whether the claimant took all reasonable steps under the circumstances to assert its rights.192
The prejudice or harm aspect of laches is likely to present more challenges to the advocate, and a creative approach can be helpful. The determination of prejudice is fact-specific, and no fixed standards define the term. As a general rule, the prejudice element looks at whether the party asserting the harm changed position in a way that would not have occurred if the claimant had acted promptly to enforce its claim.193 In the foreclosure context, borrowers must show that the loan owners’ delay placed them in a less favorable position.
Courts have authority to enforce equitable principles to bar exercise of a contractual power of sale in a mortgage or deed of trust.205 Although applied most often as a defense to a stale judicial proceeding, laches can also be the basis for declaratory relief, for example, to obtain a declaration that a mortgage lien is discharged.206 Finally, laches can be applied to reduce the amount of a monetary claim.
A second mortgage holder should be held to the same standards of compliance with applicable state foreclosure laws as a first mortgagee. A second mortgagee must have a valid mortgage with the borrower and be able to prove that the borrower defaulted, prove the amounts alleged owed by the borrower, and follow the applicable foreclosure procedures.
While most state lending laws apply to first and subordinate lien mortgages, a handful of states have statutes that apply specifically to second mortgages. Section 12.10.2, infra, provides a list of state statutes that apply specifically to second mortgages and a brief overview of the content of each.216
Conn. Gen. Stat. § 36a-498a
Connecticut limits prepaid finance charges for second mortgage loan to eight percent of principal amount. The statute also places limits on demanding full repayment prior to maturity.
Conn. Gen. Stat. § 36a-498b
This section provides Connecticut’s requirements for the release of secondary mortgage. The statute also requires the provision of notice of outstanding loan obligation within two business days of request from mortgagor.
Md. Code Ann., Com. Law §§ 12-401 through 12-415
Mass. Gen. Laws. ch. 140, § 90A
Under this Massachusetts statute, lenders cannot charge an interest rate greater than an amount equivalent to 1.5% per month computed on unpaid balances before default and for six months after continuing default and for a period after the expiration of six successive months of continuing default a rate of interest greater than one percent a month computed on unpaid balances.
Mass. Gen. Laws. ch. 140, §114B
Mich. Comp. Laws §§ 493.51 to 493.81
Mo. Rev. Stat. §§ 408.232 through 408.241
N.H. Rev. Stat. Ann. § 397-A:16-a
New Hampshire’s statute allows any interest rate agreed upon in the note between borrower and lender. Following the sixth month of any period in which a loan has been in continuous default, the lender may charge not more than 1.5% per month on any unpaid balance. Charges may not exceed eighteen percent per year simple interest on an outstanding balance. Certain information is required on the note. Any second mortgage made in violation is discharged if principal only is paid off. The statute refers to a “licensee.”
N.J. Stat. Ann. §§ 17:11C-76, 17:11C-81 (West)