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Mortgage Lending: 7.2.7.5 State Common Law Claims

In City Financial Services v. Smith,387 the court held that a home loan was unenforceable based solely upon the common law doctrine of unconscionability. City Financial Services made a $3000 loan to Ms. Smith at 22% interest plus $618 in insurance and other charges. Ms. Smith had $574 a month in disability income, was already in default with one loan with City Financial Services, and had over $6700 in other credit card debt.

Mortgage Lending: 7.3.1 Introduction

Creditors have a long and unhappy history of either steering groups of borrowers to certain unsuitable or higher-cost products,393 or targeting their marketing and outreach to a select group of borrowers.394 Too often access to this type of credit is not benign but involves active price discrimination. Borrowers who are perceived as vulnerable are steered into or targeted for inferior, overpriced, and abusive products.

Mortgage Lending: 7.3.4 Market Segmentation and Targeting Neighborhoods

The high-cost market has been a “push” market in which armies of telemarketers, brokers, and loan officers target borrowers and solicit business.452 Minority neighborhoods have been disproportionately the recipients of these unwanted advances.453 Even high-income whites living in communities of color found themselves disproportionately in high-cost loans.454

Mortgage Lending: 7.3.5 Investigating Credit Scores

Practitioners should not assume their clients got credit at the rate warranted by their credit scores. Good credit is no protection from being steered or targeted. Race can matter more than credit score in determining whether a borrower receives a subprime loan. In fact, the better an African American or Hispanic’s credit score, the more likely it is that they will receive a subprime loan compared to a similar white borrower.

Mortgage Lending: 7.3.6.1 Overview

Both state and federal law contain provisions against steering borrowers into or targeting borrowers for unfavorable loan products. The three most common federal claims arise under the Equal Credit Opportunity Act (ECOA), the federal Fair Housing Act (FHA), and the Civil Rights Act.477 Many states have parallel anti-discrimination statutes.

Mortgage Lending: 7.3.6.2 Discrimination Claims

The ECOA prohibits discrimination in any aspect of credit on the basis of race, color, national origin, religion, sex or gender, marital status, age, or public assistance status.484 The FHA and its state counterparts prohibit discrimination on the basis of race, color, religion, sex or gender, disability or handicap, familial status (for example, having children),485 or national origin in the sale, rental, or advertising of housing and in housing-related financing.

Mortgage Lending: 7.4.1 Introduction

Loan churning, also known as loan flipping, is a form of equity stripping that refers to repeatedly refinancing a homeowner’s mortgage, often in short succession. Loan flipping should be distinguished from property flipping (in which someone buys a home for quick resale, sometimes with shoddy repairs and at inflated values). Property flipping is discussed in § 7.5, infra.

Mortgage Lending: 7.4.2 Examples of Loan Churning

Loan originators may use the unaffordability of an existing loan514 or the existence of a balloon payment to push homeowners into refinancing. For example, borrowers who notice at closing that their loan is unaffordable are assured that they can refinance into a more affordable loan in a year or so.515 The new loan is usually even less affordable.516

Mortgage Lending: 7.4.3 Claims Arising from Loan Churning

The practice of loan churning may give rise to claims under state or federal law, including common law claims of unconscionability, fraud, and unfair and deceptive practices.532 Some states may have statutes specifically targeted at loan churning.533 The OCC has labeled serial refinancing as a per se predatory practice.534 The Seventh Circuit Court of Appeals has held that well-pleaded allegations of loan churning may state a federal racketee

Mortgage Lending: 7.5.1 Overview

Property flipping scams involve speculators who buy dilapidated or just older residential properties at low prices and resell them to unsophisticated first time home buyers at huge markups.538 Sometimes these scams involve new construction, with a home builder selling first-time homebuyers overpriced, poorly constructed homes or undeveloped lots in a subdivision.539 Buyers are persuaded to enter into purchase agreements only after the seller has promised to make necessary or agreed upon repa

Mortgage Lending: 7.5.2 Role of FHA Insurance in Property Flipping

While many property flipping schemes rely on steering borrowers to high-cost lenders,552 other schemes depend on the availability of government insurance.553 (And some property flippers do both—steering good credit prospects to Federal Housing Administration (FHA) loans and bad credit prospects to subprime loans).

Mortgage Lending: 7.5.3.1 Overview

A variety of parties may be involved in property flipping schemes. Generally, it is a good idea to cast a wide net in naming defendants in a property flipping complaint. Including as many scam participants as possible may facilitate discovery from all parties, add deep pockets to the case, provide more parties to contribute to a settlement, and help present the complex and unfair scheme in the proper light to the judge or jury.

Mortgage Lending: 7.5.3.2 Lenders

While sellers are obvious defendants in property flipping schemes,563 a lender willing to participate in the fraud564 or one with sloppy underwriting565 is vital to all forms of property flipping.

Mortgage Lending: 7.5.3.4 Title Companies and Closing Agents

Title companies, closing agents, and attorneys have also been implicated in flipping scams.578 As one court found, property flipping “requires the assistance of an attorney who is aware of the fraud, chooses to look the other way, or who fails to supervise non-lawyer assistants engaging in the unauthorized practice of law.”579 Almost always, closing agents are acting as the lender’s agents, pursuant to the closing instructions prepared for them by the lender.

Mortgage Lending: 7.5.4 Possible Claims in Property Flipping Cases

Aggressive litigation and advocacy can usually preserve homeownership, or alternatively, force a discharge of the debt and payment of sufficient damages to allow the homeowner to move on. Practitioners should always explore what the homeowner wants (whether to keep the home or to move), the actual condition of the house, and the cost of repairs.

Mortgage Lending: 7.5.5 Damages in Property Flipping Cases

Actual damages in property flipping cases can be significant, even without punitive damages.598 When recoverable, a claim for emotional distress damages should be developed.599 Borrowers are not necessarily limited to rescission; courts have allowed rescission and the return of interest paid and other foreseeable costs associated with the fraud.600 These schemes will often support the award of punitive damages against one or more parties.

Mortgage Lending: 7.5.6 FHA Anti-Flipping Regulation

In an attempt to curb the use of FHA insurance in property flipping schemes, the FHA adopted guidelines designed to identify and exclude flipping transactions. Among other restrictions, the guidelines seek to hold lenders accountable for the quality of appraisals on properties secured by FHA-insured mortgages.607

Mortgage Lending: 7.6.2.2 Broker Price Opinions

A broker price opinion (BPO) is a determination of property value typically based on a drive-by exterior examination, public data sources, and recent comparable sales. Broker price opinions can be produced by real estate brokers, sales agents, or sales persons who are not qualified appraisers. They typically cost less than an appraisal and are used to determine the probable selling price of a property, often in the context of a defaulted mortgage or in the context of loan servicing and modifications.629

Mortgage Lending: 7.6.2.3 Automated Valuation Models

Automated valuation models (AVM) are computer programs that analyze data including comparable property and sales data to assign a value or range of values to a property.634 AVMs have been used as a backup to check the values shown in traditional appraisals and to conduct prequalification screening, loan underwriting, portfolio review, and loss-mitigation reviews. But they are increasingly being used as substitutes for appraisals where an appraisal is not strictly required.

Mortgage Lending: 7.6.2.4 Evaluations

In contrast to an appraisal, the person conducting an evaluation need not be licensed or have any formal training,643 although states may impose some requirements.644 An evaluation need not comply with the USPAP standards for appraisers and no particular format is mandated.

Mortgage Lending: 7.6.3.2 Appraisal Discrimination

It is not much of an exaggeration to say that racial discrimination is the original sin of the real estate appraisal industry. The Home Owners Loan Corporation’s color coded maps—marking communities of color in red and grading them “hazardous”—remain the most visible evidence.681 But racial bias permeated the appraisal practices of the day and continued to do so until after the 1968 Fair Housing Act. Valuation treatises and professional materials emphasized that appraisers should consider race when analyzing properties.