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Home Foreclosures: 7.4 Unfair and Deceptive Acts and Practices (UDAP) Statutes

Abusive mortgage origination practices can often be challenged under state unfair and deceptive acts and practices (UDAP) statutes.87 Under these statutes, unfairness is typically broader than deception, and the deception standard is broader than affirmative misrepresentation. For example, the failure to disclose the disadvantageous cost or nature of the loan may be a deceptive practice.

Home Foreclosures: 7.5.1 Introduction

The Truth in Lending Act (TILA) is designed to provide consumers with accurate information about loan transactions in order to facilitate informed use of credit. TILA requires a creditor to disclose certain important information about the credit terms to the consumer in writing before consummating a credit transaction. More recently TILA has been amended to include a variety of substantive protections that seek to protect mortgage loan borrowers from abusive lending.

Home Foreclosures: 7.5.2 Truth in Lending Act Rescission Rights

The provision of TILA that is most relevant to foreclosure defense is the right of rescission.94 TILA rescission can be a powerful tool. Once a valid notice of rescission is given, the lien on the consumer’s home becomes void,95 taking away the creditor’s foreclosure remedy and its leverage.

Home Foreclosures: 7.5.3 Truth in Lending Act Damages Claims

Nearly all home mortgages are subject to the disclosure requirements of the Truth in Lending Act when the lender is in the business of making loans to consumers. TILA requires a creditor to disclose certain important information about the credit terms to the consumer in writing prior to consummation of a credit transaction, and TILA also provides more substantive protections.

Home Foreclosures: 7.5.4 Substantive Protections for Residential Mortgage Loans

As part of the sweeping changes in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress amended TILA to include a variety of substantive provisions related to mortgage lending.115 These protections, which are described briefly below, generally apply to “residential mortgage loans” which are closed-end mortgages secured by a dwelling (but not necessarily a principal dwelling).116 Violations of these provisions lead to TILA private remedies of actual damages, statutory damag

Home Foreclosures: 7.16.3 The FDIC and Assignees

The wave of bank failures that began in 2008 brings with it a set of additional hurdles to borrowers who are attempting to defend against a foreclosure. First is the requirement that persons with claims against a failed bank exhaust an administrative claims process as a precondition of any litigation.272 If a litigant does not exhaust the administrative claims process, the court lacks subject matter jurisdiction over the claim.

Home Foreclosures: 2.2.4.4 When a Mortgage Note Is Not a Negotiable Note

A negotiable note must establish an obligation to pay a sum certain or be payable on demand or at a definite time.42 A note obligating the promisor to pay for open-end credit would thus not be a negotiable instrument.43 With limited exceptions a note cannot contain undertakings beyond payment of money.44 For any of these reasons, the note may not qualify as a negotiable instrument.

Home Foreclosures: 2.2.5.3 The Holder’s Possession Through an Agent or Custodian

A holder may retain possession of a note through an agent.60 Transfers of possession of a note can occur directly or through the holder’s agent.61 If a party claims to have what is referred to as “constructive” possession of a note that is physically kept by a designated custodian, the party claiming the benefit of this agency relationship has the burden of producing evidence to establish that the agency relationship exists and that it applies in the given context.

Home Foreclosures: 2.2.5.7 A Key Litigation Issue for Holder Status—Timing of Indorsements

The UCC does not require that an indorsement be dated, and the industry practice is to leave indorsements undated.109 As a result, it is usually impossible to verify from the face of a note whether an indorsement was in place when a party took certain actions in the past to enforce the note.110 For example, state law may require that a party be a holder in order to record a document that initiates foreclosure, file a complaint, or obtain judgment at trial or through a dispositive motion.

Home Foreclosures: 2.2.5.8.2 A non-holder in possession who has the rights of a holder

A “nonholder in possession of an instrument who has the rights of the holder” typically refers to an entity that has physical possession of a note that is indorsed to some other entity. While this entity is in possession of the note, it cannot be a holder. However, the nonholder in possession can claim the rights of a holder based on a contractual or statutory right that is not apparent on the face of the note. As a transferee, the nonholder may assert the rights of a holder based on the terms of a contract with its transferor.

Home Foreclosures: 2.2.1 Overview

The securitization of mortgage debt has created significant new issues for advocates to consider in defending a foreclosure. Before the rise of securitization, homeowners’ counsel seldom raised questions about the foreclosing party’s authority to proceed. The familiar name of the loan originator routinely appeared on the face of foreclosure documents.

Home Foreclosures: 2.2.4.1 Generally

The Uniform Commercial Code defines a negotiable instrument, determines how it is transferred, and limits who may enforce it. Some familiarity with basic UCC concepts is essential in fashioning an appropriate response to a servicer’s or assignee’s claim that it has the right to foreclose based on a note and mortgage originated by someone else.20

Home Foreclosures: 2.2.5.8.3 A party seeking to enforce a lost note

The second significant category of non-holders who can enforce negotiable instruments consists of claimants who concede that they are not in possession of the instrument. These claimants unambiguously assert that they are not in possession because the note has been “lost, destroyed, or stolen.”144 In cases involving securitized mortgage obligations servicers sometimes make little or no effort to ascertain the whereabouts of notes.

Home Foreclosures: 2.2.5.9 Possession of the Note at the Right Time—What Does the Evidence Show?

For a party to be entitled to enforce a negotiable note either as a holder or as a transferee with the rights of a holder, the party must have possession of the note.168 Possession of the original note at the time of a hearing or when an affidavit was executed does not establish that the same party possessed the note when all actions essential to a valid foreclosure took place.169 These critical events can include recording of a required notice and the appointment of a trustee in a non-judicial

Home Foreclosures: 2.2.5.10 Assignments of Security Instruments Do Not Automatically Transfer the Right to Enforce the Related Negotiable Notes

A document that assigns a mortgage or deed of trust may contain language to the effect that the assignment of the security instrument acts as a transfer of the related note. Lenders have argued that this language can be effective to transfer the right to enforce a negotiable note. A few courts have accepted the argument.183 These rulings ignore essential elements of negotiation required by the UCC.

Home Foreclosures: 2.3.1 Overview

As discussed in §§ 3.3, 3.4, infra, the state appellate courts in almost a majority of judicial and non-foreclosure states harmonize the relevant UCC rules with state foreclosure law.

Home Foreclosures: 2.3.3 Application of Statutory Construction Principles

On the question of which statute (foreclosure/real property statutes or UCC) is “general” and which is “specific,” the answer may not be clear. Arguably, both are specific, at least in relation to the topics covered. UCC Article 3 represents a comprehensive set of provisions addressing the enforcement of negotiable instruments.

Home Foreclosures: 2.4.2.2 Home Equity Lines of Credit

Homeowners may borrow against their homes to draw out cash for one or more personal reasons such as to pay for home repairs, a child’s education, or medical bills.228 A lender may offer the homeowner a home equity line of credit (HELOC), rather than refinance an existing mortgage.229 A HELOC differs from a traditional mortgage loan in several ways.

Home Foreclosures: 2.4.3 The Role of Article 9 of the UCC in the Sale (Transfer) of Nonnegotiable Notes

The original version of Article 9 governed conventional security interests in personal property.283 The 1972 revisions added the sale of accounts and chattel paper into Article 9 in order to recognize “historical forms of financing that had long been practiced in many industries called ‘factoring.’”284 Later, the residential mortgage-backed securitization market flourished.285 In order to facilitate this form of financing and investment, the Nation