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DEFENSE OF MORTGAGE FORECLOSURES¹
Daniel A. Edelman²
Many lawyers and judges have long assumed that if a mortgage company seeks to foreclose, the defendant probably owes the money and has no defense. In fact, as recent publicity concerning the widespread problem of predatory lending has made clear, many mortgage lenders overreach. In a substantial portion of residential mortgage foreclosures, the homeowner has a valid defense to at least part of the claim. Either they are not in default at all, or the extent of the default is significantly less than claimed, or the mortgage is subject to attack, most likely under the Truth in Lending Act, 15 U.S.C. §1601 et seq. ("TILA"), as amended by the Home Ownership & Equity Protection Act of 1994, 15 U.S.C. §§1602(aa) and 1639 ("HOEPA"), and implementing Federal Reserve Board Regulation Z, 12 C.F.R. part 226.
The extent of the problem posed by wrongful and predatory foreclosures is illustrated by the following numbers:
Mortgage foreclosures in Illinois Number by subprime lenders
1993 5,899 131
1999 14,282 4,958
A 1999 study by the National Training and Information Center, "Preying on Neighborhoods, Subprime Mortgage Lending and Chicagoland Foreclosures," states that completed foreclosures, where the home was actually sold at auction, increased from 2,074 in 1993 to 3,964 in 1998, of which subprime lenders accounted for 30 and 1,417, respectively.
Unfortunately, most foreclosures end in default or bankruptcy. Few result in a lawyer looking through the loan documents to see if the homeowner has any claims or defenses. In part, this is because "minorities, women, and the elderly bear the brunt of abusive mortgage lending practices, particularly in predominantly minority or low-income neighborhoods that do not have access to mainstream sources of credit." "Curbing Predatory Home Mortgage Lending," joint report of the Department of Housing and Urban Development and the Department of the Treasury, HUD Document No. 00-142, issued June 20, 2000.
This chapter will discuss the types of mortgage lending and servicing practices generally regarded as predatory and the legal challenges available to the homeowner.
THE ILLINOIS MORTGAGE FORECLOSURE LAW
Transactions to which applicable
Illinois Mortgage Foreclosure Law ("IMFL") §15-1106 provides that the IMFL applies to certain security instruments in addition to those openly labelled "mortgage":
1. "any real estate installment contract for residential real estate entered into on or after the effective date of this amendatory Act of 1986 and under which (i) the purchase price is to be paid in installments over a period in excess of five years and (ii) the amount unpaid under the terms of the contract at the time of the filing of the foreclosure complaint, including principal and due and unpaid interest, at the rate prior to default, is less than 80% of the original purchase price of the real estate as stated in the contract;"
2. "any collateral assignment of beneficial interest made on or after the effective date of this amendatory Act of 1986 (i) which is made with respect to a land trust which was created contemporaneously with the collateral assignment of beneficial interest, (ii) which is made pursuant to a requirement of the holder of the obligation to secure the payment of money or performance of other obligations and (iii) as to which the security agreement or other writing creating the collateral assignment permits the real estate which is the subject of the land trust to be sold to satisfy the obligations."
IMFL §15-1106(b) provides that the IMFL may, but need not, be used to enforce:
3. "(i) a collateral assignment of beneficial interest in a land trust or (ii) an assignment for security of a buyer's interest in a real estate installment contract."
4. "any real estate installment contract entered into on or after the effective date of this Amendatory Act of 1986 and not required to be foreclosed under this Article."
In addition, IMFL §15-1207 defines "mortgage" to include a "deed conveying real estate, although an absolute conveyance in its terms, which shall have been intended only as a security in the nature of a mortgage" and equitable mortgages.
A deed absolute on its face, but intended as security, will be construed as a mortgage. Facts relevant to the determination include (a) the existence of an indebtedness, (b) a fiduciary or other close relationship between the parties, (c) prior unsuccessful attempts to obtain loans, (d) whether the consideration is sufficiently large to be consistent with a bona fide sale of the property, (e) lack of legal advice, (f) an agreement or option to repurchase, and (g) the continued exercise of ownership privileges and responsibilities by the purported seller (such as occupancy of the premises and payment of real estate taxes). Robinson v. Builders Supply & Lumber Co., 223 Ill.App.3d 1007, 586 N.E.2d 316, 320 (1st Dist. 1992); McGill v. Biggs, 105 Ill.App.3d 706, 434 N. E.2d 772, 774 (3d Dist. 1982). The amount of consideration is perhaps the most important factor. Robinson, supra. Any question should be resolved in favor of holding that the deed is intended as security.
Persons facing foreclosure are often contacted by helpful individuals who will "refinance" them by paying off the defaulted loan, taking title to the property, giving an option to repurchase to the homeowner, and leasing the property to the homeowner. Such deeds should probably be held to constitute mortgages. Furthermore, if obtained by someone who is in the business of "refinancing" real estate in this manner, they will often be subject to attack for noncompliance with the Truth in Lending Act and other consumer protection laws. See Redic v. Gary H. Watts Realty Co., 762 F.2d 1181 (4th Cir. 1985).
We have also seen the "deed as security" device used by auto title lenders which occasionally lend on the security of real estate.
The IMFL provides a statutory right to cure a default and reinstate a loan. IMFL §15-1602 provides:
Sec. 15-1602. Reinstatement. In any foreclosure of a mortgage executed after July 21, 1959, which has become due prior to the maturity date fixed in the mortgage, or in any instrument or obligation secured by the mortgage, through acceleration because of a default under the mortgage, a mortgagor may reinstate the mortgage as provided herein. Reinstatement is effected by curing all defaults then existing, other than payment of such portion of the principal which would not have been due had no acceleration occurred, and by paying all costs and expenses required by the mortgage to be paid in the event of such defaults, provided that such cure and payment are made prior to the expiration of 90 days from the date the mortgagor or, if more than one, all the mortgagors (i) have been served with summons or by publication or (ii) have otherwise submitted to the jurisdiction of the court. When service is made by publication, the first date of publication shall be used for the calculation. Upon such reinstatement of the mortgage, the foreclosure and any other proceedings for the collection or enforcement of the obligation secured by the mortgage shall be dismissed and the mortgage documents shall remain in full force and effect as if no acceleration or default had occurred. The relief granted by this Section shall not be exhausted by a single use thereof, but if the court has made an express written finding that the mortgagor has exercised its right to reinstate pursuant to this Section, such relief shall not be again available to the mortgagor under the same mortgage for a period of five years from the date of the dismissal of such foreclosure. The provisions of Section 9-110 of the Code of Civil Procedure [735 ILCS 5/9-110] shall be inapplicable with respect to any instrument which is deemed a mortgage under this Article. The court may enter a judgment of foreclosure prior to the expiration of the reinstatement period, subject to the right of the mortgagor to reinstate the mortgage under this Section.
IMFL §15-1601 prohibits waiver of reinstatement and redemption rights in the case of residential real estate, except that waiver after a foreclosure action is filed is permitted by means of a document filed with the Clerk, if the mortgagee waives a deficiency.
Entry of a judgment of foreclosure does not terminate the right to reinstatement. Under prior law reinstatement rights expired at the earlier of (a) 90 days from the date the court obtained jurisdiction over the mortgagor or (b) the date of judgment.
The IMFL provides that the five-year limitation on a subsequent right of reinstatement will exist "if the court has made an express written finding that the mortgagor has exercised its right to reinstate." Id. If the lender does not put the express written finding in the
order, it cannot receive the five-year limitation. Under prior law, once the cure provision was invoked, it could not be exercised for five years.
The express written finding pursuant to § 15-1602 is discretionary.
It is often very difficult to obtain reinstatement figures from the lender. In order to reinstate the mortgage, the mortgagor should make a demand on the lender for the reinstatement figures and if necessary should file a motion within the reinstatement period asking the Court to order the lender to provide a reinstatement figure and an explanation of how it was arrived at. The mortgagor must be prepared to tender the necessary amount within the reinstatement period. However, the mortgagor may also want to contest the reasonableness of the attorneys' fees claimed by the mortgagee or of other charges.
If the reinstatement amount is disputed, the 90 days may not begin running until the dispute is resolved. Lomas & Nettleton Co. v. Humphries, 703 F.Supp. 757 (N.D.Ill. 1989); Invex Finance, B.V. v. LaSalle National Bank, etc., 90 C 1066, 1992 WL 79052, *3 n. 7 (N.D.Ill. 1992).
Finally, an independent right to reinstate is provided for in most of the standard notes and mortgages, including the FNMA/ FHLMC (conventional) and FHA forms.
Any tender of funds to reinstate or redeem should be accompanied by a letter specifying that the funds are to be used only to reinstate or redeem. Otherwise, they can be applied to other debts, or to the deficiency. Citicorp Mortgage, Inc. v. Leonard, 166 B.R. 645 (N.D.Ill. 1994); Farm Credit Bank v. Biethman, 262 Ill.App.3d 614, 634 N.E.2d 1312 (5th Dist. 1994).
Redemption rights are conferred by IMFL §15-1603. In the case of residential real estate, the redemption period shall end on the later of (i) the date 7 months from the date all of the all the mortgagors (A) have been served with summons or by publication or (B) have otherwise submitted to the jurisdiction of the court, or (ii) the date 3 months from the date of entry of a judgment of foreclosure. The period may be shortened if a personal deficiency is waived. The redemption amount is "(1) The amount specified in the judgment of foreclosure, which shall consist of (i) all principal and accrued interest secured by the mortgage and due as of the date of the judgment, (ii) all costs allowed by law, (iii) costs and expenses approved by the court, (iv) to the extent provided for in the mortgage and approved by the court, additional costs, expenses and reasonable attorneys' fees incurred by the mortgagee, (v) all amounts paid pursuant to Section 15-1505 [735 ILCS 5/15-1505] and (vi) per diem interest from the date of judgment to the date of redemption calculated at the mortgage rate of interest applicable as if no default had occurred; and
(2) The amount of other expenses authorized by the court which the mortgagee reasonably incurs between the date of judgment and the date of redemption, which shall be the amount certified by the mortgagee in accordance with subsection (e) of Section 15-1603." IMFL §15-1603(f). Prior notice of intent to redeem is required.
A special right to redeem exists (§15-1604) with respect to residential real estate if "(i) the purchaser at the sale was a mortgagee who was a party to the foreclosure or its nominee and (ii) the sale price was less than the amount specified in subsection (d) of Section 15-1603." In that event, the mortgagor or other person entitled to redeem may do so by tendering, for a period ending 30 days after the date the sale is confirmed, "(i) the sale price, (ii) all additional costs and expenses incurred by the mortgagee set forth in the report of sale and confirmed by the court, and (iii) interest at the statutory judgment rate from the date the purchase price was paid or credited as an offset."
Deed in lieu of foreclosure and consent foreclosure
The IMFL also provides for acquisition of the borrower’s interest through (a) a deed in lieu of foreclosure and (b) consent foreclosure. A deed in lieu of foreclosure is authorized by IMFL §15-1401 and normally extinguishes the personal liability of the borrower:
Sec. 15-1401. Deed in Lieu of Foreclosure. The mortgagor and mortgagee may agree on a termination of the mortgagor's interest in the mortgaged real estate after a default by a mortgagor. Any mortgagee or mortgagee's nominee may accept a deed from the mortgagor in lieu of foreclosure subject to any other claims or liens affecting the real estate. Acceptance of a deed in lieu of foreclosure shall relieve from personal liability all persons who may owe payment or the performance of other obligations secured by the mortgage, including guarantors of such indebtedness or obligations, except to the extent a person agrees not to be relieved in an instrument executed contemporaneously. A deed in lieu of foreclosure, whether to the mortgagee or mortgagee's nominee, shall not effect a merger of the mortgagee's interest as mortgagee and the mortgagee's interest derived from the deed in lieu of foreclosure. The mere tender of an executed deed by the mortgagor or the recording of a deed by the mortgagor to the mortgagee shall not constitute acceptance by the mortgagee of a deed in lieu of foreclosure.
Often, when the borrower has some defense, it is possible to obtain cash as part of a settlement in which the borrower gives a deed in lieu of foreclosure.
Consent foreclosure is authorized by §15-1402 and also extinguishes the borrower’s personal liability:
Sec. 15-1402. Consent Foreclosure. (a) No Objection. In a foreclosure, the court shall enter a judgment satisfying the mortgage indebtedness by vesting absolute title to the mortgaged real estate in the mortgagee free and clear of all claims, liens (except liens of the United States of America which cannot be foreclosed without judicial sale) and interest of the mortgagor, including all rights of reinstatement and redemption, and of all rights of all other persons made parties in the foreclosure whose interests are subordinate to that of the mortgagee and all nonrecord claimants given notice in accordance with paragraph (2) of subsection (c) of Section 15-1502 [735 ILCS 5/15-1502] if at any time before sale:
(1) the mortgagee offers, in connection with such a judgment, to waive any and all rights to a personal judgment for deficiency against the mortgagor and against all other persons liable for the indebtedness or other obligations secured by the mortgage;
(2) such offer is made either in the foreclosure complaint or by motion upon notice to all parties not in default;
(3) all mortgagors who then have an interest in the mortgaged real estate, by answer to the complaint, response to the motion or stipulation filed with the court expressly consent to the entry of such judgment;
(4) no other party, by answer or by response to the motion or stipulation, within the time allowed for such answer or response, objects to the entry of such judgment; and
(5) upon notice to all parties who have not previously been found in default for failure to appear, answer or otherwise plead.
(b) Objection. If any party other than a mortgagor who then has an interest in the mortgaged real estate objects to the entry of such judgment by consent, the court, after hearing, shall enter an order providing either:
(1) that for good cause shown, the judgment by consent shall not be allowed; or
(2) that, good cause not having been shown by the objecting party and the objecting party not having agreed to pay the amount required to redeem in accordance with subsection (d) of Section 15-1603 [735 ILCS 5/15-1603], title to the mortgaged real estate be vested in the mortgagee as requested by the mortgagee and consented to by the mortgagor; or
(3) determining the amount required to redeem in accordance with subsection (d) of Section 15-1603 [735 ILCS 5/15-1603], finding that the objecting party (or, if more than one party so objects, the objecting party who has the least priority) has agreed to pay such amount and additional interest under the mortgage accrued to the date of payment within 30 days after entry of the order, and declaring that upon payment of such amount within 30 days title to the mortgaged real estate shall be vested in such objecting party. Title so vested shall be free and clear of all claims, liens (except liens of the United States of America which cannot be foreclosed without judicial sale) and interest of the mortgagor and of all rights of other persons made parties in the foreclosure whose interests are subordinate to the interest of the mortgagee and all nonrecord claimants given notice in accordance with paragraph (2) of subsection (c) of Section 15-1502 [735 ILCS 5/15-1502]. If any objecting party subject to such an order has not paid the amount required to redeem in accordance with that order within the 30-day period, the court (i) shall order that such title to the mortgaged real estate shall vest in the objecting party next higher in priority (and successively with respect to each other objecting party in increasing order of such party's priority), if any, upon that party's agreeing to pay within 30 days after the entry of such further order, such amount as specified in the original order plus additional interest under the terms of the mortgage accrued to the date of payment, provided that such party pays such amount within the 30-day period, and (ii) may order that the non-paying objecting party pay costs, interest accrued between the start of the preceding 30-day period and the later of the date another objecting party makes the payment, if applicable, or the date such period expired, and the reasonable attorneys' fees incurred by all other parties on account of that party's objection.
(c) Judgment. Any judgment entered pursuant to Section 15-1402 [735 ILCS 5/15-1402] shall recite the mortgagee's waiver of rights to a personal judgment for deficiency and shall bar the mortgagee from obtaining such a deficiency judgment against the mortgagor or any other person liable for the indebtedness or other obligations secured by the mortgage.
Care in drafting agreements relating to deeds in lieu of foreclosure and consent foreclosures is required. In Flora Bank & Trust Co. v. Czyzewski, 222 Ill.App.3d 382, 583 N.E.2d 720 (5th Dist. 1991), the mortgagee and the mortgagors entered into a stipulation by which the mortgagors would deed the property to the mortgagee, who then would sell the property at auction. The auction resulted in a deficiency, for which the mortgagee sought judgment. The mortgagors sought to bar the deficiency judgment, arguing that the mortgagors had executed a deed in lieu of foreclosure and that the agreement did not clearly impose liability for a deficiency. The court found that the agreement did impose such liability, rejecting the trial court’s finding that there would have been no reason for the mortgagors to execute quitclaim deeds except to be relieved from a deficiency.
Finally, §15-1403 preserves common law strict foreclosure to the extent it still exists. A common law strict foreclosure is available where the mortgagor is insolvent and the value of the property is less than the debt and outstanding property taxes, and the mortgagee gives up the right to a deficiency. Great Lakes Mtge. Corp. v. Collymore, 14 Ill.App.3d 68, 302 N.E.2d 248 (1st Dist. 1973).
All other foreclosures in Illinois must be through judicial proceedings. Illinois, unlike some other states, does not allow non-judicial foreclosures. However, federal law authorizes non-judicial foreclosure of Government guaranteed loans. Single Family Mortgage Foreclosure Act of 1994, 12 U.S.C. §3751 et seq.; 24 C.F.R. part 27. In fact, this procedure is not frequently used.
Allegations deemed included in complaint
A mortgage foreclosure complaint is "deemed" to include certain allegations, set forth in IMFL §15-1504. When responding to such a complaint, the attorney representing the defendant must admit or deny the "deemed" allegations.
Upon entry of a judgment of foreclosure and expiration of the reinstatement period and the redemption period in accordance with subsection (b) or (c) of §15-1603, the real estate shall be sold at a sale after public notice published at least once per week for 3 consecutive calendar weeks, the first such notice to be published not more than 45 days prior to the sale, the last such notice to be published not less than 7 days prior to the sale. IMFL §15-1507.
Under IMFL § 15-1508 the court has discretion to not confirm a sale if "(ii) the terms of sale were unconscionable, (iii) the sale was conducted fraudulently or (iv) . . . justice was otherwise not done". Cragin Fed. Bank for Sav. v. American Nat'l Bank & Trust Co., 262 Ill. App.3d 115, 633 N.E.2d 1011 (2d Dist. 1994); Lyons Sav. & Loan Ass'n v. Gash Assocs., 189 Ill. App.3d 684, 545 N.E.2d 412 (1st Dist. 1989); Illini Fed. Sav. & Loan Ass'n v. Doering, 162 Ill. App.3d 768, 516 N.E.2d 609 (5th Dist. 1987). Some cases state that trial courts have broad discretion in approving or disapproving sales made at their direction. Citicorp Sav. v. First Chicago Trust Co., 269 Ill. App.3d 293, 645 N.E.2d 1038 (1st Dist. 1995). For example, a sale at 1/6 of the value of the property has been held inappropriate. Commercial Credit Loans, Inc. v. Espinoza, 293 Ill. App.3d 923, 689 N.E.2d 282 (1st Dist. 1997). Courts have held that the extent of inquiry is less stringent than imposed by the Uniform Commercial Code (810 ILCS 5/1-101 et seq.), which requires that all sales "must be commercially reasonable" or in the Bankruptcy Act which requires aggressive advertising of the proposed sale and a foreclosure sale price of "a reasonably equivalent value" for the property. Resolution Trust Corp. v. Holtzman, 248 Ill. App.3d 105, 618 N.E.2d 418 (1st Dist. 1993).
If the sale is confirmed and produces a deficiency, a judgment for that amount is entered as part of the same order. IMFL §15-1508(e).
The sale is merely an irrevocable offer that is accepted by the court order confirming the sale. BCGS, LLC v. Jaster, 299 Ill.App.3d 208, 212, 700 N.E.2d 1075, 1079 (2d Dist. 1998); Citicorp Savings v. First Chicago Trust Co., 269 Ill.App.3d 293, 645 N.E.2d 1038 (1st Dist. 1995); Commercial Credit Loans, Inc. v. Espinoza, 293 Ill.App.3d 915, 689 N.E.2d 282 (1st Dist. 1997); World Savings v. Amerus Bank, 317 Ill.App.3d 772, 740 N.E.2d 466 (1st Dist. 2000). This is important for bankruptcy purposes – most but not all bankruptcy judges hold that a Chapter 13 plan proposing reinstatement of the loan can be filed before confirmation. McEwen v. Federal National Mortgage Association, 194 B.R. 594 (Bankr. N.D.Ill. 1996); In re Jones, 219 B.R. 1013 (Bankr. N.D.Ill. 1998); but see In re Christian, 199 B.R. 382 (Bankr. N.D.Ill. 1996), rev'd sub nom. Christian v. Citibank, F.S.B., 214 B.R. 352 (N.D.Ill. 1997). It is also important if the borrower redeems or reinstates after the sale but prior to the confirmation order. Citicorp Savings v. First Chicago Trust Co., supra, 269 Ill.App.3d 293, 645 N.E.2d 1038 (1st Dist. 1995).
To be safe a Chapter 13 should be filed before the sale.
IMFL §15-1510 provides that " Attorneys' fees and other costs incurred in connection with the preparation, filing or prosecution of the foreclosure suit shall be recoverable in a foreclosure only to the extent specifically set forth in the mortgage or other written agreement between the mortgagor and the mortgagee or as otherwise provided in this Article." Illinois law makes the award of attorney’s fees and expenses under a mortgage a matter within the court’s discretion based upon satisfactory proof. Mercado v. Calumet Fed. S.& L. Ass’n, 196 Ill.App.3d 483, 554 N.E.2d 305 (1st Dist. 1990); Chicago Title & Trust Co. v. Chicago Title & Trust Co., 248 Ill.App.3d 1065, 618 N.E.2d 949 (1st Dist. 1993). . For example, an Illinois court will not award fees to a creditor who is unsuccessful or makes litigation necessary by claiming an excessive amount, regardless of what a note or mortgage purport to allow. Helland v. Helland, 214 Ill.App.3d 275, 277-78, 573 N.E.2d 357, 359 (2d Dist. 1991). This would appear to render inappropriate the practice of certain lenders of adding attorney’s fees and related expenses to the mortgage balance, even though not provided for in a judgment or other court order or stipulation executed in connection with a judicial proceeding.
The attorney who undertakes the defense of a mortgage foreclosure should be mindful of a number of points:
It is always desirable to act before default. Although appellate decisions urge liberal vacation of default judgments in mortgage foreclosure actions upon a motion made within 30 days, Bank & Trust Co. v. Line Pilot Bungee, Inc., 323 Ill.App.3d 412, 752 N.E.2d 650 (5th Dist. 2001), it is the author’s experience that courts are more reluctant to vacate defaults in foreclosures than in virtually any other type of case.
It is usually beneficial to file suit against the lender before the lender institutes a foreclosure lawsuit.
The borrower will rarely recognize or understand what constitutes a valid defense. The author has seen numerous pro se answers which do nothing more than admit that a default exists.Do not have the borrower appear or file anything pro se. Do not rely on the borrower to identify "what is wrong" with a mortgage transaction. Review the documents yourself.
Get a complete set of closing documents, a complete loan history, and all available correspondence from the borrower. Informal requests should be sent to the current and prior servicer and the closing agent. A mortgage servicer is legally obligated under federal law (Cranston Gonzales Amendment to Real Estate Settlement Procedures Act, 12 U.S.C. §2605, discussed below) to respond to certain requests while it is servicing the loan and for one year thereafter. Requests should be sent out at once. If a lawsuit is already on file, discovery asking for these items should be issued immediately.
The most common documents giving rise to defenses and counterclaims are (a) the Truth in Lending disclosures, including the basic financial disclosure statement, any itemization of amount financed, any advance disclosures under the Home Ownership & Equity Protection Act, and any notice of right to cancel, (b) the note and mortgage itself (including all riders and attachments), (c) the HUD-1 Settlement Statement, and (d) the account history. Also obtain all correspondence with the mortgage company and demand letters. A small delinquency can be offset by a few Cranston Gonzales or FDCPA violations.
Ascertain the state of title to the home, either by obtaining a title search or conducting one yourself. The sloppiness of lenders is often little short of incredible. For example, we have seen multiple instances of lenders obtaining a mortgage from less than all joint tenants. The non-signing joint tenants almost certainly did not receive Truth in Lending disclosures or notices of their right to cancel the loan. If they qualify as parties entitled to exercise rescission rights (if they live in the property), the mortgage is subject to rescission under federal law (although it may be effective as to the joint tenant’s interest under state law). In this regard, the title of many inner-city properties is often "messy," as a result of persons who cannot afford lawyers informally determining the ownership of property without compliance with probate and recording laws.
If the loan is less than 3 years old (the Truth in Lending Act rescission period), always get evidence of every disbursement listed on the HUD-1, including such items as governmental fees and charges and credit reports. In Cook County, the charge for recording an instrument is endorsed on the instrument. In other counties, there are standard fee schedules from which the cost can be readily computed. The cost of a credit report is often listed on the report itself.
The importance of doing this cannot be overemphasized. Many predatory lenders cannot resist "marking up" such items as recording fees, credit reports, and the like. The "markup" is a finance charge, invariably not disclosed as such. (Indeed, it can be argued that the entire charge for the "marked up" item is a finance charge, not just the amount of the "markup.") As discussed below, the "tolerance" of error permitted under Truth in Lending before a borrower can rescind in response to a mortgage foreclosure is only $35. Therefore, if you can establish $35 worth of "markups", you have a defense to foreclosure.
Many predatory lenders also are in the habit of making loans that bump right up against the "triggers" for special disclosure and other requirements, such as the 8% HOEPA "trigger" (discussed below). There is no margin of error in this situation. If as a result of padding recording charges or credit report fees the "points and fees" on a loan are at 8.01% instead of 7.99% as the lender intended, the mortgage is subject to rescission.
If the HUD-1 shows a disbursement to the borrower, do not assume that the borrower actually got the money. Find out. Have the borrower bring in bank statements for the relevant period if there is any question. The author has had a number of cases where the money went into the pocket of a broker or lender. All such undisbursed amounts are finance charges, and they are almost never disclosed as such.
Ascertain the number of dwelling units in the property and who occupies them. Many applicable statutes, such as TILA and RESPA, apply only if the "principal" purpose of a transaction was "personal, family or household." The IMFL gives certain rights only if the property is "residential." Finally, the Illinois Credit Agreements Act, 815 ILCS 160/1 et seq., creates a special statute of frauds in favor of institutional lenders that bars parol evidence of an agreement to "lend money or extend credit or delay or forbear repayment of money not primarily for personal, family or household purposes . . . ."
Financing the acquisition of a 1 or 2 unit property in which the borrower resides is for "personal, family or household" purposes. Financing the acquisition of a six-flat in which one unit is occupied by the borrower and the others are rented to unrelated persons may not be. If you have an appraisal it will confirm the number of dwelling units and usually provide separate valuations for the building and underlying land.
Make sure that there is nothing inaccurate on the loan application, or that there is a good explanation if there is any inaccuracy.
Many mortgage foreclosure cases appear to be brought by nominal parties who do not qualify as the "real party in interest" in federal court and may not have standing under state law.
It is often difficult for mortgage servicers, particular if they are not the original lender, to prove the true status of an account. Affidavits are often submitted to prove default that are conclusory and insufficient. Manufacturers & Traders Trust Co. v. Medina, 01 C 768, 2001 WL 1558278 (N.D.Ill., Dec. 5, 2001); Cole Taylor Bank v. Corrigan, 230 Ill.App.3d 122, 595 N.E.2d 177, 181 (2d Dist. 1992). Computer-generated bank records or testimony based thereon are often offered without proper foundation, or are summarized without being introduced. Manufacturers & Traders Trust Co. v. Medina, supra, 01 C 768, 2001 WL 1558278 (N.D.Ill., Dec. 5, 2001); FDIC v. Carabetta, 55 Conn.App. 369, 739 A.2d 301 (1999).
Testimony, whether live or in the form of an affidavit, to the effect that the witness has reviewed a loan file and that the loan file shows that the debtor is in default is hearsay and incompetent; rather, the records must be introduced after a proper foundation is provided. New England Savings Bank v. Bedford Realty Corp., 238 Conn. 745, 680 A.2d 301, 308-09 (1996), later opinion, 246 Conn. 594, 717 A.2d 713 (1998); Cole Taylor Bank v. Corrigan, supra, 230 Ill.App.3d 122, 595 N.E.2d 177, 181 (2d Dist. 1992). It is the business records that constitute the evidence, not the testimony of the witness referring to them. In re A.B., 308 Ill.App. 3d 227, 719 N.E.2d 348 (2d Dist. 1999).
Nor is such an affidavit made sufficient by omitting the fact that it is based on a review of loan records, if it appears that the affiant did not personally receive or observe the reception of all of the borrower’s payments. Hawaii Community Federal Credit Union v. Keka, 94 Haw. 213, 11 P.3d 1, 10 (2000). If the underlying records are voluminous, a person who has extracted the necessary information may testify to that fact, but the underlying records must be made available to the court and opposing party. In re deLarco, 313 Ill.App.3d 107, 728 N.E.2d 1278 (2d Dist. 2000).
Counsel should challenge any such testimony or affidavits. Counsel should not simply assume that the mortgage company must be right in claiming a default; there are reported decisions in which it turned out that the lender’s right hand did not know what the left hand was doing and that there was really no basis for a claimed default. In re Hart, 246 B.R. 709 (Bankr. D.Mass. 2000); In re McCormack, 96-81-SD, 1996 WL 753938 (D.N.H. 1996). See also, FNMA v. Bryant, 62 Ill.App.3d 25, 378 N.E.2d 333 (5th Dist. 1978), where the court found that the lender had foreclosed too quickly and that the default had been cured. Frequently, mortgage servicers attempt to service loans without consulting the loan documents, with the result that they depart from the their terms. In other cases, mortgage companies have been unable to prove that they actually own the loan and gave notice of acceleration as required by the loan documents. In re Kitts, 2002 WL 416912 (Bankr. E.D.Tenn. Feb. 28, 2002).
There is a common assumption that mortgage companies desire performing loans, not to foreclose and acquire real estate. This assumption is no longer well founded. There are an increasing number of "scavengers" that buy bad debts, including mortgages, for a fraction of face value and attempt to enforce them. Such entities profit by foreclosure. "Mortgage sources confide that some unscrupulous lenders are purposely allowing certain borrowers to fall deeper into a financial hole from which they can’t escape. Why? Because it pushes these consumers into foreclosure, whereupon the lender grabs the house and sells it at a profit." Robert I. Heady, The People’s Money, "Foreclosure, You Must Avoid It," South Florida Sun-Sentinel, Feb. 25, 2002, 2002 WL 2949282. In addition, particularly if the loan is guaranteed (by private mortgage insurance or the government), a mortgage company may find it more profitable to foreclose and make a claim on the guarantee rather than work with a "difficult" borrower.
Furthermore, production of original records often reveals unauthorized charges and other improprieties that may give rise to a claim against the mortgage company.
The order directing a foreclosure sale is an order capable of being made final through a Rule 304(a) finding, but not appealable in the absence of such a finding. The order confirming the sale is a final order appealable without a Rule 304(a) finding. "A judgment ordering the foreclosure of a mortgage is not final and appealable until the court enters orders approving the sale and directing the distribution. Unless the court makes a finding pursuant to Supreme Court Rule 304(a) . . . that there is no just reason for delaying enforcement or appeal, the judgment of foreclosure is not appealable." In re Marriage of Verdung, 126 Ill.2d 542, 556, 535 N.E.2d 818, 824 (1989); accord, Marion Metal & Roofing Co. v. Mark Twain Marine Indus., 114 Ill.App.3d 33, 448 N.E.2d 219 (1st Dist. 1983); Bell Federal S. & L. Ass’n v. Bank of Ravenswood, 203 Ill.App.3d 219, 560 N.E.2d 1156 (1st Dist. 1990).
Most lawyers representing lenders in foreclosures include 304(a) language in the judgment directing the sale.
Trial by jury
A jury trial on statutory claims (Consumer Fraud Act, etc.) is available in federal court, because of the Seventh Amendment, Inter-Asset Finanz AG v. Refco, Inc., 1993 U.S. Dist. LEXIS 11181, *8-9 (N.D.Ill. 1993); Cellular Dynamics, Inc. v. MCI Telecommunications Corp., 1997 U.S.Dist. LEXIS 7466 (N.D.Ill. 1997), but not in state court, Martin v. Heinold Commodities, 163 Ill.2d 33, 643 N.E.2d 734 (1994). This is one reason why you may want to sue first.
PREDATORY LENDING PRACTICES
Lenders often complain that there is no definition of a "predatory" mortgage loan. However, there are a number of practices that are generally regarded as "predatory." Many are legally actionable.
One predatory lending tactic consists of touting reduced monthly payments as compared with existing loan without disclosure of such material facts as (i) that the homeowners’ taxes and insurance are included in the payments on the existing loan, but not in the payments on the proposed loan, (ii) the number of payments will be greater, and (iii) the total of payments will be greater. Allegations of this nature were made by the Attorney General of Illinois against First Alliance Mortgage, now bankrupt, and by the Federal Trade Commission against Associates.
Another common complaint concerns the deceptive use of "teaser" rates on adjustable rate mortgages. A broker or lender quotes a "10% mortgage" to the unsophisticated homeowner. In fact, the 10% is a "teaser" rate applicable to the first 12-24 months. The rate for the rest of the term is indexed on a basis that would produce a 12-14% rate, which the borrower cannot afford.
A particularly offensive practice is the use of "spurious open end credit." TILA and other consumer credit disclosure laws distinguish between "closed end credit," of which the conventional home mortgage is the classic example, and "open end credit," such as a credit card or home equity line of credit. The disclosure requirements applicable to open end credit are less onerous because the consumer cannot tell, for example, how much she will charge on her credit card over the years.
Certain lenders have taken advantage of the lesser disclosure requirements for open-end credit. They issue open-end credit instruments for wholly inappropriate purposes, such as home improvement financing and to replace mortgages. The effect of using open-end credit documentation is to evade certain TILA disclosure requirements:
Total finance charge
Whether, if you make the minimum required payments, the mortgage will fully amortize, i.e., will you have a large balloon payment
Avoid including "points" in the annual percentage rate.
In addition to these subtle origination abuses, the author has seen outright forgery and alteration of loan documents, coercion of elderly homeowners, and making loans to persons who are clearly mentally incapacitated. Falsification or alteration of applications is a common means of making unaffordable loans.
Home improvement abuses
A considerable number of mortgages result from telephone or door-to-door solicitation by home improvement "contractors." In fact, the solicitors are really "brokers" rather than contractors. Once they sign up a homeowner, they "broker" the work to the cheapest subcontractors they can find, often without required tradesmen’s licenses. They also arrange for financing, either by having the homeowner execute a retail installment contract or by referring the homeowner to a lender or broker. The result is that the homeowner is obligated for large sums of money, secured by his or her home, and receives substandard work or in extreme cases no work. To facilitate the performance of shoddy or no work, the loan proceeds are often disbursed in an illegal manner, e.g., directly to the contractor rather than to the homeowner or into an escrow account from which funds can be released upon certification of a competent architect or inspector.
To "lock in" the homeowner, some of these "contractors" will engage in "spiking," or doing part of the work immediately to negate the homeowner’s statutory rescission rights. The homeowner may believe that her statutory right to cancel the transaction within three days no longer applies after her roof or porch has been removed.
Another tactic is the "two contract ploy," in which the homeowner’s signature is procured on a purportedly binding agreement prior to disclosure of all financial terms. In some cases, the initial agreements represent that the financing terms will be other than the final terms, or contain stiff penalties for cancellation. The homeowner who balks at signing onerous financing terms is then told to pay in cash.
The practitioner should not assume that the price of the work listed on the documents actually was paid to the contractor. Often, the contractor may get as little as 75% of the purported price or "amount financed." This practice is known as "discounting" or "chopping."
Questionable mortgage broker practices
Some lenders have been paying money to borrowers' mortgage brokers to induce them to sign up borrowers at a higher interest rate than necessary. These payments are known as "yield spread premiums" or "YSPs" in the mortgage industry. Their legality is discussed extensively below.
Some mortgage broker agreements require the borrower to pay the broker fee if the borrower decides to cancel or not proceed with the transaction. In a non-purchase money loan -- i.e., one subject to the three-day right to cancel under TILA -- such a provision contradicts the rescission notice and is illegal. Manor Mortgage Corp. v. Giuliano, 251 N.J. Super. 13, 596 A.2d 763 (App.Div. 1991). This is because all compensation payable by the borrower to mortgage brokers is now defined as a finance charge, and upon exercise of the right to rescind the borrower is relieved of liability for all finance charges. If the broker made the loan in its name, under the industry practice commonly known as "table funding," the broker is a creditor and any attempt by the broker to collect a finance charge is a TILA violation. Manor Mortgage, supra (mortgage broker sued for fee after borrower rescinded; court not only held that broker could not recover fee, but where broker qualified as "creditor" because loan was issued in its name, found that attempt to collect fee amounted to a refusal to rescind and awarded statutory damages and attorney’s fees).
Unnecessarily high rates
Between 30% and 50% of homeowners who receive "subprime" or "B-D" mortgage loans actually qualify for "prime" or "A" loans. John Taylor, "An Anti-Predator’s Readers Guide to Tall Tales of Subprime Lending," American Banker, April 27, 2001, p. 12, states:
A study by the Research Institute for Housing America, an offshoot of the Mortgage Bankers Association of America, found that minority borrowers are more apt than whites to receive subprime loans, even after controlling for credit risk factors. Freddie Mac estimates that up to 30% of the subprime loans they have purchased were made to borrowers qualified to receive prime loans. Fannie Mae's CEO claims that half of subprime borrowers should be receiving lower interest rates. . . .
Often, this results from inappropriate payments to mortgage brokers or racial discrimination.
In some cases, the loans are not merely unnecessarily expensive but unaffordable. Some lenders will make loans without any reasonable expectation of repayment for the purpose of acquiring the borrower's equity. In many cases, such loans involve exorbitant "points" and other devices, so that the financing entity is getting a mortgage substantially in excess of the amount of cash actually disbursed to unrelated third parties.
Some lenders advertise that they make "no documentation" subprime loans. This is an open invitation to the making of unaffordable loans.
Excessive points and fees
The average origination cost on a $100,000 residential mortgage loan is 1-2%. While subprime loans may be somewhat more costly to originate, the June 20, 2000 HUD-Treasury report, "Curbing Predatory Home Mortgage Lending," noted that "While subprime lending involves higher costs to the lender than prime lending, in many instances the Task Force saw evidence of fees that far exceeded what would be expected or justified based on economic grounds, and fees that were ‘packed’ into the loan amount without the borrower's understanding."
Single premium credit insurance
This is credit life or disability insurance, the entire premium for which is charged at the outset of the loan, added to the loan balance, and financed. Approximately 50% of the premium consists of commission, payable to the lender. By selling this product, the lender can increase amount of the loan and the amount on which interest is computed without actually disbursing funds.
In many cases, borrowers are told that the credit insurance is mandatory (illegal), or it is simply included in the loan papers without any request or agreement, a practice known as "packing".
Most mortgage loans are refinanced prior to the end of their 15 to 30 year terms. If the single-premium credit insurance policy is still outstanding, the borrower is supposed to receive credit for the unearned portion of the premium upon refinancing. Most borrowers don’t think of asking and are unable to tell if the payoff figure includes a credit for the unearned premium. In many cases, it doesn’t.
The June 20, 2000 report, "Curbing Predatory Home Mortgage Lending," described "loan flipping" as the practice of repeatedly refinancing a mortgage loan without benefit to the borrower, in order to profit from high origination fees, closing costs, points, prepayment penalties and other charges, steadily eroding the borrower's equity in his or her home."
A particularly egregious and offensive aspect of flipping is requiring the borrower to refinance low-rate first mortgages. Many homeowners who need to borrow for home improvements or other needs are steered to predatory lenders who will not simply make a second mortgage home improvement loan, but insist on refinancing the balance on a 6-8% purchase money mortgage with a 10-13% loan. The author has seen subsidized 0% mortgages replaced by 13% predatory loans.
Lenders also promote the use of mortgages to consolidate unsecured credit card and personal loan debt.
Bogus and junk fees and charges
These are used at both the outset of the loan and in servicing loans to increase the lender’s income or to increase the amount of the loan without actually disbursing funds. Typical examples of "junk fees" at origination are $75 for transporting documents, $100 for wire transfers, "warehouse fees," "processing fees," "review fees," and many others.
Several lenders have been accused of imposing late charges on payments that are not in fact late, of imposing property inspection and preservation charges not authorized by the loan documents or, in the case of FHA mortgages, applicable HUD regulations and handbooks. In one case, a lender charged $10 for accepting an electronic funds transfer, without authority in any document.
Subprime loans will often provide for hefty penalties for prepayment. The homeowner who has been induced to sign an unnecessarily expensive loan is thus precluded from depriving the lender of its ill-gotten gains by going to a competitor.
Balloon payments and call provisions
A common feature of predatory lending is structuring loans so that the borrower still owes most of the amount borrowed at the end of the loan. The homeowner is not able to pay the balloon payment at the end of the loan, and either loses the home after making years of high interest payments or is forced to refinance.
Some loans provide that they can be accelerated in the sole discretion of the lender.
In some cases, the borrower actually owes more at the end of the loan than at the beginning, because the loan payments are insufficient to cover the interest.
Loans over 100% loan-to-value (LTV) ratio
Recently lenders have been promoting loans where the amount of the loan exceeds the fair market value of the home, often as much as 125%. Such loans are impossible to refinance except by another, similar loan, locking the borrower into high-rate loans.
Mandatory arbitration clauses require, as a condition of receiving a loan, that a borrower agree to resolve any and all disputes arising out of the loan through arbitration, rather than litigation. The June 20, 2000 HUD-Treasury report found that "Mandatory arbitration may severely disadvantage HOEPA borrowers. Because of the potential for such clauses to restrict unfairly the legal rights of the victims of abusive lending practices, HUD and Treasury believe that Congress should prohibit mandatory arbitration for HOEPA loans."
In many cases, these clauses also contain a waiver of substantive TILA rights, such as the right to attorney’s fees.
Misapplication of payments and miscomputation of interest
Most lawyers, much less borrowers, have no idea whether mortgage payments are being properly computed and applied. Often, they are not.
It has been estimated that 25% of all adjustable rate mortgages are not properly adjusted. In one case, we found that the note and a rider conflicted as to the frequency of adjustments. In another, we found such a short interval between the reference date and the change date that the lender could not apply the formula according to its terms.
Another abuse that often escapes attention concerns the use of "daily interest". Traditionally, banks and mortgage companies treat payments received within the grace period as having been received on the due date (generally, the first of the month). If a payment is received after the grace period, a late charge is imposed, but there is no other consequence unless the borrower falls so far behind that the loan is accelerated. This is what most borrowers think will happen when a mortgage provides for a late charge of, e.g., 10% of the payment if it is late.
Certain "subprime" mortgage companies do not follow this protocol when applying payments received after the due date. Instead, they compute interest on the entire outstanding principal for the additional number of days prior to receipt of the payment. Often, the entire payment will be applied to interest!
This practice is misleading. If the note and TILA disclosure state that the consequence of paying 16 days late is the addition of a $60 late fee, the borrower does not expect that the consequence will be a $60 late fee plus $600 in extra interest.
One of the most commonly used uniform promissory note forms employed by Fannie Mae and Freddie Mac is Form 3200, "Multistate Fixed Rate Note - Single Family - FNMA/FHLMC Uniform Instrument Form 3200 12/83," that provides in pertinent part:
Interest will be charged on unpaid principal until the full amount of principal has been paid. I will pay interest at a yearly rate of %.
The Fannie Mae Servicing Guide, Part III, Ch. 1, § 101 (page 306) says that the language from Form 3200 means one-twelfth of annual interest with each monthly payment, i.e., the manner in which banks and mortgage companies have traditionally calculated interest:
III, 101: Scheduled Mortgage Payments (09/30/96)
The interest portion of the fixed installment must be determined by computing 30 days' interest on the outstanding principal balance as of the last paid installment date. For this calculation, always use the current interest accrual rate for the mortgage. Interest for second mortgages may be determined by a payment-to-payment calculation method if the mortgage instrument requires it. [Emphasis added.]
The Fannie Mae Servicing Guide, Part VI, Ch. 1, §102.01 (page 605) says much the same thing:
VI, 102.01: Interest Calculation (03/20/96)
Interest charged to the mortgagor should always be calculated on the outstanding principal balance of the mortgage as of the last paid installment date, using the current interest accrual rate. A full month's interest should be calculated on the basis of a 360-day year, while a partial month's interest should be based on a 365-day year.
Force placed insurance
All mortgages require the homeowner to insure the home against fire and casualty. If the homeowner fails to pay his insurance premiums (either directly or through an escrow account), the cheapest thing for the lender to do is to advance the premium and add it to the debt, thereby continuing coverage. Instead, some lenders "force place" their own insurance, which has much higher premiums. Often, a substantial portion of the premiums are paid as commissions to an affiliate of the lender. Sometimes, the insurance is for an amount in excess of that authorized by the note and mortgage. Also, the insurer or an affiliate may provide "free" services (paid from the insurance premiums) to the lender, such as tracking whether borrowers have their own insurance.
Some or all of these practices may be contrary to the note and mortgage and the Illinois Collateral Protection Act.
Illinois has a Collateral Protection Act, 815 ILCS 180/1 et seq., which requires specified notices (i) at the time the loan is entered into, 815 ILCS 180/10, and (ii) within 30 days after the forced placement of any insurance, 815 ILCS 180/15. "Substantial compliance" is required if the loan is made on or after July 1, 1997. The Act provides that "A creditor that places collateral protection insurance in substantial compliance with the terms of this Act shall not be directly or indirectly liable in any manner to a debtor, co-signer, guarantor, or any other person, in connection with the placement of the collateral protection insurance." 815 ILCS 180/40. It also provides that "This Act shall not be deemed to create a cause of action for damages on behalf of the debtor or any other person in connection with the placement of collateral protection insurance." 815 ILCS 180/50. The creditor may require that the insurance be paid for at once, as a balloon payment at the end of the loan, or through amortization.
The effect of noncompliance with the Collateral Protection Act has not been determined. One argument is that the debtor may not be charged for insurance except in compliance with the Act.
IS THERE A DEFAULT...(text cut due to length, please click this link to get the rest of the article (JB)