LOAN DOC AUDIT

Stop Foreclosure - save your home

Foreclosure is currently the single largest issue affecting California property owners. According to the latest survey from the Mortgage Bankers Association (Q1 2008), over 3% of California real estate loans are in foreclosure (about 182,500 of roughly 6 million loans).

For many homeowners facing foreclosure, it seems as though there are no options, and often, people in trouble just give up. The shame of it all is that many homeowners can stop foreclosure, but do not realize it.

What if homeowners had an option to stop foreclosure other than declaring bankruptcy?

We encourage any California homeowner who is having trouble with their refinance loan to contact us today for more details.

Loan rescissions for paid-off loans:

What about all the homeowners who aren't (yet) in financial trouble, or those who don't want to deal with refinancing in the current lending environment? Can TILA do anything for those folks?

Maybe. For homeowners who refinanced or took out an equity loan within the last three years, and then paid off that loan, there may be a right to rescind the already-paid loan. And, because the borrower has already repaid the lender the entire principal balance, the lender ends up owing the borrower money.

Sounds too good to be true, right? Well, several federal courts, and California's Second District Court of Appeals don't think so. A line of cases dealing with the issue have held that:

* Neither TILA nor Reg. Z lists "refinancing" as an event that cuts off the rescission right. Congress stated specific ways that the extended rescission right goes away: expiration of three years from the transaction, the sale of the borrower's property, or the transfer of the borrower's ownership interest in the property (such as through a contract to sell the property, foreclosure, or in bankruptcy when the Trustee takes title to the assets of the Bankruptcy estate).

* TILA allows rescission of the entire loan transaction, and rescission embodies several borrower remedies, including the lender penalty of losing the right to collect interest on the loan. Specifically, Reg. Z states that a borrower "shall have the right to rescind the transaction." This point refutes a contention of many lenders that a borrower cannot rescind a paid off loan because the lender's security interest has already been released, because both the transaction and its rescission involve more than simply releasing a security interest.

* Preserving the rescission right despite a loan payoff protects consumers as intended under TILA. Congress enacted TILA to require lenders to make specific disclosures to borrowers regarding the true cost of credit. Under the law, the proper question is: did the lender provide proper disclosures? If the answer is no, then the borrower may have a rescission right. Allowing a lender to escape its disclosure obligations simply because a loan has already been paid would undermine the purpose of TILA. In the worst cases, a bad lender could escape TILA liability for defective disclosures by "churning" its borrowers into new loans, which is clearly not what Congress intended.

TILA Facts

IMPORTANT NOTICE: This information is provided for general educational purposes only. It is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice about your situation.

The federal Truth in Lending Act, commonly referred to as "TILA," is a powerful tool for homeowners facing escalating loan payments. TILA, along with Regulation Z, impose strict disclosure requirements on lenders for certain loans secured by a borrower's principal residence. When a lender violates TILA, a borrower may be entitled to a significant reduction in their loan balance, and attorney fees. As with most statutes, conditions and special rules apply. Here are some of the basics.

1. TILA does not apply to purchase money loans. Only non-purchase money loans are covered by TILA. There is an additional exclusion of purchase money loans refinanced by the same lender that made the purchase money loan. However, this exclusion does not apply if the borrower received additional advances.

2. TILA does not apply to business or investment property loans. By statute, TILA only covers (i) non-purchase money loans, (ii) secured by a borrower's principal residence, (iii) where the loan proceeds are used primarily for personal family purposes (as opposed to business or investment purposes).

3. TILA violations allow a borrower to cancel their loan. Every TILA loan must provide two kinds of notice to a borrower: the borrower's three day right to cancel, and accurate calculations of the total cost of credit (APR, finance charge, amount financed, and total of payments). There are statutory requirements about the contents and accuracy of each form of notice. If the notices are incomplete, or inaccurate beyond the statutory allowances, then the borrower has an extended right to cancel the loan. In most cases, the borrower's right to cancel is extended for three years from the date the loan was consummated. However, a borrower's right to cancel can be extended even longer if a lender starts a foreclosure.

4. TILA rescissions impose severe penalties on lenders. Once a borrower sends their lender a rescission notice under TILA, several important changes happen to the borrower-lender relationship.

First, the lender is no longer entitled to collect any interest, fees or costs associated with the loan, even costs paid to third parties like title insurers. Instead, every penny paid by the borrower over the life of the loan goes towards reducing the principal balance owed to the lender. The borrower is required to make a "tender offer" to pay the lender any remaining principal balance. Payment is usually accomplished by refinancing or selling the property.

Second, once a loan is rescinded, the lender's security interest in the borrower's property automatically becomes void under federal law. "Security interest" includes the Promissory Note and any recorded documents (Deed of Trust, Mortgage, etc.) that secure the loan. This feature is particularly helpful for borrowers in foreclosure, because once a lender's security interest is void, their right to foreclose goes away.

Third, within 20 days of receiving a borrower's rescission notice, the lender must return to the borrower any money or property that has been given to anyone (including the lender) related to the loan. In addition, the lender must take steps to reflect that their security interest no longer encumbers the property. The practical effect of this rule is that the lender must accept a borrower's rescission within 20 days of receiving it. Failure to act within the 20 days is an additional TILA violation that exposes the lender to additional damages.

Fourth, the lender must pay the borrower's reasonable attorney fees, actual damages, and in some cases, statutory damages.

5. There are special rules that apply to TILA rescissions. While there are too many examples to cover in this fact sheet, one noteworthy rule is that a borrower cannot rescind a loan if their home is already sold (on the open market or through foreclosure), or (in some parts of the country, including California) if the borrower is in contract to sell their home.

Because of the special rules that apply, best practices dictate having the borrower's documents reviewed by qualified counsel with experience in TILA matters.