Lender Compliance Analysis

Discussion on Forensic Loan Audits

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In foreclosure, while still owned, a qualifying property is not subject to statutes of limitations and financial remedies can be used as an offset for defensive recoupment but the real beneficial power is cancellation of the loan in a process knowns as right of rescission. When the transaction is rescinded, all parties must be returned to their pre-transaction position and the transaction is cancelled.

This information is not intended as legal advice. We strongly recommend borrowers seek competent legal representation. The chance of prosecuting and winning a TILA violation case without a knowledgeable attorney is "slim to none". We serve a network of hundreds of attorneys across the USA.

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Forensic Loan Audits are widely misused and misrepresented across the USA, as discussed on the LCA Home page. For this reason only A-La-Carte services are offered in this area, no "packages" are available.

By "misuse" we mean borrowers are being misled to the benefits, don't qualify for the powerful loan rescission they expect and when not used "after" securitization audit issues in a state court, may find their case in federal civil court where it is commonly felt lenders are favored. Borrowers are strongly urged to consult a competent knowledgeable attorney.

• borrowers pay for full audit services before knowing if they will benefit from the remedies and a tender offer is feasible;
• borrowers are led to believe they can cancel their loan and get their home for free which is not the case. At the assessment stage you should calculate the tender offer (takeout financing in the form of a refinance mortgage - albeit at a higher rate but on a lower loan amount) and financial remedies if cancellation rights have expired before wasting money on finding violations that cannot be used.

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Statute of Limitations

• Extended rights of rescission must be exercised within 3 years from loan closing.
• No limit to offsets of setoffs in foreclosure.

To Determine Whether the Rule Applies – Ask Three Questions

• First, does Regulation Z apply to the transaction?
• Second, is the loan secured by a borrower's “principal dwelling?”
• Third, is the transaction to purchase the dwelling?

What Kind of Loan is Rescindable?

• The Right of Rescission applies to non-purchase money, Regulation Z loans in which a security interest is taken in a borrower's principal dwelling. For example:
• Home equity line of credit
• An installment loan where the borrower pays a fixed amount and repays the debt on an agreed payment schedule
• A security interest that is acquired by a contractor who is also extending credit in the transaction

Types of Non-rescindable Loans

• A loan to purchase or build the borrower's principal dwelling (i.e., a residential mortgage transaction).
• A consolidation or Refinancenance with the same lender who already holds the mortgage and no additional funds are borrowed.
• A business-purpose loan, even though the loan is secured by the borrower's principal dwelling.
• A transaction in which a state agency is a creditor.
• A mechanic’s lien where the contractor is not a party to the credit transaction.

Cash-out Refinance Rules

• Here, the consumer is Refinancing more than they owe on their current mortgage and taking the difference out in cash.
• For a cash-out Refinancing with the same lender, only the cash-out portion is subject to the right of rescission.
• For a cash-out Refinancing with a different lender, the entire loan amount can be rescinded.

Structure must be borrower's Principal Dwelling

• A consumer can only have one principal dwelling at a time.
• A vacation or other second home would not be a principal dwelling.
• A transaction secured by a second home that is not currently being used as the borrower's principal dwelling is not rescindable, even if the consumer intends to reside there in the future.
• When a consumer buys or builds a new dwelling that will become the borrower's principal dwelling within one year, it is considered the principal dwelling if it secures the construction loan.

Who is able to Rescind a Loan?

• The Right of Rescission does not apply to just borrowers. All consumers who have an ownership interest in the property have the right to rescind.

Special Rules for Foreclosures

• After initiation of foreclosure on the borrower's principal dwelling that secures the loan, the consumer can rescind if: –A mortgage broker fee that should have been included in the finance charge was not included; or –The creditor did not provide the right of rescission notice.

Right of Rescission Requirements for Lenders

• Lenders must provide certain “material disclosures andmultiple copies of the right of rescission notice to EACH owner of the property.
• After providing all proper disclosures, lenders must wait at least 3 business days before disbursing loan proceeds.

What are the Material Disclosures?

• An accurate and complete Truth in Lending Disclosure Form.
• Disclosure must include the APR, finance charge, amount financed, and total of payments.
• Other necessary disclosures include the number of payments to be made over the life of the loan and the regular payment amount.

TILA Disclosures Must Be Accurate

• Accuracy relies on two elements:
• Finance Charge
• Annual Percentage Rate, the “APR”

Finance Charge Accuracy

• If the borrower is seeking to rescind and the lender has not started foreclosure proceedings –the tolerance is one-half of one percent (.005).
• If the lender has started foreclosure proceedings, the tolerance is $35.
• If the lender overstates the Finance Charge, there is no extended right to rescind.

Annual Percentage Rate – APR Accuracy

• Tolerance for the APR disclosed in the TILA Disclosure is one-eighth of one percent (.00125).
• The APR is inaccurate if it exceeds or is lower than the true APR by .00125 (see Commentary 226.22(a)(2)-1.
• One-eighth of one percent (.00125) accuracy tolerance applies to “regular” transactions.

A Word about HOEPA Loans

• TILA was amended in 1994 to add the Home Ownership and Equity Protection Act.
• The main purpose of the law was to protect consumers from predatory lending practices.
• The law imposed new disclosure requirements and substantive limitations on certain closed-end mortgage loans bearing rates or fees above a certain percentage or amount.
• Failure to provide properly completed HOEPA Disclosures or use of a prohibited loan term can create an extended right to rescind the loan.

Rescission Process - Notifying the Lender

• Borrower must notify the lender, in writing, of the cancellation of the loan.
• Notice can be transmitted by mail, telegram, or other means.
• It should be sent to the lender's designated place of business.
• A rescission notice sent by the borrower’s attorney is also effective.
• When the lender fails to provide an address to send the rescission notice, delivery to the servicer will be effective notice as to the lender or its assignee.

Relationship between Servicer and Creditor

• 15 USC section 1641. Liability of assignees
• (f) Treatment of servicer –(2) … Upon written request by the obligor, the servicer shall provide the obligor, to the best knowledge of the servicer, with the name, address, and telephone number of the owner of the obligation or the master servicer of the obligation.

Effects of Rescission

• Once a consumer rescinds a transaction, the security interest becomes void and the consumer is not liable for ANY amount, including finance charges.
• Within 20 calendar days after receipt of a notice of rescission, the creditor shall return any money or property that has been given to anyone in connection with the loan.
• The lender must take steps to terminate the security interest.
• Once the lender has performed as above, the consumer must tender any money received back to the lender.
• Once tender is delivered, rescission is complete.
• As a result of the rescission, the lender retroactively loses the right to charge interest, fees, and costs on the loan, even costs paid to outside third parties such as the title insurer.
• Once the security interest is void the loan is unsecured and may be included in bankruptcy. Consult an attorney.

Assignee Liability

• 15 USC section 1641. Liability of assignees
• (c) Right of rescission by consumer unaffected –Any consumer who has the right to rescind a transaction under 15 USC 1635 of this title may rescind the transaction as against any assignee of the obligation.

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FPG-USA specializes in lender compliance analysis. Direct inquiries to info@fpg-usa.com.