I. The Set-Up
Foreclosure defendant-debtor foreclosing lender's sheriff's foreclosure sale quickly approaches. Mortgage broker contacts debtor to advise of a wonderful opportunity to refinance. This refinance would enable debtor a new loan with better terms and, most importantly, foreclosing lender's arrearage and loan paid off-stopping the sheriff's sale.
Debtor is unsophisticated. Debtor has never been in foreclosure and fell behind on her small home equity line of credit after that money was used for necessary home improvements. Debtor became momentarily unemployed and foreclosure ensued. Debtor is immediately comfortable with broker, though they have never met.
Debtor inherited his parents' home. The 40-year-old home has over $100,000.00 in equity, even in light of foreclosing lender's ongoing interest and penalties. At sheriff's sale, the property would certainly be attractive to a third-party bidder.
While debtor would be entitled to the overage between the sheriff's sale purchase price minus the judgment and any other liens such as sheriff's costs, that purchase price would be approximately 80% the fair market value of the property. Further, debtor does not want money but rather to remain in his family's home with his wife, three children, and dog.
Broker does not ask for anything but for debtor to attend closing. Broker does not ask for debtor to complete a loan application. Broker does not ask for authorizations to retrieve credit scores. Broker does not ask for tax returns. But, broker calls constantly, engendering the semblance of a professional friendship with growing desperate debtor.
As the sheriff's sale approaches, broker coordinates with broker's affiliated title agency a closing to occur the day before the foreclosing lender's scheduled sheriff's sale. Debtor is growing frantic but broker assures a closing.
A few days before the sale, broker advises debtor that, to effectuate the refinance, debtor needs to deed her property to never before spoken of investor. At closing, broker advises debtor that debtor and investor will execute a lease-to-buy-back agreement enabling debtor to lease the property at below its rental market value with the opportunity to repurchase under that property's fair market value within one year (after debtor's credit clears). Broker tells debtor that this lease-purchase is a form of refinance. Debtor believes broker, because - all other options have evaporated.
During the lease, debtor will maintain all indicia of home ownership. Debtor will pay the real estate taxes, utilities, and otherwise, as he had before. Broker tells debtor that essentially nothing will change post-closing, except the requirement of rental payments (which will go towards the new mortgage).
Prior to closing, broker obtains a commitment towards a purchase money loan from bank on behalf of investor. Because bank is unaware of neither the lease-purchase agreement nor the relationship between the parties, bank issues a commitment but not truth-in-lending required notice of high cost mortgage disclosures. Bank also does not issue Truth-in-Lending required notices of right to rescind because bank is unaware that the purpose of the transaction is to refinance debtor's foreclosing lender; instead, bank is advised by broker and investor that it is an arm's length purchase transaction.
Closing is scheduled for noon, sheriff's sale minus one day. Debtor arrives early. Title agent arrives on time. Broker and investor are nowhere to be found. The hours tick by. Debtor grows frantic fearing the loss of his home the following day. Title agent advises debtor that the loan must close by 5:00 p.m. or risk foreclosing lender's sheriff's sale not be canceled for the inability to wire funds past that time to foreclosing lender as payoff.
At 4:45 p.m., broker and investor appear with a stack of documents. Broker, investor, and title agent each urge debtor to sign without reading or risk sheriff's sale. Debtor complies. Title agent has seen this before and knows the documents therein are irrelevant anyway; debtor will never regain title.
On the settlement sheet, there are, for the first time revealed, bizarre charges: seller's assist, brokerage fee, attorneys' fee, points, and other charges effectively reducing the sale price by 25% (i.e., broker, investor and title agent obtaining that money through bank). Though the property was valued at $100,000.00, the sale price indicates $50,000.00. Foreclosing lender's payoff is $10,000.00 and all closing costs are around $25,000.00. The HUD-1 indicates seller is to obtain $15,000.00 from closing, but investor and broker advises debtor that debtor-seller's closing proceeds will be kept in escrow towards future unanticipated expenses such as home repair..
Debtor's instincts make him realize that he will never see that escrow but it is a small price to pay to save his home and his home's equity (approximately $50,000.00).
III. The Flip
Closing plus one day, broker arranges for a second mortgage from which broker, investor and title agency receive an additional $50,000.00 - exhausting debtor's remaining equity. Broker keeps hounding debtor to pay rent while investor immediately defaults on bank and the second mortgage.
Three months elapse and debtor has made his rental payments (which broker and investor advise are forwarded to bank per investor's mortgage) when he receives a foreclosure notice addressed to investor.
Shortly after receipt of the foreclosure notice, debtor discovers the scam. Debtor calls investor and broker, but no response. Debtor calls bank, but bank is not authorized to speak to a non-borrower. Debtor calls counsel who advises debtor has no standing to intervene in the foreclosure. Counsel later thinks debtor a fool for expecting something for nothing; counsel advises debtor that debtor has no damages because debtor was on the eve of sheriff's sale notwithstanding his foreclosure bailout.
Debtor files a pro se motion to stop bank's sheriff's sale. Judge advises debtor that debtor was fortunate to have an additional one year of occupancy, and then denies the motion.
Debtor's family home is sold at bank's sheriff sale on which there is no bidder because there is no more equity. Bank ejects debtor, his wife, his three children, and then euthanizes debtor's dog after five days.
V. The Beginning: Act I
Debtor and his family are homeless. Debtor's equity has evaporated as has his entitlement to the proceeds of the lease-purchase sale. Debtor is unable to reconnect with investor or broker. Title agency claims innocence. Debtor's wife divorces him. Broker perpetrates this scam with a number of different investors upon a number of different borrowers. Broker is nowhere to be found. The Department of Banking is not interested nor is the Attorney General because they are too busy (and think debtor is at partial fault).
A foreclosure rescue scam has been successfully completed.
Analysis: Act II
- A. Standing
Standing determines "whether the litigant is entitled to have the Court decide the merits of the dispute or of particular issues." Standing has three elements:
First, the Plaintiff must have suffered an "injury in fact" - an invasion of a legally protected interest which is (a) concrete and particularized, and (b) "actual or imminent, not 'conjectural' or 'hypothetical'." Second, there must be a causal connection between the injury and the conduct complained of - "the injury has to be fairly... trace to the challenged action of the Defendant, and not... the result of the independent action of some third party not before the Court." Third, it must be "likely," as opposed to merely "speculative," that the injury will be "redressed by a favorable decision."
Per Twombly, Plaintiff's must specifically plead a true injury occasioned by the causes of action causally related to the misconduct which can be imputed to all parties, not forgetting bank (the tangentially yet most important Defendant). Plaintiff's must illustrate that the injury (lost equity, lost title, etc.) can ultimately be redressed by the Court via an award of damages (such as, equal to lost equity or finance charges) or equitable relief (such as, equitable mortgage, rescission of purchase mortgage, or foreclosure recoupment/set-off). The complaint is not hypothetical and thus falls "within the zone of interests protected by the law invoked." The plaintiff should not address the Court for a remedy otherwise excluded by the equal representative branches.
- B. Petition to Intervene
Because the affirmative federal action will not stop bank's state foreclosure upon investor (thus, placing debtor's property at risk for sheriff's foreclosure sale), debtor will need to intervene in the foreclosure as a non-party.
Because the determination of the foreclosure will affect debtor's legally enforceable interest and debtor will be otherwise adversely affected by the disposition of the property, debtor is entitled to intervene as of right. However, intervention is not easily briefed-it requires the affirmative action be both attached and explained, or risk a court viewing the petition as debtor's meritless attempt to regain some form of entitlement to the property via impermissible collateral attack.
- C. Equitable Mortgage
Courts throughout the country have long held that a deed, absolute on its face, can be declared a mortgage where the parties intend that it serve as security for a loan, especially where the transaction involves fraud or overreaching. When a deed is accompanied by a contract to repurchase, the transaction may be regarded as a mortgage.
Adequacy of consideration, indicia of maintenance of homeownership, and, most importantly, intent of the parties govern.
Because all evidence will likely point towards the elements of an equitable mortgage having been met, many courts have granted summary judgment to debtor.
- D. Truth-in-Lending Act
Having asserted standing, stopped the state foreclosure via intervention, and then won summary judgment converting the deed to an equitable mortgage, debtor may now move for affirmative relief.
Because the equitable mortgage is actually a refinance of the foreclosure debt (i.e., the foreclosure rescue), TILA requires notices of right to rescind, pre-paid finance charges, and otherwise be delivered to the bank's implied borrower-debtor. A TILA violation (non-disclosure) provides debtor a right to rescind his non-purchase money consumer credit transaction secured by his dwelling. In a refinance transaction, a TILA violation will be hyper-technically, strictly construed and result in rescission if request for rescission is made within three years of the violation and then an action to enforce rescission is filed within one year thereafter (subject to equitable tolling). A request to rescind need not precede the action, but the failure of bank to rescind in response to the request will additionally make bank liable for statutory and actual damages.
Because of the false HUD-1 closing charges, this transaction (now a refinance) would have incredibly high (undisclosed per TILA) pre-paid finance charges requiring, per the Home Ownership and Equity Protection Act, notice by bank to debtor that this is a "high rate" mortgage. That disclosure must precede closing by three business days. As that HOEPA disclosure was not made, debtor may rescind against any assignee as well a collect additional HOEPA statutory penalties.
HOEPA is a sub-chapter of TILA. Both allow attorneys fees and costs be awarded.
Finale: Act III
Within the victims' communities, foreclosure rescue scammers were originally termed "angels" because of their miraculous ability to cure a foreclosure. This author has approximately a dozen foreclosure rescue affirmative actions pending at any given time, all with strikingly similar facts as discussed above. Foreclosure rescue actions are the most intense of any kind: combining the least sophisticated yet most paranoid debtor-client, often with no ability to pay except via contingent fee, armed with a counter-intuitive affirmative hyper-technical action against a, at first blush, seemingly "innocent" lender (and sometimes assignee), while proceeding parallel in both federal (as a plaintiff) and state (as an intervenor-defendant) courts. There are no angels able to grant a miracle cure to financial distress, but, with creative lawyering, sound academic fundamentals, self-confidence, and inner zeal to right wrongs, an attorney can become the true foreclosure rescuer.