For the past five years, the most continuously newsworthy topic regarding personal finance has surprisingly not been taxes, but rather mortgage rates or more specifically, refinancing. Now that it appears we are nearing the end of the Real Estate Bubble, creditors are being scrutinized for their lending tactics under the misnomer "Predatory Lending".
Top ten signs of a "predatory" loan are:
- Excessive Fees: Totaling more than 5% of the loan amount
- Asset Based Lending: Basing the loan amount on the borrower's assets, not income (ability to repay)
- Flipping: Refinancing the homeowner over and over again without cognizable benefit, thus stripping the borrower of personal equity while charging unnecessary fees
- Abusive Pre-Payment Penalties: Effective for more then three (3) years and costing more the six (6) months' interest
- Steering: Placing borrowers into sub-prime mortgages with high fees and interest when the borrower would otherwise qualify for a conventional loan
- Targeting: Marketing sub-prime loans to minorities regardless of economic realities
- False Appraisals: Increasing the amount of a loan based on an intentionally high appraisal of the property
- Cash Out Refinances: Pressuring vulnerable borrowers to increase the amount of their loan by borrowing additional money to satisfy a misperceived need
- Falsifying Loan Application: Convincing borrowers to misstate their income
- Dragging the Body: Brokers physically taking homeowners to a lender who provides TILA disclosures on a computer, which the homeowner is expected to immediately read, understand and then to acquiesce
There is no cause of action for Predatory Lending. However, there are many which fall under that lay heading, most of which are hyper-technical codifications of overlapping common law contract and tort concepts and remedies.
Truth-In-Lending Act (TILA): TILA requires a creditor to adequately disclose terms, conditions and costs to the consumer. In a consumer credit transaction, lenders must make accurate, clear and written disclosures, most commonly including the contact information of the lender, the rate and amount financed, and the payment schedule. A typical violation is the failure of a lender to give the borrower written notice of the right of rescission (which exists for three (3) days after refinancing). Remedies for violations may include actual damages, legal fees and costs, and rescission. Notably, criminal penalties may also be imposed upon the lender.
Homeowners Equity Protection Act (HOEPA): HOEPA intends to broaden TILA by extending consumer's cancellation rights and limiting the terms of high interest/fee loans. Specifically, pre-payment penalties beyond and balloon payments within five (5) years are prohibited. A violation may result in the borrower recovering "the sum of all finance charges and fees paid by the consumer..." 15 U.S.C. §1640(a)(4).
Real Estate Settlement Procedures Act (RESPA): Restricting unnecessary increases in fees associated with closings, RESPA prohibits referral fees and requires full disclosure of settlement costs and services, escrow account practices, and the business relationships between settlement service providers. Remedies include actual damages, legal fees and costs, as well as treble damages.
Unfair and Deceptive Acts or Practices (UDAP), Credit Services Act (CSA) and Unfair Trade Practices Act and Consumer Protection Law (UTPCPL): UDAP (Federal) and UTPCPL and CSA (PA) are similar laws intending to protect consumers from confusing, misleading or intentionally unfair conduct within the marketplace. What the charge of Conspiracy is to criminal defense attorneys, UDAP and UTPCPL is to lenders and CSA is to mortgage brokers-a broad provision which carries additional penalties separate from the underlying violation. For example, a borrower who attends closing only to find that their interest rate is 1% higher then previously agreed could claim UDAP and UTPCPL violations against the lender, CSA violation against the broker, as well as RESPA violations. These broad provisions provide statutory penalties of at least $100 per violation, actual damages, treble damages and legal fees and costs.
Equal Credit Opportunity Act (ECOA): By requiring creditors to notify applicants within thirty (30) days of its decision and the specific reason(s) for denial, ECOA seeks to prohibit discrimination against subject classes and those who receive public assistance. Penalties include actual and punitive damages. Many of these claims are first presented through the Pennsylvania Human Relations Commission (PHRC) and Equal Employment Opportunity Commission (EEOC), which require a complaint be filed within 180 days of the underlying discriminatory conduct.
Pennsylvania Home Improvement Finance Act (HIFA) and Federal Trade Commission Practice Rules (FTC): Home improvement financing and loan transactions physically occurring within a borrower's house require heightened notices per HIFA and The FTC. Until a "Notice of Cancellation" is furnished, the cancellation period does not begin to run, which also extends the statute of limitations for violations and provides a "backdoor" to TILA remedies. Importantly, the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) preempts actions based on state usury laws and associated remedies only concerning laws that impose caps on interest rates, not those based on HIFA.
Magnusson-Moss Federal Act (MMA): While often used in "Lemon Law" claims, MMA also applies to claims arising from breach of consumer product warranties, ostensibly including those contained within the loan transaction. A violation of the FTC should be incorporated as a per se violation of the MMA. Remedies include actual damages and legal fees and costs.
Racketeer Influenced and Corrupt Organizations Act (RICO): An "enterprise" involved in a "scheme to defraud" as evidenced by at least two (2) "predicate" acts can be found civilly liable for actual damages, legal fees and costs, punitive damages, and potential criminal prosecution. While initially passed by congress as a method of criminally prosecuting organized crime, its civil counterpart will likely produce an aggressive response to its proponent. A civil RICO count should only be used if its remedies cannot be found elsewhere and the proponent can produce evidence of the predicate acts when challenged. Otherwise, the stigma associated with RICO often prompts jurists (especially in federal court) to require the pre-discovery production of evidence of the acts and if failing to adequately respond, sanctions may be imposed.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Bankruptcy Reform Act): As the above "Predatory Lending" actions are often invoked both offensively (to restructure a loan) and defensively (pending foreclosure), creditors and debtors facing litigation must consider the effect of bankruptcy before making any decision. Gone are the days of the bankruptcy filer who invokes the "Automatic Stay" on the eve of every one of the foreclosing lender's rescheduled Sheriff's Sales or the business owner who runs up credit cards in an attempt to expand only to seek discharge of those debts when plans go astray. Through the passage of The Reform Act, congress placed severe burdens on would be debtors and debtors' attorneys, including: (1) attorney's personal liability for the debtor's debts for an uninvestigated, "bad faith" filing; (2) the extension of a creditor's relief from the automatic stay for "serial filers"- re-filing within one year from dismissal of a prior bankruptcy petition; and (3) extending relief from stay for two (2) years upon a finding that the debtor transferred property in a scheme to defraud creditors. While congress has certainly increased a debtor's burdens and attorney's obligations and liabilities, a (strictly liable) lender should still protect itself from an inadvertent violation of the automatic stay (which is imposed concurrent with the bankruptcy filing) as at least one court has ruled the debtor entitled to tort damages for that violation.
Fair Debt Collection Practices Act (FDCPA), Fair Credit Reporting Act (FCRA) and Fair Credit Extension Uniformity Act (FCEUA): While not expressly related to the performance of a mortgage transaction, these Acts instead relate to candidate evaluation for or in collection of a loan. The FDCPA (applies only to collection agencies, including law firms), FCEUA (creditors) and FCRA (credit reporting agencies, users of credit reports, and furnishers of credit information) seek to curb negligent, abusive and technically proscribed collection or credit reporting practices. While violations of the FDCPA and FCEUA are easily identified by misconduct which fails to pass the "smell test", FCRA actions require a rigid understanding of the Act in order to determine the validity of a claim (for example, it is a violation for a credit agency to fail to remove negative credit information which is "obsolete"-after seven (7) years or ten (10) years after bankruptcy). Interestingly, the FCRA enables both statutory ($100-$1,000 per violation, plus legal fees and costs) and common law (loss of opportunity, dignitary harm, actual harm, emotional distress, etc.) remedies. For this reason, FCRA claims can be entitled: Credit Defamation.
When reviewing available causes of action, attorney's tendencies to be over-inclusive should be tempered. Many claims arise out of arguable violations and minimal, if any, actual damages. Lenders' counsel may react to receiving a thirty page complaint alleging every potential cause of action not with awe, but rather ridicule knowing that the proponent either lacks a detailed understanding of the filing or is operating a "mill" and is too busy to craft a more finely tuned complaint. Both types will either settle cheap or will not have the abilities to respond to dispositive motions or extensive discovery. Debtors' counsel know that a claim based solely on a technical statutory violation must be crafted to limit discovery while maximizing recovery so that counsel does not wind up in unprofitable, time-consuming litigation on behalf of a client whose actual damages are nominal. There is no short-cut to litigating these claims and the practical consequences should be understood prior to engaging. Counsel should seek to litigate claims only where there are actual damages occasioned by what would otherwise consist of a common law action in fraud or contract.
A warning to first-time lender liability claimants: the statute of limitations for each of these actions greatly vary not only depending on the action, but also whether the action is brought offensively (via complaint) or defensively (via counterclaim), and is strictly enforced.
As the refinancing era draws to a close, the three year ARMS begin to lapse, rates begin to rise, and personal equity plateaus, the ability to spew acronyms during often adversarial litigation will not be enough to navigate this narrow, but deep and complex practice area. Whether representing a first-time mortgagor at closing, a serial bankruptcy filer subject to the fifth foreclosure or a sub-prime lender facing a class action brought by the attorneys general of all northeastern states, a disciplined application should enable clients to receive maximum protection while enabling an efficient practice and limiting malpractice premiums.