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1. RESCISSION UNDER TILA
The right to rescind a mortgage under the Truth-in-Lending Act (TILA) is found at 15 U.S.C. § 1635. Under TILA a mortgage loan that is covered may be rescinded if the financed charge and other disclosures affected by the finance charge such as the amount financed are understated by an amount more than one half of 1% of the face value of the note or $100.00, whichever is greater. 15 U.S.C. § 1605(f)(a). However, in the refinancing of a residential mortgage transaction with a new creditor if there is no new advance and no consolidation of the existing loans the tolerance for accuracy is 1% of the face amount of the note or $100.00, whichever is greater.[1]
If the “finance charge” is understated by ½ of 1% of the note amount or the APR is understated by 1/8th of 1% (0.125%) then the consumer’s rescission rights are extended for up to three years. 15 U.S.C. § 1635(f). In the case of the $62,500 1% equals $625 divided by 2 gives us $337.50.
“Finance Charge” is defined at 15 U.S.C. § 1605. Basically it is “the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit.” The statute and regulations list exceptions to this general rule. Pertinent here are the so called “real estate related fees.”
To be excluded from the finance charge calculation, real estate related fees must be “bona fide and reasonable in amount.” See 12 CFR § 226.4(c)(7). RESPA, Section 8(b), prohibits the markup of a real estate settlement service in a covered loan. Since RESPA covers all “federally related” consumer mortgage loans, practically all mortgage lending is covered. Obviously, if an otherwise excludable charge is marked up in violation of RESPA, it is no longer “bona fide” or “reasonable.”
2. CHECKING THE DISCLOSURES
The following “material disclosures” must be properly and accurately made for covered loans or the mortgage continues to be rescindable for up to three years:[2] 1) the annual percentage rate, including applicable variable rate disclosures; 2) the finance charge; 3) the amount financed; 4) the total of payments; 5) the payment schedule.
Assume a loan with a note amount of amount of $62,500.00 and the following points and fees: [3]
1) loan origination fee, $2,989.00;
2) appraisal fee, $300.00;
3) processing/underwriter fee, $390.00;
4) funding fee, $365.00;
5) administration fee, $295.00;
6) document preparation fee, $195.00,
7) tax service fee, $63.00;
8) settlement or closing fee, $200.00;
9) abstract or title search, $375.00;
10) title examination, $225.00;
11) title insurance, $200.00;
12) title service fee, $75.00;
13) recording fee, $120.00;
14) recording tax, $93.75;
15) property insurance, $1,226.30.
A. Checking the disclosed “finance charge” and “amount financed.”
Items 1,3,4,5,6,7,8 and 12 are included in the disclosed pre-paid finance charge when added together equal $4,572.00[4].
To calculate the “amount financed” the pre-paid finance charge is subtracted from the note amount. In our example we subtract $4,572.00 from $62,500.00 to get the disclosed “amount financed” of $57,928.00. The amounts included by the creditor in the “amount financed” should be carefully scrutinized. Oftentimes, especially in sub-prime loans, charges that are otherwise excludable from the finance charge have been marked-up in violation of the Real Estate Settlement Procedures Act (RESPA) and be sure to check such things as recording fees and title insurance as these charges may be inflated.
Items 9 through 11 (real estate related fees) are excluded from the calculation of the “finance charge” only to the extent that they are “bona fide” and reasonable. Furthermore recording fees are excluded only if they are actually paid to public officials for recording. A dead give away that something may be amiss is a recording fee that is a round number such as the $120.00 number listed above. The actual recording fee in this transaction was only $63.00. In other words the recording fee was marked up $57.00. In the example the consumers were charged $275.00 for “Abstract or title search.” Discovery has shown that the abstract was performed by a third party and that the fee for this was only $120.00 indicating another markup of $255.00. Marking up of fees of others is prohibited by RESPA Section 8(b), 12 U.S.C. § 2601(b). These charges should therefore, at least to the marked up portion, be included in the finance change calculation.[5] 63.00 + 255.00 = $318.00, so in this example the “amount financed” includes at least $318.00 that should have been included in the finance charge calculation.
Including these charges in the “finance charge” changes the amount financed from $57928.00 to $57,610.00, APR to 13.12% and the finance charge to $173,211.80. The TILA disclosure (Figure 3) disclosed the APR as 12.592% and the finance charge as $170,778.77.
To be considered accurate the disclosed APR must be within 1/8th of 1% of the actual APR. In this example the APR is understated by .528% or over ½ of 1%. The disclosed finance charge is also incorrect. Take our calculated finance charge of $173,211.80 - $170,778.77 (the disclosed finance charge) reveals an understatement of the true finance charge of $2,423.03.
HOEPA, or the Home Ownership and Equity Protection Act, was passed almost unanimously by Congress in September of 1994 as part of the Riegle Community Development and Regulation Improvement Act, Pub. L. No. 103-325 (September 23, 1994). It is codified at 15 USC § 1639 “Requirements for certain mortgages.” Shortly thereafter regulations implementing the Act were published at 60 Fed. Reg. 15463 (March 24, 1995). These regulations have been revised twice once in 1996[6] and again in 2001[7].
The purpose of HOEPA is to trigger specific discloses by the lender to the borrower on a home equity loan when the interest rate and other closing costs cross a threshold where the act deems the loan to be of “high costs.”[8] It also regulates certain practices that increase the costs of loans and regulates disclosures, the timing of the disclosures, prepayment penalties, limitations after default, balloon payments, negative amortization, prepaid payments, extending credit without regard to the ability of the consumer to repay, requirements for payments under home employment contracts among other things.
I. HOEPA Coverage
HOEPA covers loans that are defined at 15 USC § 1602(aa) of the Truth and Lending Act. The definition of mortgages and loans that are covered is fairly long and convoluted. First HOEPA applies only to Mortgage loans that are closed end non-purchase loans secured by the consumer’s principal dwelling. In addition there there are two “triggers” that are used to determine HOEPA coverage. If either one of them are met the loan is covered. First the loan must have an annual percentage rate (APR) of more than 8 percentage points over the yield of treasury securities having a comparable period of maturity on the 15th of the month immediately preceding the month in which the application for the credit was received by the creditor. This is the APR trigger. The second trigger is the “points and fees” trigger. This is met if the total points and fees paid by the consumer at or before the closing will exceed the greater of 8% of the “total loan amount” or $400.00 whichever is greater. Please see Figure One for a graphic representation HOEPA coverage. Each of these triggers are described below. Open-ended loans such as home equity lines of credit are not covered.[9]
a. The APR “trigger”
HOEPA regulations were amended in December of 2001 and the amendments became mandatory and effective on October 1, 2002. [10] One of the amendments lowered the APR trigger from 10 %above the treasury securities rate to 8 %above the treasury securities rate. [11] The “trigger” for junior mortgages remains at 10%. The applicable date for comparable treasury securities is not the date of the loan but instead is the 15th of the month immediately preceding the month in which the loan was applied for.[12] Comparable treasury securities means U.S. treasury bonds that are of the same duration as the loan and if there are no comparable bonds, bonds that have the closest duration would be used.[13] For example if the Federal Reserve Board was not issuing 30-year T-bills during the applicable time period, T-bills with a 20-year maturity period would be used.[14] The relevant federal securities rate may be determined by going to the
Fed’s website at: http://www.federalreserve.gov
To determine the applicable APR trigger add the Treasury Securities rate to the applicable trigger rate and then compare to the consumer’s actual APR. For example:
Assume a 30-year Mortgage that is a first lien and consummated after October 1, 2001.
Loan date: December 1, 2004
APR (Disclosed): 12.592%
Application date: November 15, 2004
Term of loan: 360 Months
20[15] yr. T-Bill rate on October 15th 2004: 5.36%
Adding:
APR Trigger
In this example the APR trigger is not met. You should always check the creditor’s calculation of the APR. Often items that should be included in the APR calculation are left out as shown below.
b. The points and fees trigger
As stated above and illustrated in Figure One, if the points and fees paid by consumer in a covered mortgage transaction exceed 8% of the “total loan amount”, the loan is a high cost or HOEPA loan. The term “total loan amount” is defined by HOEPA at 15 USC § 1602(8a)(1)(b) and at Reg. Z. § 226.32(a)(ii). Essentially, it is the “amount financed” minus fees which are part of the amount financed only because they are excluded from the definition of the finance charge by 15 U.S.C. § 1605(e) or Reg. Z § 226.4(c)(7). In other words, if the “amount financed” contains any of the charges listed in the Reg. Z § 226.4(c)(7), or credit insurance premiums or debt cancellation fees, those count toward the points and fees trigger and must be subtracted from the “amount financed” to get the “total loan amount.” A charge cannot be included in both the points and fees trigger and in the “total loan amount.”
Subtracting from $62,500 leaves $57,928. Dividing $4,572 by $57,928 yields 7.9%. The loan does not appear to meet the “points and fees” trigger either and does not appear to by covered by HOEPA.
HOEPA points and fees generally include all items included in the “finance charge.” Real Estate Charges are exempted from inclusion in the finance charge as long as they they are bona fide and reasonable. 15 U.S.C. § 1605(e), 12 C.F.R. 226.4(c)(7). If not then § 1602(aa)(4)(C) requires their inclusion in the finance charge for the purpose of determining the APR and “points and fees.” The inclusion of these fees yields the following: Items 1,3,4,5,6,7,8 and 12 were included above added together equaled $4,572.00[16]. Add to $4,572.00 item #9 ($375.00), item # 13 ($120.00) gives us total points and fees of $5,067. Subtracting from $62,500 leaves $57,433. Dividing $5067 by $57,433 yields 8.82%. The loan meets “points and fees” trigger after all and is by covered by HOEPA.
c. HOEPA Required Disclosures and Prohibited Acts
Once it has been determined that a loan meets the requirements of HOEPA coverage certain acts are prohibited and certain disclosures are required. Under HOEPA, in addition to the other disclosures provided for by the Truth-in-Lending Act, the creditor to provide what is known as a Section 32 notice. See Figure 4. The notice must have in conspicuous type size the following: “you are not required to complete this agreement merely because you have received these documents or have signed a loan application. If you obtain this loan the lender will have a mortgage on your home you could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.” The Section 32 notice must also contain the following information: (a) in the case of a credit transaction with a fixed rate of interest, the annual percentage rate and the amount of the regular monthly payment or in the case of another type of credit transaction the annual percentage rate of the loan, the amount of the regular monthly payment, a statement that the interest rate and monthly payment may increase, and the maximum amount of monthly payment based on the maximum interest rate allowed. 15 U.S.C. §1639(a). These disclosures must be given to the consumer not less than three business days prior to the consummation of the loan. 15 U.S.C. § 1639(b)(1).
HOEPA prohibits prepayment penalties unless the following conditions are met: (1) At the time the loan is consummated the consumer is not liable for an amount of monthly payments including the amount of the credit extended or being extended under the mortgage transaction that is greater than 50% of the gross income of the consumer and the income and expenses of the consumer are verified by a credit report, (2) The penalty must apply only to a prepayment made with amounts obtained by the consumer by means other than a refinancing by the creditor under the mortgage of an affiliate that creditor, (3) The penalty may not apply until after the end of a five-year period beginning on the date on which the mortgage is consummated, and (4) The penalty must be not prohibited under other applicable (state) law. 15 U.S.C. § 1639(c).
A HOEPA loan cannot require an increase in the applicable interest rate that is higher than the interest rate that applies before a default. 15 U.S.C. § 1639(d). Balloon payments are prohibited if they have a term less than five years. 15 U.S.C. § 1639(e). Negative amortization is also prohibited. 15 U.S.C. § 1639(f) .The loan can call for no more than two advance payments. 15 U.S.C. § 1639(g). Creditors are prohibited from extending credit to a debtor without regard to the ability of the consumer to repay the credit. 15 U.S.C. § 1639(h). Creditors cannot make payments to home improvement contractors under a HOEPA loan other than in the form of a check that is payable to the consumer or payable jointly to the consumer and the contractor or at the election of the consumer or by a third party escrow agent in accordance with terms and written agreement signed by the consumer, the creditor and the contractor before the date of the payment. 15 U.S.C. § 1639(i). A violation of the any above to be deemed a failure to deliver the required material disclosures for the purpose of the civil liability section of this Title (15 U.S.C. §1635)(j).
d. REMEDIES
All of the standard truth-in-lending remedies found under 15 USC §1640(a) for actual damages, statutory damages, attorney’s fees and costs are available under HOEPA. Under § 1640(a)(2)(iii) a consumer can recover actual damages, attorney’s fees and between $200 and $2000 for statutory damages. In addition rescission and rescission damages are also available under § 1635. Rescission is discussed below.
Under HOEPA special enhanced damages are called for pursuant to 15 U.S.C. § 1640(a)(4) which says:
“[and]
(4) in the case of a failure to comply with any requirement under Section 1639 of this title, an amount equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material.”
These damages include all finance charges and fees paid by the consumer See Newton v. United Companies Financial Corporation, 24 F.Supp.2d 444 (Eastern District of Pennsylvania 1998) “Violations of HOEPA give rise to rescission and awards of Section 1640(a)(2) and Section 1640(a)(4) statutory damages.”
2. HOEPA Damages and Remedies
Any violation of HOEPA gives rise to a claim for statutory damages under the Truth-in-Lending Act. The consumer will be entitled to an award of statutory, actual damages for the disclosure violation and is able to rescind the transaction. 15 U.S.C. §§1635(g), 1640(g).
Under “regular” TILA and HOEPA rescission requires a lender of assignee of a mortgage loan to return the consumer to the position he was in if the loan had never been made. This means that mortgage lien must be releases and all interest and fees by the consumer must be refunded. 15 U.S.C. § 1635.
When the HOEPA violation is “material” consumers are entitled to enhanced damages in addition to statutory damages for disclosure and rescission violations. The requirement that the violation be material is only under Section 1640(a)(4) for the enhanced damages. Under “regular” TILA pursuant to § 1640(g) the consumer is only entitled to a single recovery even if there are multiple violations in one transaction. This is not true under HOEPA. Subsection 1640(d) limits the recovery under Subsection (a)(2) only. The HOEPA cause of action is found at Section 1640(a)(4) and is therefore not limited by the restrictions found in Subsection (d).
15 U.S.C. § 1541(d)(1) makes assignees liable “all claims and defenses the consumer could assert against the creditor of the mortgage.” This means that the consumer can make any claim against an assignee that he could have asserted against the original lender. Any failure of a lender to give the HOEPA disclosure or the failure to make any of the other material disclosures required by the Truth-in-Lending Act gives the consumer the right to resend the mortgage loan. 15 U.S.C. § 1681(j), 1635; 12 C.F.R. §§ 226.32(c and d), 226.3(a) “HOEPA explicitly provides that violations of its any of its notice provisions entitles consumers to resend mortgage loans and to recover TILA and HOEPA statutory penalties. 15 U.S.C. § 1639(j). In addition, the statutory damages provision was amended to increase the total award to the consumer in case of HOEPA violations. Besides the standard $2,000.00 TILA penalty, the consumer may also recover an amount equal to the total finance charges and fees paid. 15 U.S.C. § 1640(a)(4). Newton v. United Companies Financial Corporation, 24 F. Supp. 2d 444, 451.
Conclusion
HOEPA is a challenging statute to litigate under. It can be used however to afford powerful remedies for consumers and satisfaction for consumer attorneys.
[1] See 15 U.S.C. § 1635(f) and Reg. Z § 226.15(a)(3), and § 226.23(a)(3).
[2] Reg. Z § 226.23(g)
[3] See Figure 2 Sample HUD-1 Settlement Statement
[4] See Figure 3 Sample Truth-in-Lending disclosure.
[5] A good argument can be made that the entire unreasonable charge should be included in the finance charge based on language in § 1602(aa)(4), Reg Z § 226..32(b)(1)(iii) and the Reg. Z Commentary at § 226.32(b)((1)(ii)-2.
[6] 61 Fed. Reg. 49237 (September 19, 1996)
[7] 66 Fed. Reg. 6504 (December 20, 2001)
[8]
See report to Congress by
the Commission on
Affordable Housing and
Health Facility Needs for Seniors in the 21st Century, July 28th 2002.
http://govinfo.library.unt.edu
[9] 15 U.S.C. § 1602(aa)(1)
[10] 65 Fed. Reg. 81438 (December 26, 2000).
[11] 66 Fed. Reg. 65604 (December 20, 2001)
[12] Reg. Z Section 226.32(a)(1)(i)
[13] Official Staff Commentary Section 226.32(a)(1)(i) - 4ii
[14] Official Staff Commentary Section 226.32(a)(1)(i) - 4iii
[15] There were no 30 year bonds on that date.