One of the most difficult parts of lending law, but one that is vitally important to know for homeowners who believe they have been victimized by a bank, is that of the Truth in Lending Act, or TILA. The Truth in Lending Act was first implemented in 1968 and was designed to protect borrowers in consumer credit transactions by requiring lenders to disclose clearly important aspects of a loan and its costs.
When violating this law, lenders have a very small margin of error. Fees and costs of the loan transaction must be within very small tolerances for the loan to be in compliance with TILA. With the vast number of creative financing instruments of the past years, it would be almost impossible for every mortgage broker and loan underwriter in the country to have complied with this law in 100% of mortgages originated.
Thus, homeowners facing foreclosure may have valid legal defenses based on the Truth in Lending Act, especially if they were given a subprime loan. In 1994, TILA was amended with the Home Ownership and Equity Protection Act (HOEPA) to give consumers extra protections against predatory lending and require further disclosures for subprime or high cost mortgages.
There are a number of potential violations of the Truth in Lending Act that lenders may have committed, and which are just waiting for homeowners to discover. While the following list is not nearly exhaustive, it may give borrowers facing foreclosure some ideas of common ways that lenders violate federal lending law in order to take advantage of borrowers.
Private Mortgage Insurance. If the lender does not adequately disclose to the borrowers under what conditions Private Mortgage Insurance (PMI) may be terminated on a property, a violation may exist. PMI protects lenders against default and is often paid by homeowners who do not put down 20% of the purchase price when buying their home. The insurance may be terminated, however, once the owners have 20% equity or after they have made payments on time for 60 months.
Nondisclosure of costs of credit. If the lender fails to disclose fees or charges, a violation of the Truth in lending Act may be present. All charges and fees for a mortgage must be disclosed on the documents homeowners receive at closing, as well as listed on the HUD-1 Settlement Statement. Not disclosing these costs can make the entire loan transaction subject to rescission, which would require all payments by the owners to be returned by the bank.
Nondisclosure of loan origination referral fees. This is similar to the nondisclosure of costs of credit, and any fees paid to loan originators must be disclosed to the borrowers. Corrupt mortgage brokers who attempted to hide high fees charged to the homeowners for a loan may have caused the lender to violate the TILA, and finding such undisclosed fees can help owners stop foreclosure using this defense.
There are so many potential violations of just this one law and its amendments that it would be nearly impossible to list them all. And the penalties for violations include a complete rescission of the loan, which may allow borrowers to take back all of the payments they have made to the bank over the years and put that money into refinancing the house or simply walking away and moving on with their lives. They may be able to end the foreclosure and have the option of keeping the home or using the money to plan their future.
If nothing else, the threat of having to defend against Truth in Lending Act violations may force the bank to negotiate a mortgage modification rather than fight in court for years. Lenders have no hesitation when beginning a foreclosure lawsuit, but are more than willing to negotiate with homeowners who are serious about defending the case. While banks use the courts as a sate weapon against borrowers, these same borrowers can use the federal laws in self-defense to fight the lender.
Homeowners who believe that aspects of their loan may have violated the Truth in Lending Act should probably speak with an attorney who can explain the law and evaluate the mortgage and inform them of their foreclosure rights under this law. This is a specialized area of the law and may require more research and time than the borrowers have available. For a relatively small fee, an attorney may be able to help force the bank to negotiate a settlement or drag the foreclosure process out by years.
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