The Truth in Lending Act, arguable the nation’s most powerful Consumer Protection Act, and the New Jersey Consumer Fraud Act, give homeowners the means to fight back against a predatory lender. These claims could void the mortgage, dramatically reduce the sums a borrower owes, and because of the discretion granted trial courts under Regulation Z, could enable the trial court to allow a borrower to pay any remaining sums owed in reasonable monthly installments.[1] When asserted as a counterclaim in a mortgage foreclosure action, the nature of the counterclaims creates genuine issues of material fact that precludes summary judgment.
An Example Case:
Consider the following facts from a case that survived summary judgment by a foreclosing mortgage lender and resulted in a settlement allowing the homeowner to keep his home. On or about February 2007, Mr. Smith applied for a home equity loan with the Bank. At the time of application, Mr. Smith earned less than $200 weekly in addition to social security income. Mr. Smith worked with one particular loan officer employed by the Bank throughout the process and expressed to that loan officer that he needed a loan urgently to assist with a family crisis.
At the loan officer’s request, Mr. Smith forwarded two years’ tax returns, social security awards letter, and bank statements. The loan officer stated that although Mr. Smith’s credit was poor, the home had a lot of equity; therefore, the loan could be approved. Despite Mr. Smith’s request for a home equity loan, the loan officer stated that Mr. Smith would need to refinance the first mortgage in order to obtain the cash he required. Mr. Smith expressed that he had limited income and did not think he earned enough to make payments on a larger loan. The loan officer responded by stating that income was irrelevant because of the equity in his home. The loan officer further explained that Mr. Smith was approved for a “no-doc” loan.
On or about April 9, 2007, Mr. Smith was informed that the loan was approved and he appeared at a closing. Prior to the day of closing, Mr. Smith did not receive a Good Faith Estimate of closing costs or a Truth-in-Lending Statement describing the rate and terms of the loan. During the closing of the loan, Mr. Smith was presented with a stack of papers to sign and he quickly went through the documents, signing where indicated. Although he was promised that he would be receiving approximately $25,000 in cash, the Settlement Statement signed at closing reflected that he was not receiving the $25,000 as promised; rather, the cash was directed to go to medical judgments that reported on Mr. Smith’s credit. Mr. Smith was not informed previously that these debts were going to be paid, and without the cash, the loan had no value to him. Mr. Smith signed all the documents; however, he informed the closing agent that he did not want the loan as proposed. The closing agent instructed that Mr. Smith should contact the lender to “work it out.” Mr. Smith immediately contacted the loan officer and informed the loan officer that he wanted to cancel the mortgage loan. The loan officer promised that he would revise the loan so that Mr. Smith would be provided with the cash he needed. The loan was never cancelled as Mr. Smith had requested.
On April 13, 2007, Mr. Smith was informed that the loan had been revised and was instructed to return to close the loan again. Whereas he had an urgent need for the cash already promised, Mr. Smith returned and signed additional loan documents including a revised Settlement Statement reflecting greater cash proceeds. The revised Settlement Statement reflected the second closing date of April 13, 2007.
Mr. Smith was not provided a copy of the documents he signed at the April 9th or April 13th closing dates. Furthermore, Mr. Smith was not provided with a new Notice of Right to Cancel (“Notice”) on April 13, 2007. The only Notice provided to Mr. Smith reflected that his right to rescind had expired on April 12, 2007. Thus, Mr. Smith was led to believe that he could no longer exercise his three-day right of rescission.
Mr. Smith also alleged that the loan for which he was approved for was based on false information supplied by the loan officer. The application on which the loan was approved falsely reflected that Mr. Smith earned $9,585 in monthly income as a contractor. The application also incorrectly indicated that Mr. Smith had an account with a credit union with a total balance of $15,000 and an account with Wells Fargo Bank with a balance of $38,500. Mr. Smith did not have an account with either institution at the time of the closing. On the contrary, he had only a few hundred dollars in total assets.
As a result of the new loan, Mr. Smith’s monthly mortgage payment went from approximately $1,200 prior to the refinance, to an interest-only payment of more than $2,000. Mr. Smith alleged that the income and assets disclosed on the loan application was a fiction created by the Bank’s agent in order to conform the loan application to the lender’s underwriting standards. Mr. Smith alleged that the Bank took advantage of his desperate need for cash and obligated him to a mortgage loan the Bank knew Mr. Smith could not afford to repay.
A Summary Judgment Motion will be Denied if there are Genuine Issues in Dispute
The standard for deciding a summary judgment motion is covered by New Jersey Court Rule (“Rule”) 4:46-2(c) which states that a summary judgment motion shall be granted if the pleadings, depositions, etc. show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law. In Brill v. Guardian Life Ins. Co. of America, 142 N.J. 520 (1995) the New Jersey Supreme Court held that the standard for summary judgment is that a movant must show on the full motion record that the adverse party, who is entitled to have the facts and inferences viewed most favorably to it, has not demonstrated the existence of a dispute whose resolution in his favor will ultimately entitle him to judgment. The Supreme Court in Brill instructed that the motion judge was to consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party were sufficient to permit a rational fact finder to resolve the alleged disputed issue in favor of the non-moving party. Id. at 540. The Court cautioned, however, that the judge's function is not to weigh the evidence and determine the truth of the matter, but determine whether there is a genuine issue for trial. Id. The Court, quoting from Bell v. Eastern Beef Co., 42 N.J. 126 stated that if reasonable minds could differ, the motion should be denied. Brill, 142 N.J. at 536.
It is the moving party’s obligation to meet the threshold burden on its own claims. And if it fails to meet that burden, its motion for summary judgment must be denied. It is not the duty of the non-moving party to fill in the gaps of a summary judgment motion where, as was done in the case described, the movant fails to accurately address counterclaims and fails to present its case and legal argument for why it is entitled to judgment as a matter of law. Where there is a genuine issue of a material fact, and it is properly joined by the pleadings, summary judgment is improper. Brill, 142 N.J. at 540.
The following will demonstrate the material factual disputes concerning key issues in the case described: whether (1) whether Mr. Smith validly exercised his right to cancel the 1st loan, and (2) whether the Bank originated and funded a mortgage loan without due consideration of Mr. Smith’s ability to repay and by falsifying documentation.
A Rescission Raises a Genuine Issue of Material Fact About the Amount Owed
If a creditor fails to furnish the notice of the consumer’s right to rescind in the clear, conspicuous, accurate manner prescribed by the TILA, the right to rescind remains unexpired until the expiration of three years, or the sale or transfer of the consumer’s ownership interest in the property, whichever occurs first. See, Reg. Z, 12 C.F.R. 226.23.(a)(3). See also, Beach v. Ocwen Federal Smith, 523 U.S. 410, 411 (1998). “[W]hen a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void and the consumer shall not be liable for any amount, including any finance charge.” Reg. Z. § 226.23(d)(1).
Under TILA, although a mortgagor’s right of rescission generally expires three years after the date of consummation of the transaction, a mortgagor’s right to rescind is extended if the lender improperly discloses rescission rights. Johnson v. Thomas, 342 Ill. App. 3d 382, 276 Ill. Dec. 669, 794 N.E.2d 919, 51 U.C.C. Rep. Serv. 2d 769 (1st Dist. 2003). A violation of the lender's duty under the TILA, accompanying regulations to disclose the right to rescind, and other disclosures, entitles the borrower to rescind the loan agreement for up to three years whether or not the violation was material. Truth in Lending Act, §125(f), 15 U.S.C.A. §1635(f); 12 C.F.R. §226.23(a)(3). Even mere technical violations provide a basis for liability under the TILA. Truth in Lending Act, §102 et seq., 15 U.S.C.A. §1601 et seq. See, In re McElvany, 98 B.R. 237, 240 (Smithr.W.D.Pa.1989). When a transaction is subject to rescission, the notice of the right to rescind to the consumer must identify the transaction and “clearly and conspicuously” disclose the consumer's right to rescind the transaction and the date the rescission period expires. 12 C.F.R. §226.23(b) (1995). It is well established that, as a remedial statute, the TILA should be liberally construed in favor of borrowers. See, Shepeard v. Quality Siding & Window Factory, 730 F.Supp. 1295, 1299 (D.Del.1990). The TILA requires disclosures to be properly made to begin the three-day rescission period. See, 15 U.S.C. §1635(a) (1994). In order for a rescission notice to comply with the TILA and Regulation Z, it must provide the date the rescission period expires. 12 C.F.R. §226.23(b)(1) (1995).
Issues of whether a lender made all required disclosures in connection with a mortgage refinance transaction and whether the borrower gave timely notice of rescission involves fact questions that can not be resolved on a motion to dismiss a TILA claim. Truth in Lending Act, §§ 125, 129(a), 15 U.S.C.A. §§ 1635, 1639(a); 12 C.F.R. §226.23(a)(3); Smith v. Argent Mortg. Co., LLC., 237 F.R.D. 436 (D.Colo. 2006).
Mr. Smith’s loan closed on April 13, 2007. The only Notice of Right to Cancel provided to Mr. Smith stated that his rescission rights expired on April 12, 2007. The inaccurate Notice extended the time-period for Mr. Smith to exercise his right to rescind, which he did on September 18, 2009 by way of a written demand to the Bank.
In Johnson, the lender argued that the consumer received the notice of right to cancel in the mail following the transaction; thus, the consumer’s right to rescind expired three days thereafter. Johnson, at 398. The court in Johnson noted that the notice the consumer allegedly received provided a rescission date that had already passed. Id. Thus, the consumer was not properly notified pursuant to TILA and Regulation Z. Id. Accordingly, the right to rescind was extended for a period of three years from the date of the consummation of the transaction. Id. The court held that because the mortgagor properly exercised her right to rescind under the TILA and Regulation Z, the creditor’s refusal to lift the lien on her home constituted an additional statutory violation. Id. at 400. See also, Mayfield v. Vanguard Sav. & Loan Ass’n, 710 F.Supp. at 145 (E.D.Pa.1989); Newton v. United Cos. Financial Corp., 24 F.Supp.2d 444, 445 (E.D.Pa.1998) (damages may be awarded both for the “failure to honor a valid rescission demand” and for the “creditor's failure to rescind voluntarily.”)
Mr. Smith’s loan was a consumer transaction that involved a non-purchase money mortgage secured by Mr. Smith’s primary residence. At all times relevant, the Bank was a creditor under the federal Truth-in-Lending Act, 15 U.S.C.A § 1601 et seq. (“TILA”) that was required to provide notices of the right to cancel the mortgage and deliver material disclosures to Mr. Smith. The undisputed evidence was that the Bank failed to comply with TILA by failing to provide Mr. Smith with proper and accurate written rescission notices as required by TILA.
In light of the violations, Mr. Smith was entitled to rescind the mortgage for an extended three-year period commencing from the date of the consummation of the transaction. Mr. Smith demanded that the subject mortgage loan be rescinded on April 9, 2007 with the closing agent and again with the lender later in the day, and again on September 18th, 2009. Mr. Smith also has a claim in the recoupment of statutory damages for the TILA violation. 15 U.S.C.A § 1640.
By virtue of the foregoing, the mortgage, Mr. Smith argued that the loan was rescinded, and the Bank’s alleged security interest in Mr. Smith’s home was void by operation of law. A valid rescission raises a genuine issue of material fact about an amount owed to the Bank. Accordingly, there was a factual dispute whether Mr. Smith was provided the three-day right to rescind as required by TILA; thus, precluding summary judgment.
A Mortgage Lender Cannot Simply Disregard Liability for the Errors Contained in a Borrower’s Loan Application
In the instant case, the Bank claimed it had no liability for the errors contained in the loan application. These errors include grossly overstating Mr. Smith’s income and account balances. The loan application falsely reflected that Mr. Smith earned $9,585 in monthly income as a contractor. Amongst the documents produced to obtain this loan were Mr. Smith’s social security award letters and tax returns. The Bank could clearly see that Mr. Smith did not earn in excess of $9,000 in income per month.
The application also incorrectly indicated Mr. Smith had a bank account with a credit union with a total balance of $15,000 and an account with Wells Fargo Bank with a balance of $38,500. Amongst the documents produced to obtain this loan were bank statements from Mr. Smith. None of the statements produced by Mr. Smith showed bank accounts with anywhere near the amount stated on the application.
The Bank claimed that Mr. Smith could not rely on the false information contained in the loan application because he signed it. However, Mr. Smith did not prepare the application. In fact, Mr. Smith testified that none of the documents submitted for the loan (including, bank statements, tax returns, social security award statements), did it show accounts in the denomination that appears on the loan application.
The Bank could not simply dismiss their liability for falsifying loan documentation by placing the blame on the borrower. As anyone that has obtained a mortgage loan knows, there are many documents that are slipped in front of a borrower to sign and no opportunity to review the documents before signing and moving to the next.
Don’t Be Bullied by the Bank
If you believe that you may be the victim of predatory lending, don’t sit on your rights. Each case lives or dies on provable facts. If there is sufficient evidence to show a factual dispute, summary judgment is impossible. Let the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP help you fight back against predatory lending and protect your most valuable asset.
[1] TILA at 15 U.S.C § 1635 provides for extended rescission rights of home equity loans loan in the event of violation of certain material provisions of TILA. A TILA rescission voids the mortgage, and eliminates all settlement charges and finance charges form the transaction. In addition, consumers can recover a $4,000.00 statutory damage award for any failure to honor a valid TILA rescission and $4,000.00 for the original material violation that resulted in the extended rescission rights. A statutory TILA rescission reverses the rescission process under common law. Under TILA the mortgage is void, the amount owed is substantially reduced, and only after such reduction is the consumer required to make her tender. “Some courts have invoked their equitable discretion to grant the consumer the opportunity to pay the Consumer’s Tender Obligation over an extended period of time, in effect, restructuring the mortgage to take into account the elimination of the finance charges as a result of the rescission of the transaction.” In re Stuart, 367 B.R. 541, 522 (Bkrtcy. E.D. Pa. 2007).
