It helps, if you want to win a case, to know the definitions of the terms you are going to use. A wise man once said, he who defines the terms controls the conversation. Well, to better understand what a loan violation is, you have to understand the case law behind lender practices and know what is permissible. But even then, just knowing the law isn’t enough. You also have to search out the documents that law pertains to.
A forensic loan audit is the only sure way to know where loan violations are within a mortgage document. Most of the violations that occur in a loan will be in the closing documents. That means you need three things:
- The borrower’s copies of mortgage documents
- A list of all applicable laws and associated penalties
- A loan auditor to review the documents and analyze them to identify the violations
A professional loan auditor will perform a comprehensive document review and outline all the problem areas in the loan. If there are any loan violations then the forensic loan audit will uncover them. A reputable loan auditor will refund your money if no violations are found. You can’t beat that.
If you are a loan modification attorney it can get frustrating approaching a lender to request a mod on behalf of a client and being turned down. Worse yet, getting turned down and with no good reason offered. You have to go back to your client and deliver the bad news.
However, 83% of US loans are frought with lender violations of one applicable law or another. TILA, RESPA, HOEPA, a state law, ECOA, or one of over 80 laws that can be violated. Many of these violations provide your client with a right to rescission of their loan. Instead of facing foreclosure, your client could instead turn the tide of negotiation in their favor. And you’ll be hero.
It all begins with a loan audit. That’s where you can see if there are any violations of your client’s loan. Your loan auditor will provide you with a comprehensive report, detailing missing documents or other violations of your client’s loan and an analysis of what it may mean to your client financially and legally. Click the link to view a sample loan audit.
Your loan auditor can provide a comprehensive report and help you identify areas that are key negotiating points in the loan modification process. Get more information on the loan auditing process.
The Home Mortgage Disclosure Act, or HMDA, is a piece of legislation passed in 1975 that requires lenders to report public loan data. The public data is used to ensure that lending institutions are meeting the requirements of the law and meeting the needs of their housing communities.
The Federal Financial Institutions Examination Council (FFIEC) compiles the data from reporting institutions and that data is used to determine trends in lending. Tables are created for each Metropolitan Statistical Area. You can find this data on the FFIEC website.
As an example, the FFIEC website offers a table showing reasons for refinance denials. While this information doesn’t show specifics regarding individual cases, it could shed some light on general trends regarding lending habits and that could help you in your negotiations with specific lenders or in cases of litigation where lender violations are an issue.
The FFIEC website is a great place for additional research in pursuing the rights of homeowners.
A forensic loan audit has the potential to disclose a variety of lender violations. There are about 80 different laws - federal, state, and local - that lenders must comply with when underwriting a mortgage loan. If they violate any one of those laws the lender faces a penalty, fine, or forced reimbursement of interest and principle. It could be costly for the lender.
Because the risk is so high for the lender and relatively low for the borrower, getting a forensic loan audit is one of the important things to do when seeking a loan modification. In fact, many lenders may turn you down for a loan modification request if there is no compelling reason to provide one. If you can show them that they’ve violated a law in their underwriting of a loan then that could be enough to get them to the negotiating table.
Once you get the lender to the negotiating them you’ve then got to convince them to give you terms that are favorable to you. Let your attorney do the negotiating. They often have more pull and can point out legal details that the lender’s attorney will hope you’ll miss.
At the end of the day, the goal is to keep your home and make it affordable for you to do so. A forensic loan audit can be an essential tool.
The ECOA - Equal Credit Opportunity Act - forbids lenders from considering race, color, religion, national origin, sex, marital status, or age when a person applies for a loan. They can’t even consider whether or not you receive public assistance. This offers greater opportunities for women who wish to take out a loan for purchasing real estate.
Married women often find themselves in situations where they do not have credit because major purchases are made in their husband’s name. While your creditworthiness may be considered for a loan, the fact that you are a woman without credit history may not.
Single women often have other issues related to credit, but unless there is a real compelling reason to deny you a loan based on your creditworthiness, the fact that you are a single woman cannot be used against you either. Nor can your marital status or gender be used to increase the terms of you credit. A loan audit can reveal such instances if they exist in your loan and can save you from foreclosure if there is evidence of such dealing with your lender. Consult an attorney before you do anything else and request a loan audit.
Two states that have laws against prepayment penalties are Texas and Vermont. These are good laws considering that many homeowners who default on their loans do so as a result running into financial trouble and losing their home because they could not pay off their loan early when they had the chance. Prepayment penalties discourage homeowners from making sound financial decisions that can affect their future and long-term financial security.
The biggest problem with prepayment penalties are that many of them are nondisclosed. That is, the mortgage company doesn’t tell the borrower about the penalty during the document preparation process. As a result, many homeowners find themselves paying huge penalties when they sell their homes and that may cause them financial hardship to such a degree that they can’t afford another home.
If you find yourself trying to sell your home and have been notified of a prepayment penalty, request a forensic loan audit. If the mortgage company has violated any federal law it may be in their best interest to waive your prepayment penalty or modify your loan to lessen or do away with it altogether.
If I were a banker and I told you that I was going to fix a violation so that you don’t have to worry about it, would you let me? The law is quite clear on this point. A lender cannot fix a violation in retrospect. And if you don’t believe me then at least take the word of a banker:
You can’t fix this type of violation. You have closed the loan and advanced the money so the best option is to document the error, train the loan officer(s) and move on. Do not rewrite the loan because the customer has the right to rescind this loan because of the HOEPA violation. If you rewrite the loan, you are only trying to take away their rights. Courts have shown this is not acceptable and you can’t take away someone’s rights.
This applies to HOEPA violations as well as RESPA and TILA violations. A bank or lending institution cannot fix a violation or rewrite the loan. You have a right to rescission under federal law and if the bank rewrites the loan without your knowledge or permission they are taking away your rights. If that happens to you then we recommend finding an attorney who specializes in real estate and mortgage law. They’ll be able to help you identify lender violations and other red flags.
RESPA, or Real Estate Settlement Procedures Act, was passed in 1974 and requires that lenders provide borrowers with certain disclosures prior to closing, at closing, and after closing.
Disclosures required at the time of loan application include:
- The special information booklet
- A Good Faith Estimate
- Mortgage Servicing Disclosure Statement
These three documents are required at the time of the loan application or within three days of receiving the loan application unless the borrower is turned down for the loan.
Disclosures required before closing:
- A Controlled Business Arrangement is required when a borrower’s loan servicing company refers the borrower to a service provider with whom the lender has a beneficial relationship through ownership or other interest
- HUD-1 Settlement Statement
Disclosures required at the time of settlement (closing):
- HUD-1 Settlement Statement - RESPA entitles the borrower an opportunity to see the HUD-1 Settlement Statement one day prior to closing, but the borrower should receive it in the closing documents as well.
- Initial Escrow Statement - Shows the borrower an itemized list of estimated taxes, insurance premiums, and other charges to be paid from the escrow account within the first 12 months of the loan.
Disclosures required after closing:
- Annual Escrow Statement - As the name states, required yearly
- Servicing Transfer Statement - Required if your loan is sold
While RESPA does not prescribe penalties for failure to provide all of these disclosures, some of them do lend themselves to heavy penalties to the lender and in some cases the borrower could receive a refund on some parts of the loan or interest.
Learn more about RESPA and other lender violations.
How long does it take to get a loan modification? Right now, because there is such a huge demand for loan mods, it could take a little while. In actuality, it only takes one day for the loan modification to happen, but prior to signing the contract, other things have to take place.
From the time that you request a loan modification from your bank to the day the loan mod actually happens could be 5-7 business days. That’s because the bank must approve you as if approving you for a first time loan and process the paperwork. They are also working other loan modifications during the same time.
Prior to requesting it from the bank, you should have forensic loan audit or document review done. That will another 5-7 business days. If you have a homeowner-client who is very distressed financially then they need to understand that it’s not an overnight solution. If the homeowner is caught up in the foreclosure process while pursuing a loan modification then the bank could come from the keys before the process is completed. That’s why you should contact the bank prior to initiation of the loan modification process (after you receive your loan audit) and inform them of your decision to pursue the loan modification. It is often wise to halt the foreclosure process before seeking the loan modification. Let the audit be your leverage.
While it generally true that a holder in due course is not liable for claims made against the seller of a property, there are times when a holder in due course could be liable. If an assignee to a mortgage takes control over the loan when there is a clear violation of the contract under applicable law then that assignee could be liable. Here’s a situation that could lead to a rescission just as if the originator of the loan were still servicing the loan.
Mortgage Company A underwrites a loan for $250,000 to a borrower in January 2008. In August 2009, Mortgage Company A sells the loan to Mortgage Company B. In September 2009 the homeowner loses his job. Mortgage Company B attempts to collect payments for 90 days then begins the foreclosure process. In February 2009, the homeowner discovers a TILA violation after conducting a forensic loan audit. Mortgage Company A failed to provide the necessary disclosures to the homeowner. Is Mortgage Company B now liable and can the homeowner seek a loan modification based on this situation?
The answer, clearly, is “yes.”
We are not attempting to provide legal advice here, but the question is a matter of whether or not Mortgage Company B should have known about the violation prior to purchasing the loan. Since recognition missing required documents is something that a simple review would have uncovered, it can be argued that Mortgage Company B did not do its due diligence. As a holder in due course on the mortgage documents in question, Mortgage Company B could be liable and the homeowner may be able to request a loan modification.