If your mortgage lender acted deceptively, unethically, unfairly, or in a fraudulent manner when you took out your loan, it may have engaged in unfair lending practices and you may be able to successfully challenge a foreclosure action. Read on to learn more about fighting a foreclosure by showing that your lender engaged in illegal lending practices.
(If you are facing imminent foreclosure, visit our Foreclosure section for help.)
Understanding Unfair Lending Practices
The term “unfair lending practices” encompasses many different type of activities when it comes to loan origination and is frequently used to describe any fraudulent, abusive, discriminatory, or deceptive lending practice. For example, the following actions can constitute unfair lending practices:
- taking advantage of an unsophisticated borrower
- financing excessive points and fees (an excessive cost of credit), and
- engaging in unfair, fraudulent, or deceptive conduct at any time during the loan origination process.
Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA)
The main protections for consumers against unfair lending practices associated with residential mortgage loans are found in the Truth in Lending Act (TILA), as well as in an amendment to TILA called the Home Ownership and Equity Protection Act (HOEPA).
Under TILA, lenders must make certain disclosures about the cost of borrowing in the mortgage documents, including the annual percentage rate, the finance charge, the amount financed, the total payments, and the payment schedule. Lenders that don’t provide accurate disclosures are in violation of this law.
HOEPA prohibits the lender from including certain terms in a loan. Among other things, HOEPA does not permit balloon payments with some loans and prohibits the lender from requiring more than two payments to be paid in advance from the loan proceeds.
Remedies for Violations
Both TILA and HOEPA permit you to sue for money damages, including a refund of any financing costs you paid. In some cases you may be able to rescind (cancel) your mortgage. With a rescission, the lender must give back closing costs and finance charges, and you must return the present balance of the mortgage.
Rescinding the mortgage will stop a foreclosure, but this usually only works if you can arrange a refinance to return the remaining loan principal to the lender. In a robust real estate market this is not a problem, but with a property that is underwater (where the value of the home is less the amount owed), refinancing may not be possible and a court may require you to demonstrate that you can actually complete a valid tender before allowing the rescission.
(Learn more about TILA and HOEPA in Nolo’s article Should You Fight Your Foreclosure in Court?)
Common Types of Misconduct that Constitute Unfair Lending Practices
Creditor overreaching and predatory lending are two common types of misconduct that constitute unfair lending practices.
Creditor overreaching typically occurs in one (or both) of the following ways:
- the cost of a mortgage is substantially more than the benefit the borrower receives from the loan, and/or
- the terms and benefits of the mortgage were misrepresented (or important disclosures were not provided) to the borrower.
Both types of overreaching may be present in a single transaction. If so, this can quickly lead for a foreclosure since the loan is most likely unsuitable and unsustainable for the borrower.
Some examples of creditor overreaching include:
- making a loan in a different amount than the borrower requested with no explanation as to why the amount is different
- making a loan with a higher interest rate than the borrower was promised
- refinancing a loan that requires monthly escrow payments with a new loan that has the same monthly payment, but no escrow requirement
- extending credit to a financially distressed borrower with terms that make a default (and a subsequent foreclosure) more likely, and
- giving an adjustable rate loan to a borrower who is on a fixed income or has little income growth potential.
Creditors that engage in these types of acts may have violated TILA and also be subject to any number of other legal claims, including violations of state unfair and deceptive practices laws and fair lending laws.
Predatory lending is any type of unscrupulous lending practice where a lender takes advantage of a borrower. Low-income, elderly, or otherwise vulnerable people are often the target of this type of lending.
The following are a few examples of predatory lending:
- loan flipping (repeated refinances that generate loan fees, prepayment penalties, and other fees for the lender, but result in little or no economic benefit to the borrower)
- “packing” loans with expensive credit insurance products that have limited or no benefit to the borrower
- providing loan terms that make it more difficult or impossible for the borrower to reduce or repay the indebtedness (for example, negative amortization loans)
- marketing inappropriate or expensive products to borrowers who are elderly or have little education and who would have qualified for mainstream credit products and terms
- using balloon payments in a short-term transaction or to conceal the true burden of financing, and
- failing to disclose the true costs and risks associated with a loan.
A court will consider all of the circumstances of the transaction to determine whether the situation, taken as a whole, constitutes predatory lending. If a court determines that a loan was predatory, it could order the lender to modify the terms of the loan or cancel the debt, or take any other equitable action.
When to Hire an Attorney
Unfair lending practices often ultimately cause a borrower to default on mortgage payments, which in turn generally leads to a foreclosure. The unfair lending practices mentioned in this article represent just a few of the offenses that lenders have been known to commit. There are, of course, others. If you have been the victim of unfair lending practices and are facing foreclosure, you should speak to a qualified attorney who can advise you about what to do in your circumstances.
To learn more about different foreclosure defenses, see our Fighting Foreclosure in Court area.