If it’s clear that the foreclosing party failed to follow the law and that as a result, you were deprived of an important right, it may be worth it to go to court and contest the foreclosure. After all, if you could get the foreclosure lawsuit dismissed or significantly delayed, you may be able to stay in your house much longer than you would otherwise. And that, of course, could have significant financial and emotional benefits.
You’re on Active Duty in the Military
If you’re on active military duty, you have some special protections under the Servicemembers Civil Relief Act (SCRA). For example, you can postpone the foreclosure by making a request in writing. Also, if a foreclosure is completed against you while you’re on active duty, or one year thereafter, the sale is invalid unless a court approved it before the sale or you agreed to the foreclosure by waiving your rights. The waiver must be in writing and be executed while you are on active duty or afterwards. The right to a judicial foreclosure can’t be waived beforehand. (See our article on special protections for active duty service members for more detail on these rules.)
The Lender Didn’t Follow State Foreclosure Procedures or Mortgage Terms Governing Foreclosures
Because every foreclosure means that someone loses a home, many courts require the foreclosing party to strictly follow state law and respect the terms of the mortgage or deed of trust. If they don’t, you can call them on it.
But if the foreclosing party makes a trivial violation of the rules, the judge will probably let it go. Virtually all judges overlook errors that are inconsequential, such as the misspelling of a name. And the statutes of some states specifically provide that certain procedural errors (often failure to provide required notices) will not affect the right of the foreclosing party to obtain the foreclosure.
Similarly, if the foreclosing party’s error doesn’t actually cause you any harm, it’s probably not worth fighting over. Most courts will overlook a violation that is technical in nature and doesn’t deprive you of a fair procedure, on the principle of “no harm, no foul.” For example, say the lender failed to record the notice of default in the local land records office (a typical requirement) on time, but you got your required notice on time. The court might well decide that the failure to record didn’t harm you and allow the foreclosure to proceed.
More serious violations will get a more serious response from the court. For example, if the lender failed to send you a notice of default as required by state law, the lender might have to start over, because the lack of adequate notice deprived you of valuable time to resolve the problem. (You might have negotiated with the lender, gotten refinancing, or taken advantage of state rules permitting reinstatement or redemption of the mortgage.)
The Foreclosing Party Can’t Prove It Owns the Mortgage
In federal courts and some state courts, only the mortgage holder (the owner or someone acting on the owner’s behalf) may bring a foreclosure lawsuit.
If your mortgage, like many, has traveled across the world and been owned by many different entities, proving just who owns it can be difficult for the last holder in the chain of title. Because mortgages are frequently bought and sold electronically, the only proof of ownership is a chain of assignments from one owner to the next. These assignments might never have been put down on paper, but rather kept in computer databases. The original mortgage document that you signed is stored somewhere, but it can be difficult for a foreclosing party to actually come up with it, or even a copy of it.
Some attorneys representing homeowners have been successful in delaying or derailing foreclosures brought in federal court on the ground that ownership has not been satisfactorily established. The legal theory involves a concept called “standing”—that is, who has the right to bring a lawsuit in the federal court. To have standing to sue about a contract, you must have an ownership interest in the contract and have suffered some loss. In several recent cases in federal courts, the foreclosing parties were unable to establish these facts, and so the courts dismissed the foreclosure complaints.
Because these cases were decided in federal court, there is currently no good information on what type of proof of ownership would be acceptable in state courts, which frequently have different rules about standing to sue. For example, in Ohio and many other states, the Uniform Commercial Code (UCC) gives a long list of persons connected with a loan the right to sue to enforce its terms. In those states, it would be hard to get a foreclosure thrown out by arguing that the wrong party brought it.
These cases can be difficult to bring and argue, and you may not get very far if you try to do it yourself. On the other hand, some federal courts are friendlier to self-represented people than are state courts, and Nolo has an excellent book on representing yourself under the federal rules of civil procedure. See Represent Yourself in Court, by Paul Bergman and Sara Berman (Nolo).
The Mortgage Servicer Made a Serious Mistake
Mortgage servicers make mistakes all the time when they’re dealing with borrowers. A study done by law professor Katherine M. Porter showed that in 1,700 Chapter 13 bankruptcy cases, a majority of the claims submitted by mortgage owners had errors. (Misbehavior and Mistake in Bankruptcy Mortgage Claims, Texas Law Review 2008.) You may be able to fight your foreclosure based on this kind of mistake—for example, because the mortgage servicer imposed excessive fees or told you that you owed more than you really did.
What to Look For
Many errors occur when a lender or mortgage servicer tells you how much you must pay to reinstate or redeem your mortgage. Many states let you reinstate a mortgage within a certain period of time by getting current on your mortgage payments, including costs, attorneys’ fees, and interest. And even if a state doesn’t specifically provide a period in which you can reinstate the loan, the mortgage documents may themselves allow it. (See our Summary of State Foreclosure Laws.)
In either case, when you receive notice of an impending foreclosure and are told how much you would need to pay to reinstate the mortgage, the amounts must be reasonably accurate and must be justified by language in the mortgage documents. For example, your lender can’t require you to pay a fee for a monthly reappraisal or inspection of the property if the mortgage documents don’t provide for it, if you were current on your payments when the inspection was made, or if the overall number of inspections or the inspection fee itself is obviously unreasonable. You could properly contest the foreclosure on the ground that the notice you received deprived you of the right to reinstate your mortgage because of the excessive fees.
EXAMPLE: Henry receives a statutory notice of default that tells him he’ll have to make up three missed payments and pay costs of $2,000. The costs include $800 for a reappraisal of the property and $1,200 for six drive-by property inspections at $200 a pop. While he could make up the missed payments, he can’t afford the costs so he doesn’t reinstate the mortgage within the time allowed in the notice. The lender starts a foreclosure lawsuit.
A mortgage broker advises Henry that the reappraisal and inspection fees are a rip-off, so Henry contests the foreclosure on the basis that the notice of default was faulty. The court agrees and delays the foreclosure for a month to give Henry time to reinstate the mortgage without paying the inflated fees. If Henry doesn’t reinstate on time, the foreclosure will go forward.
Determining whether or not your mortgage agreement allows a particular cost or procedure requires careful reading of the document. The fact is, mortgages are often almost undecipherable—you need an expert to make sense of them. The biggest area of contention is the amount the lender charges the homeowner for attorney fees paid by the lender for work on the default notice and foreclosure documents. As a general rule, such charges must be reasonable.
If the mortgage has been bought by Freddie Mac, Fannie Mae, or the FHA, there are limits on what attorneys can charge for services related to mortgage defaults or foreclosures. Limits also apply to fees charged by mortgage servicers. If the fees exceed these limits, and reinstatement of the mortgage is conditioned on payment of the fees, the result depends on the kind of foreclosure proceeding:
- In a judicial foreclosure, the judge could dismiss the foreclosure proceedings and either reinstate the mortgage or require the lender to start over. Or, in some states, the judge could delay the foreclosure, giving you more time to reinstate.
- In a nonjudicial foreclosure, a violation of attorney fee limits may be the basis for you to ask the court for an order (injunction) halting the foreclosure proceedings.
In addition to errant attorney fees, the most common errors that may have been made by your mortgage servicer—and that may lead a court to stop a foreclosure—are:
- misapplying your mortgage payments to the wrong account
- buying insurance on the property and billing you for it even though you already carried (and were current on) the insurance required by your mortgage agreement
- failing to pay your property tax, resulting in your owing fines to the government, even though you were paying into an escrow account and the servicer was responsible for paying the taxes
- charging you late fees and property inspection fees even though you were current on your mortgage payments, and
- engaging in coercive collection practices and falsely claiming that certain amounts are due.
How to Get Information About Errors
The more information you can wrest from your mortgage servicer, the better. A federal law called the Real Estate Settlement Procedures Act (RESPA) provides a way for you to challenge common kinds of errors such as improper charges, improper calculation of interest, or the failure to credit payments properly. It also gives you a way to get the information you need to make such a challenge.
Your first step is to send the servicer what’s known under RESPA as a qualified written request identifying the borrower and the account and the information you’re after. (View the Sample Qualified Written Request in PDF format.)
Within 20 business days of receiving the qualified written request, the servicer must provide you with written acknowledgement that your request was received.
Within 60 business days, the servicer must provide the information you requested or explain why it is not available, plus give you the name and contact information of someone you can follow up with.
While this process is going on, the servicer cannot report to a credit bureau as overdue any payment relating to your qualified written request. However, foreclosure proceedings may continue (if you are requesting this information after the foreclosure has begun).
If the servicer you are requesting information from has transferred your account to another servicer, your qualified written request must be sent no later than a year after the transfer.
If the servicer fails to comply with the act, you can sue and ask for statutory damages of $1,000, reimbursement for your attorneys’ fees, and compensation for your other losses. However, none of these remedies will help you stop the foreclosure. On the other hand, knowing that these remedies exist may help prod the servicer into giving you the information you’ve asked for.
The Lender Engaged in Unfair Lending Practices
You may be able to fight your foreclosure by proving one or more violations of federal or state laws designed to protect you against illegal lending practices.
Two federal laws protect against unfair lending practices associated with residential mortgages and loans: the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA). Both allow you to sue for money damages, including a refund of any financing costs you paid. Both of them also let you cancel your mortgage under some circumstances. Canceling the mortgage would usually work to defeat the foreclosure, if you could arrange for a refinance to return the remaining loan principal to the lender.
As powerful as these statutes may sound, most lenders are aware of them and either comply with their requirements or structure their loans so that they don’t apply. Still, your case may be the exception.
The Right to Rescind the Loan
For the purpose of fighting a foreclosure, the most important provision of these laws is that you may, for some types of loans and some types of violations, be able to retroactively cancel or rescind your loan. This is referred to as the right to an extended rescission.
Both laws require a lender to give you a three-day rescission period when you take out the loan. But your right to rescind is extended for three years if it later comes to light that the lender violated an important part of the law. Even better, the three-year period is itself extended in the event of a foreclosure. So, if one or both of these laws cover the mortgage being foreclosed on, and you can show a material violation of these laws, you can cancel the loan and by doing that defeat the foreclosure. But those are a couple of big “ifs.” Let’s take them one at a time.
What Loans Are Covered?
The right to extended rescission applies only if you did not use the mortgage loan to buy or build your primary residence. So a first mortgage, which you used to buy your house, is not covered. But a home equity loan, equity line of credit, or refinancing loan would be covered. (The law is aimed at predatory lenders who use loans to skim the equity from borrowers’ homes, particularly older, minority, and low-income homeowners.)
But lenders of second or third mortgages rarely foreclose—so the right to rescind is unlikely to help you with foreclosure. It might, however, help you if you refinanced your first mortgage and the holder of the new mortgage is foreclosing.
HOEPA applies only to (1) loans that are closed-end consumer credit—that is, loans that are repayable under specific repayment terms over a specified term, and (2) loans that fall into at least one of the following two categories:
- The loan is a high-cost mortgage that has an annual percentage rate (APR) that is at least 10% above the rate for U.S. Treasury securities of a comparable term. For example, if the yield on a 15-year Treasury bond is 6%, an APR of 16% on a 15-year loan will qualify. For first-mortgage loans made after October 1, 2002, the loan’s APR must be at least 8% above the Treasury rate. The APR trigger for junior liens remains at 10%.
- The loan has up-front fees and charges (including broker fees and, as of October 1, 2002, premiums and other charges for credit insurance) that are at least 8% of the loan amount or $400 (an amount that changes annually with the Consumer Price Index), whichever is greater.
What Is a Material Violation of TILA and HOEPA?
To be able to rescind your loan, you must also show that the lender materially violated the law—in plain English, that it violated a significant provision of the law.
Material violations of TILA. Lenders violate this law when they don’t make the disclosures it requires, including the annual percentage rate, the finance charge, the amount financed, the total payments, the payment schedule, and more. Typically, these terms are found in a document called a Truth in Lending Disclosure Statement. The numbers on this disclosure statement must be accurate to within very narrow tolerances. Depending on the type of loan, the disclosed annual percentage rate (APR) must be within one-eighth of one percentage point of the actual APR. The total finance charge cannot be understated by more than $100 in most cases and by not more than $35 if the creditor has started foreclosure proceedings.
Material violations of HOEPA. The violations must be something that deprived you of the benefits of HOEPA. A lender that makes a HOEPA loan must comply with various notice provisions. The lender is also prohibited from including certain mortgage terms, such as balloon payments in loans with terms of less than five years and negative amortization requiring more than two payments to be paid in advance from the loan proceeds.
Who Can Be Held Responsible for TILA and HOEPA Violations?
TILA and HOEPA apply not only to the original lender or mortgage originator, but also to any person or entity who became an owner through an assignment. In other words, downstream mortgage holders are held accountable for the sins of the original lenders. Downstream mortgage holders can escape liability only if they can demonstrate that a reasonable person exercising ordinary due diligence could not have determined that the loan was covered by TILA or HOEPA.
How to Rescind a Loan
To rescind a loan, you must give the lender (not the mortgage servicer) a written notice of rescission. If the rescission is successful, the lender must return everything you paid except for payments of loan principal, and you must return the portion of the loan principal that has not yet been repaid. In other words, when you rescind a loan, you can get out from under the loan (and the foreclosure), but you can’t keep the loan proceeds. You’ll need to refinance to repay the principal.
More information on TILA and HOEPA. Any attorney you hire to fight your foreclosure should be intimately familiar with TILA and HOEPA and know how those laws may help you in fighting your foreclosure. If you are representing yourself, I recommend that you buy a copy of Foreclosures, by John Rao, Odette Williamson, Tara Twomey, Geoff Walsh, Andrew G. Pizor, Diane E. Thompson, Margot Saunders, and John W. Van Alst, published by the National Consumer Law Center (http://www.nclc.org/).
You Have a High-Cost Mortgage
A number of states have special protections for people facing foreclosure on high-cost mortgages.
If your state has a high-cost mortgage statute, and the lender has violated any of its provisions, you might be able to raise that violation as a defense in your foreclosure case. If your state has a high-cost mortgage statute, there’s a brief summary on your state’s page in our Summary of State Foreclosure Laws, including any provisions that might help you fight your foreclosure.