Challenging Unfair Lending Practices in a Foreclosure

Learn about common unfair mortgage lending practices, and find out if you can get money or stop a foreclosure as a result of such practices.

By , Attorney · University of Denver Sturm College of Law

The term "unfair lending practices" encompasses many different types of activities when it comes to loan origination. This term 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.

If your mortgage lender acted deceptively, unethically, unfairly, or in a fraudulent manner when you took out your loan, it might have engaged in unfair lending practices and you might be able to successfully challenge a foreclosure action.

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), and in an amendment to TILA called the "Home Ownership and Equity Protection Act" (HOEPA).

TILA Violations

Under TILA, lenders must make certain disclosures about the cost of borrowing in the loan 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 Violations

For certain loans, HOEPA prohibits late fees greater than 4% of the past due payment and balloon payments are generally prohibited except under limited circumstances, among other things.

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 might 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 tactic usually only works if you can arrange a refinance to return the remaining loan principal to the lender. A court might require you to demonstrate that you can actually complete a valid tender before allowing the rescission.

What Types of Misconduct Constitute Unfair Lending Practices?

Creditor overreaching and predatory lending are two common types of misconduct that constitute unfair lending practices.

Creditor Overreaching

"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, or
  • the terms and benefits of the mortgage were misrepresented (or important disclosures weren't provided) to the borrower.

Both types of overreaching may be present in a single transaction. If so, a foreclosure might happen because 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 might have violated TILA and could 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

"Predatory lending" is any type of unscrupulous lending practice where a lender takes advantage of a borrower. Low-income, older, 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 older 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 might 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've been the victim of unfair lending practices and are facing foreclosure, you should speak to a qualified attorney who can advise you if you have a defense to a foreclosure and tell you what to do in your circumstances.

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