U. S. SUPREME COURT  

• A new motion to dismiss standard was announced by the United States Supreme Court.
• Bell Atlantic Corporation v. Twombly, 127 S.Ct. 1955, May 21, 2007
• Twombly abrogates Conley v. Gibson 355 U.S. 78 S.Ct. 99, 2 L.Ed.2d 80
• Old standard was “complaint could not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can proof no set of facts in support of his claim which would entitle him to relief.” 
  

New Motion to Dismiss Standard 

• The new standard announced in Twombly was a little difficult to discern from the opinion itself.
• The Eleventh Circuit Court of Appeals in Watts v. Florida International University, 495 F.3d 1289 (August 17th 2007) said:
• “A formulaic recitation of the elements of a cause of action will not do,”
• “‘Stating such a claim requires a complaint with enough factual matter (taken as truth) to suggest’ the required element,” and
• “It is sufficient if [the] complaint succeeds in ‘identifying facts that are suggestive enough to render the [the element] plausible.’”

Safeco Insurance Company of America v. Charles Burr 127 S.Ct. 2201 June 4, 2007  

• Issue: Under the Fair Credit Reporting Act what is the standard for “willfulness” under 15 U.S.C. 1681n.
• Held: The Fair Credit Reporting Act requires notice to any consumer subjected to “adverse action … based in whole or in part on any information contained in a consumer [credit] report.” 15 U. S. C. §1681m(a).
• Anyone who “willfully fails” to provide notice is civilly liable to the consumer. §1681n(a).
• We hold that [a] reckless action is covered.
• This adopts what most of the Circuits were saying and means “willful” under the FCRA can be a reckless violation as opposed to a knowing violation.  
  

 

• Rosario v. American Corrective Counseling Services, Inc. -- F.3d ----, 2007 WL 3197534, C.A.11, November 01, 2007 (NO. 06-16507)
• A debt collector, American Corrective, contracted with a Florida district attorney’s office for the collection of bad checks.
• Plaintiffs received notices and letters sent by American Corrective on stationery of the State Attorney’s Office seeking payment of the amount of the check plus fees of $125.00 including $75.00 for participation in an eight hour educational class.
• The letters also stated that failure to participate in the program could result in a criminal prosecution by the State of Florida.
• Plaintiffs sued alleged that American Corrective violated various provisions of the FDCPA in particular violations of 15 USC §§ 1692d, 1692e, 1692e(2)(a), 1692e(4). 

Rosario v. American Corrective Counseling Services 
 

• That is: 1692d-Harrisment, 1682e-False or misleading representations, 1692e(2)(a)-of the character, amount, or legal status of any debt, 1692e(4)-
• Both the plaintiffs and defendants moved for summary judgment.
• The defendants claimed11th Amendment immunity saying that they were an agent or instrumentality of the State of Florida.
• The District Court granted summary judgment for American Corrective and plaintiffs appealed.
• The 11th Circuit Court reversed holding that American Corrective as a private, for-profit company and was not entitled to 11th Amendment immunity and was therefore subject to the FDCPA

Evory v. RJM Acquisitions Funding, LLC, Seventh Circuit (Ill.), October 23, 2007  

• Under a novel theory several consumers brought separate actions against RJM Acquisitions and others alleging violations of the Fair Debt Collection Practices Act contained to letters to their attorney.
• The District Court granted debt collectors’ motions to dismiss.
• Held: Written notice sent a consumer's lawyer must comply with FDCPA requirements;
• FDCPA prohibitions against false representations and abusive, deceptive or unconscionable acts apply to representations and statements made to consumer's lawyer;
• Although the “competent lawyer” standard governs as to most FDCPA violations committed against consumer's lawyer; the normal “unsophisticated consumer” standard governs as to any false representations and statements made the consumer’s lawyer. 

Pescatrice v. Robert J. Orovitz, P.A. Slip Opinion, 2007 S.D.Fla., October 17, 2007  

• Pescatrice filed suit against Orovitz for violations of the Fair Debt Collection Practices Act alleging violations of 15 U.S.C. §§ 1692d, 1692e, and 1692f;
• The claim was that Orovitz violated these sections by suing her in state court on a time-barred claim and by serving her with a proposed “Stipulation for Entry of Final Judgment Execution Withheld.”
• Orovitz moved to dismiss for failure to state a claim.
• The court denied Orovitz’s motion applying the Twombly standard mentioned above.  
  

Pescatrice v. Orovitz 

• Held: [P]ursuant to Twombly, to survive a motion to dismiss, a complaint must now contain factual allegations which are “enough to raise a right to relief above the speculative level,”
• As under Conley, a complaint must be liberally construed, assuming the facts alleged therein as true and drawing all reasonable inferences from those facts in the plaintiff's favor;
• “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds' of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.”
• Rather, the facts set forth in the complaint must be sufficient to “nudge the [plaintiffs’] claims across the line from conceivable to plausible.”

 

REAL ESTATE SETTLEMENT PROCEDURES ACT 

• Cohen v. JP Morgan Chase and Company, 498 Fed. 3rd, 111 2nd Circuit 2007, a consumer brought an action against JP Morgan Chase alleging that Chase had violated the Real Estate Settlement Procedures Act (RESPA) by charging a “post closing fee” in connection with the refinancing of his home mortgage. The district court had dismissed the action and Cohen appealed.
• The Second Circuit held that Section 8(b) of RESPA, which prohibits the charging of any portion, split or percentage of any fee, in connection with a federally related mortgage loan for services not actually performed, was ambiguous with respect to Congressional intent and therefore an interpretation by the Department of the Housing and Urban Development (HUD) of that RESPA provision was entitled to Chevron[1] deference. The guidance given deference by the court was the 2001 Policy Statement promulgated by HUD.
•  
  [1] See Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) This was a case in which the United States Supreme Court set forth the legal analysis for determining whether to grant deference to a government agency's interpretation of its own statutory mandate. 
  

• In a case with a long history, Culpepper v. Irwin Mortgage, 491 Fed. 3rd, 1260 11th Circuit Court also applied the 2001 HUD statement. Plaintiff borrowers had brought a class action against Irwin Mortgage Corporation alleging that its payment of yield spread premiums to mortgage brokers in exchange for delivering interest rates “above par” violated the Real Estate Settlement Procedures Act (RESPA). The District Court for the Northern District of Alabama granted summary judgment and the borrowers appealed. This case has a long over ten year history and this was the fourth time that the 11th Circuit Court of Appeals had reviewed it.
• In this latest opinion the circuit finally put the case to rest by affirming the granting of summary judgment and decertification of a class action by the district court. The interesting thing about the case was that the appeals court again gave Chevron deference to the HUD 2001 Policy Statement. 
  

CREDIT REPAIR ORGANIZATIONS ACT  

• Zimmerman v. Cambridge Credit Counseling Corporation, 409 Fed. 3rd, 473 1st Circuit 2005, the court held that just because the Internal Revenue Service classifies a credit counselor as a tax exempt entity this does not necessarily mean that it can enjoy the Credit Repair Organizations Act’s exemption for tax exempt non-profits. Zimmerman filed a class action against Cambridge alleging violations of CROA and the district court, finding that Cambridge was exempt dismissed the case. Zimmerman appealed to the 1st Circuit which stated to be excluded from the Credit Repairs Organizations Act under 15 U.S.C. § 1679A(3)(B)(i), a credit repair organization must actually operate as a non-profit organization and be exempt from taxation under § 501(c)(3). 
  

CONSUMER ARBITRATION  

• In a refreshing opinion from the Eleventh Circuit Dale v. Comcast Corp. 498 F.3d 1216 C.A.11 2007 September 04, 2007, the court held that a class action waiver found in Comcast’s service agreement was substantively unconscionable. In doing so the court stated:
• In a recent case, Kristian v. Comcast Corp., 446 F.3d 25 (1st Cir.2006), the First Circuit addressed the enforceability of arbitration agreements invoked by Comcast against a group of Boston subscribers suing Comcast for violations of state and federal antitrust law. Id. at 29. The Boston subscribers argued the arbitration agreement prevented them from vindicating their statutory rights by, among other things, prohibiting the use of the class mechanism. Id. at 37. In deciding whether the class action waiver was valid, the First Circuit first noted that “the legitimacy of the arbitral forum rests on the presumption that arbitration provides a fair and adequate mechanism for enforcing statutory rights.” Id. at 54 (internal quotation omitted). Relying on unopposed expert evidence presented by the plaintiffs, the court found that the bar on class arbitration threatens this presumption given the “complexity of an antitrust case generally, and the complexity and cost required to prosecute a case against Comcast specifically.” Id. at 58. “[W]ithout some form of class mechanism-be it class action or class arbitration-a consumer antitrust plaintiff will not sue at all.” Id. at 58. Accordingly, the court struck down the class arbitration waiver, concluding that “Comcast [would] be essentially shielded *1224 from private consumer antitrust enforcement liability, even in cases where it has violated the law.” Id. at 61.“Plaintiffs [would] be unable to vindicate their statutory rights [and] the social goals of federal and state antitrust laws [would] be frustrated because of the ‘enforcement gap’ created by the de facto liability shield.” Id. at 61.
• We thus conclude that the enforceability of a particular class action waiver in an arbitration agreement must be determined on a case-by-case basis, considering the totality of the facts and circumstances. Relevant circumstances may include, but are not limited to, the fairness of the provisions, the cost to an individual plaintiff of vindicating the claim when compared to the plaintiff's potential recovery, the ability to recover attorneys’ fees and other costs and thus obtain legal representation to prosecute the underlying claim, the practical affect (sic) the waiver will have on a company's ability to engage in unchecked market behavior, and related public policy concerns. 
  

TRUTH IN LENDING ACT  

• Hamm v. Ameriquest Mortgage Company 7th Cir. October 17, 2007
• This is an interesting case regarding grounds for rescission of a mortgage loan under the Truth-in-Lending Act (TILA).
• It is a good example of creative thinking.
• Plaintiffs Hamm and Jones filed cases seeking rescission alleging that their TILA disclosures were defective because they did not explicitly state their payment period.
• In Hamm District Court granted Ameriquest’s motion for Summary Judgment.
• Another District granted the Motion for Summary Judgment of Jones.
• The two cases were consolidated for appeal.

 

Hamm v. Ameriquest 

• One of the disclosure requirements for “closed end transactions” is “the number, amount, and due dates or period of payments scheduled to repay the total of payments.” 15 U.S.C. 1683(a)(6).
• TILA rescission rights are found at 15 U.S.C. § 1635(a) and 12 CFR § 226.15.
• “[T]he obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction
• or the delivery of the information and rescission forms required under this section together with a statement containing the material disclosures required under this subchapter, whichever is later[.]” 

Hamm v. Ameriquest 

• “delivery of the information [] required under this section”
• The Hamm court said:
• “TILA imposes an explicit requirement that a lender include “[t]he number, amount, and
• due dates or period of payments scheduled to repay the total of payments,” in its Disclosure Statement to the borrower. 15 U.S.C. § 1638(a)(6) (emphasis added); see also 12 C.F.R. § 226.18(g)(1) 
  

Hamm v. Ameriquest 

• Held:“TILA imposes an explicit requirement that the lender include ‘the number amount of due dates or period of payments scheduled to repay the total of payments,’ in the disclosure statement to the borrower, 15 U.S.C. § 1638 at 86 see also 12 C.F.R § 226.18(g)(1).” To make this requirement creditors must list all payment due dates. They also had the option of specifying the “period of payments” scheduled to repay the obligation.

Truth-in-Lending Act Rescission and Class Actions A Brief History  

• Courts began struggling with the question of whether class action rescission claims were allowable under the Truth in Lending Act within a decade after the TILA was enacted in 1968 by Congress. As early as 1978, the U.S. District Court, Eastern District of Louisiana in Nelson v. United Credit Plans, Inc., 77 F.R.D. 54 (E.D. La. 1978), questioned whether or not rescission class actions were maintainable under 15 U.S.C. § 1635. saying, “Class actions are not discouraged under the Truth in Lending Act any more than they are in any other context, but Congress has not evidenced an intent that class treatment is appropriate in actions seeking remedy of rescission under the Act.”
• Recently in In re Ameriquest Mortg. Co. Mortg. Lending Practices Litigation, No. 05-CV-7097 (N.D.Ill., 04/23/07). The U.S. District Court, Northern District of Illinois, refused to dismiss class allegations in a suit seeking a declaration that certain class members were entitled to rescind their loans.
• Two years later the Fifth Circuit, in James vs. Home Construction of Mobile, Inc., 621 F.2d. 727, found that TILA rescission was not suitable for class treatment.
• Paradoxically a class was certified in the same Circuit was later where some class members could choose rescission as an option to other remedies. Tower v. Moss, 625 F.2d 1161 (5th Cir. 1980).
• Elliott vs. ITT, Corp., 150 F.R.D. 569 (N.D.Ill.,1992) class certification was denied but the Court stated, “Had plaintiff sought only an order directing ITT to correct specific deficiencies in its written disclosures, the court might readily find that certification is appropriate.”  
  

• A Court from the Southern District of Ohio in Mayo v. Sears, Roebuck & Co., 148 F.R.D. 576 (1993) the court denied certification saying, “the grant of attorney's fees for individual actions brought pursuant to section 1635 is somewhat inconsistent with the Rule 23(b)(3)… Accordingly, the Court denies class certification to Plaintiffs' claim for rescission pursuant to 15 U.S.C. § 1635.”
• In Hickey v. Great W. Mortgage Corp. ., 158 F.R.D. 603 (N.D.Ill.1994), the Court granted a motion to certify a class seeking damages and a declaration that the class had a right to rescind its transactions under TILA.
• A rescission class was certified in Mount vs. LaSalle Bank, 1994 WL 731006, Northern District of Illinois, (April 28, 1994). Again, the plaintiffs were seeking a declaration that certain loans were rescindable.
• In Jefferson vs. Security Pacific Financial Services, 161 F.R.D. 63 and 162, F.R.D. 123, Northern District of Illinois (1995), it was stated that rescission was an individual remedy.
• A rescission class was certified by a District Court in the Eastern District of Pennsylvania in Williams vs. Empire Funding Corp., 183 F.R.D. 428 (E.D.Pa.,1998). “Plaintiffs only seek a declaration that the notices of rescission in the sales and financing contracts violate TILA, and thus that each member of the class is entitled to seek rescission.
• Class certification was denied in Gibbons vs. Interbank Funding Group, 208 F.R.D. 278, Northern District of California (2002). The court found that common issues did not predominate.
• In MacIntosh vs. Union Bank and Trust, 215 F.R.D., 26 District of Massachusetts (2003) a District Court allowed a rescission class of HOEPA borrowers to proceed saying, “This Court agrees with this latter line of cases holding permissible class actions seeking rescission.

• A class was certified in Latham vs. Residential Loan Centers, 2004 W.L. 109335 Northern District of Illinois (2004) “we agree with the latter line of cases holding that a class claim under TILA seeking a declaration of the right to rescind can be maintained[.]”
• “[T]here is nothing in the language of TILA which precludes the use of the class action mechanisms provided by Rule 23 to obtain a judicial declaration whether an infirmity in the documents, common to all members of the class, entitles each member of the class individually to seek rescission,” according to the court in Rodrigues v. Members Mortgage Co., Inc., 226 F.R.D. 147, 153 (D.Mass.2005)
• First Circuit released its opinion in McKenna, et al. v. First Horizon Home Loan Corp., 475 F.3d 418 January 29, 2007. In finding that class claims for rescission were not certifiable as class actions the court stated, “We ground this holding primarily on our conclusion that Congress did not intend rescission suits to receive class-action treatment.”
• Finally a rescission class was certified in Andrews v. Chevy Chase Bank, FSB 2007 WL 112568 E.D. Wis., 2007. Making a public policy statement the Andrews court said, “Second, assuming a TILA plaintiff can satisfy the requirements of Fed.R.Civ.P. 23, public policy strongly favors allowing class actions in cases like the present one. Class actions serve the purpose of providing compensation in cases involving public wrongs and widespread injuries. There is no reason why a plaintiff who alleges that a defendant has violated TILA and caused widespread injuries should not be able to bring a class action. Denial of class action status would reward defendants who may have committed wrongs and leave victims who may have been wronged uncompensated.”
• In an opinion released on Valentines Day 2007 the Andrews Court granted a stay while the defendant Chevy Chase Bank FSB pursues a Rule 23(f) petition to the Seventh Circuit. 

Back to the Ameriquest opinion mentioned at the top of this topic in which the Northern District of Illinois refused to dismiss class allegations in a suit seeking a declaration that certain class members were entitled to rescind their loans. Ameriquest followed the Andrews court: “The Seventh Circuit has not yet ruled on this issue, but we disagree with McKenna and agree with the district courts in this and other circuits that have found that neither [Rule 23] nor TILA prohibits the limited relief plaintiffs seek here.” the Ameriquest court wrote. “While we recognize that actual rescission is a personal remedy, we find nothing in TILA precluding declaratory relief authorizing class members to individually request rescission where they are legally entitled to do so.” Whatever the outcome in the 7th Circuit, the current atmosphere in the mortgage lending arena portends an increase in the number of consumers seeking rescission of their mortgages. The history of litigation regarding class action rescission claims also suggests that practitioners should expect to see a lot of litigation in this area.

 
 
 
 
 

Foreclosure Crisis 
 

• According to The RealtyTrac™ (www.realtytrac.com), there were more than 1.2 million foreclosure filings reported in 2006.
• This is a 42 percent increase from the previous Year.
• The nation’s foreclosure rate was one new foreclosure for every 358 U.S. households.
• Yesterday there were 2,191 foreclosed properties for sale in Mobile county and
• 1083 in Baldwin County
• 1330 in Montgomery County
• 4203 In Jefferson County

 
 
 
 
 

Regulatory Framework 
 

• Real Estate Settlement Procedures Act
• 12 USC § 2601 et seq.
• Truth-in Lending Act
• 15 USC § 1601 et seq.
• Home Ownership and Equity Protection Act
• Which is a 1995 amendment to TILA.
• HOEPA is found at 15 USC § 1639

 
 
 
 
 

Regulatory Framework 
Truth-in-Lending Act 

• TILA 15 USC § 1601(a) congress found that
• The informed use of credit results from an awareness of the cost thereof by consumers; and
• It is the purpose of this subchapter to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.

 
 
 
 
 

Importance of Disclosures in Loans Secured by Consumers’ Principal Residence 

• 15 USC § 1635
• Right of rescission as to certain transactions
• It applies in the case of a “consumer credit transaction.”
• That is a Non Purchase Money Mortgage,
• If “material” disclosures are inaccurate.

 
 
 
 
 

What are the “Material Disclosures” Under TILA 

• the annual percentage rate, including applicable variable rate disclosures;
• the finance charge;
• the amount financed;
• the total of payments;
• the payment schedule.
• Found at Reg. Z § 226.23(g)

 
 
 
 
 

Material Disclosure Violations & Rescission 

• Effect of a material disclosure violation:
• Under § 1635-- The consumer shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction
• or the delivery of the information and rescission forms required under this section
• together with a statement containing the material disclosures required under this subchapter, whichever is later.

 
 
 
 
 

Rest of the Rescission Story 

• Except that 15 USC § 1635(f)
• Limits the period to up to three years later, or sale of the property.
• What do you get?
• Consumer is entitled to
• termination of the lien,
• refund of all interest, finance charges, fees,
• actual damages and
• Attorney’s fees 15 USC § 1640(a)(3)

 
 
 
 
 
 

Right of Rescission?

15 USC §1635 
 
 

Purchase Money or

refinancing thereof

with no new advance. 
 
 
 

Consumer Credit Transaction

or

Non-purchase Mortgage?  
 

NOT COVERED

15 USC § 1635(e) 

This illustration assumes a mortgage with a lien on the consumer’s principal dwelling. 

All Material Disclosures

Accurately Given? 

YES 

NO 

Rescindable until midnight

of the 3^{rd business day}

^{after consummation}

^{of the transaction.} 
 

^{Rescindable up to three years after consummation}

^{of the transaction. 15 USC § 1635(f)} 

 
 
 
 
 

Checking the TILA Disclosures 

• Answering the age old question, “Why is the APR different from the interest rate on my note?”
• Calculating the Finance Charge and Amount Financed.
• Calculating the APR.
• Variable Rate calculations

 
 
 
 
 

Checking and Calculating the Finance Charge, Amount Financed and APR 

• Assume a 30-year Mortgage Loan with a note amount of $62,500 and a note interest rate of 10.25%.
• This yields a monthly payment of $560.07
• In the above example the APR would equal the interest rate.
• Why is the APR different from the interest rate?
• Almost always there are other fees included that meet the TILA definition of finance charge.
• The APR must be accurate to 1/8^{th of 1% or .125%.}
• ^{Lets assume further the points and fees as shown in Figure 1 and}
• ^{use those figures to calculate the Amount Financed and the Finance Charge.}

 
 
 
 
 

• loan origination fee, $2,989.00;
• appraisal fee, $300.00;
• processing/underwriter fee, $390.00;
• funding fee, $365.00;
• administration fee, $295.00;
• document preparation fee, $195.00,
• tax service fee, $63.00;
• settlement or closing fee, $200.00;
• abstract or title search, $375.00;
• title examination, $225.00;
• title insurance, $200.00;
• title service fee, $75.00;
• recording fee, $120.00;
• recording tax, $93.75;
• property insurance, $1,226.30.

 
 
 
 
 

Calculating the Finance charge and the Amount Financed 

• What is the finance charge?
• “Finance charge” as defined by TILA
• is the sum of all charges
• payable directly or indirectly by the person to whom the credit is extended
• and imposed directly or indirectly by the creditor as an incident to the extension of credit.
• It contains more than just interest.
• The Finance Charge disclosure must be accurate to 1/2 of 1% of the note amount or $100.00 which ever is greater.
• Reg. Z 226.23(g)(1)(i).
• The tolerance is reduced to $35.00 once a foreclosure has been initiated. Reg. Z 226.23(h)(2)(i).

 
 
 
 
 

Finance Charge and APR Example 

• Items 1,3,4,5,6,7,8 and 12 are included in the disclosed finance charge when added together equal $4,572.00.
• This is the total of so-called prepaid finance charges.
• To calculate the Amount Financed, subtract $4,572.00 (the prepaid finance charge) from $62,500 leaving $57,928.00.
• Using this figure as the  “Amount Financed” in our calculator gives:

 
 
 
 
 

Credit Calculator 

Loan Amount

Amount Financed 

Interest Rate (APR) 

Periodic Payment 

Number of Payments at Above Amount 

$57,928 

11.917% 

$560.07 

360  

Payments per Year 

12 

Term of Loan 

360 Months 

$62,500

 
 
 
 
 

APR Calculations on a Variable Loan 

• Calculating the APR on a Variable loan is more difficult.
• Before using the calculator, APR-2002, from NCLC,
• First calculate the rate on the first group of payments using the Note amount over the term of the entire loan.
• A different calculator is used for this calculation
• Hugh’s “What’s Missing” calculator is a good one.
• http://www.hughchou.org/calc/missing.cgi

 
 
 
 
 

Credit Calculator 

Loan Amount 

Interest Rate 

Periodic Payment 

Number of Payments at Above Amount 

$62,500 

10.25% 

$560.07 

24  

Payments per Year 

12 

Term of Loan 

360 Months

 
 
 
 
 

Step Two Variable Rate APR Calculation 

• Next calculate the rate on the second group of payments
• Again using the Note amount
• over the term of the entire loan.

 
 
 
 
 

Credit Calculator 

Loan Amount 

Interest Rate 

Periodic Payment 

Number of Payments at Above Amount 

$62,500 

11.954% 

$640.68 

335 

Payments per Year 

12 

Term of Loan 

360 Months

 
 
 
 
 

Step Three Variable Rate APR Calculation 

• Now calculate the rate on the third group of payments.
• Using the Note amount again
• over the term of the entire loan.

 
 
 
 
 

Credit Calculator 

Loan Amount 

Interest Rate 

Periodic Payment 

Number of Payments at Above Amount 

$62,500 

12.922% 

$637.29 

1 

Payments per Year 

12 

Term of Loan 

360 Months

 
 
 
 
 

Step Four Variable Rate APR Calculation 

• Enter the results in a calculator that does a “Blended rate calculation.”
• “APR-2002” from NCLC is used for this example.
• It is free with their Truth-in-Lending book.

 
 
 
 
 

APR Calculator for Variable Rate Loans

 
 
 
 
 

HOEPA Purpose and Coverage 

• HOEPA, or the Home Ownership Equity Protection Act, was passed almost unanimously by Congress in September of 1994 as part of the Riegle Community Development and Regulation Improvement Act, Pub. L. No. 103-325 (September 23, 1994).
• It is codified at 15 USC § 1639 “Requirements for certain mortgages.”
• An anti-predatory lending law, the purpose of HOEPA is to trigger specific disclosures by the lender to the borrower on a home equity loan when the interest rate and other closing costs cross a threshold where the act deems the loan to be of “high costs.”

 
 
 
 
 

HOEPA Purpose and Coverage 

• HOEPA also regulates certain terms contained in covered loans.
• HOEPA Provides for Enhanced damages for Material Violations
• “High Cost” loans are covered that is loans with either
• An APR 8% over applicable T-Bill rate and/or
• Points and Fees > 8% the Total Loan Amount

 

This illustration assumes a loan consummated after October 1, 2002,  
that is a first lien. 

HOEPA Coverage1640 (aa) 

Consumer Credit Transaction OR

Non-purchase Mortgage? 

Open Ended Loan? 

Not Covered 

NO 

YES 

APR 8% over

Treasury Securities 

NO 

YES 

Points and fees

over 8% 

NO 

YES 

COVERED 

YES 

COVERED 

Not Covered 

Not Covered

 
 
 
 
 

HOEPA Required  
“Section 32 Notice”

 
 
 
 
 

APR and Points and Fees HOEPA Calculations Using Disclosed Figures 

• APR of more than 8 percentage points over applicable T-Bill rate
• Applicable t-Bill Rate is the rate the 15^{th of the month next proceeding the application for the loan.}
• ^{http://www.federalreserve.gov/RELEASES/H15/data.htm}
• ^{Points and fees of more than 8% of the “Total Loan Amount”}

 
 
 
 
 

APR Trigger 

• Assume a 30-year mortgage that is a first lien and consummated after October 1, 2001.
• Loan date: December 1, 2004
• APR (Disclosed): 12.592%
• Application date: November 15, 2004
• Term of loan: 360 Months
• 20 year T-Bill rate on October 15th 2004: 5.36%
• (There were no 30 year bonds on that date.)
• Adding: 8%
• APR Trigger 13.36%
• APR trigger is not met.

 
 
 
 
 

Points and Fees Trigger as disclosed 
in the example. 

• Page 2 of handout and Figure 1.
• Items 1,3,4,5,6,7,8 and 12 are included in the disclosed finance charge.
• Added together these equal $4,572.00
• Subtracting from $62,500 leaves $57,928
• Dividing $4,572 by $57,928 yields 7.9%.
• The loan does not appear to meet the “points and fees” trigger either and does not appear to by covered by HOEPA.

 
 
 
 
 

“Amount Financed” and  
“Total loan amount” when RESPA violations are considered 

• Real Estate Settlement Procedures Act
• 12 U.S.C. § 2601 (RESPA)
• RESPA was enacted in 1974 because Congress became concerned about predatory lending practices in the housing industry.
• The purpose of RESPA is “to ensure that consumers throughout the Nation are . . .  protected from unnecessarily high settlement charges caused by certain abusive practices.”
• 12 U.S.C. § 2601(a).

 
 
 
 
 

Prohibition of Fee Splits  
and Mark-ups 

• § 2607Prohibition Against Kickbacks and Unearned Fees
• (a) Business Referrals. No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
• (b) Splitting Charges.   No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.

 
 
 
 
 

Calculation of the Amount Financed and Total Loan Amount considering RESPA violations 

• Under truth-in-lending items 9 through 11 are excluded from the calculation only to the extent that they are “bona fide” and reasonable. Reg Z 226.4(c)(7)
• Furthermore recording fees are excluded only if they are actually paid to public officials for recording.
• A dead give away that something may be amiss is a recording fee that is a round number such as the $120.00 number listed above.
• The actual recording fee in this transaction was only $63.00. In other words the recording fee was marked up $57.00.
• Discovery has shown that the abstract was performed by a third party and that the fee for this was only $120.00 indicating another markup of $250.00.
• Marking up of fees of others is prohibited by RESPA Section 8(b), 12 U.S.C. § 2601(b).
• How can fees that violate RESPA be bona fide or reasonable?

 
 
 
 
 

Points and Fees Trigger 

• “Total loan amount” is defined by HOEPA at 15 USC § 1602(aa)(1)(b) and at Reg. Z. § 226.32(a)(ii)
• “Amount Financed” minus fees which are part of the amount financed only because they are excluded from the definition of the finance charge by 15 U.S.C. § 1605(e) or Reg. Z § 226.4(c)(7)
• Unless they are “bona fide and reasonable.” Reg. Z 226.32(b)(1)(iii)
• These are so called “title related fees” found in the 1100 series in the HUD-1 statement and fees for credit insurance.
• If the “amount financed” contains any of the charges listed in the Reg. Z § 226.4(c)(7), or credit insurance premiums or debt cancellation fees, those count toward the points and fees trigger and must be subtracted from the “amount financed” to get the “total loan amount.”
• A charge cannot be included in both the points and fees trigger and in the “total loan amount.”

 
 
 
 
 

Points and Fees after RESPA Considerations 

• Items 9 through 11 are excluded from the calculation only to the extent that they are “bona fide” and reasonable
• Recording fees are excluded only if they are actually paid to public officials for recording
• Actual recording fee in this transaction was only $63.00
• Recording fee was marked up $57.00
• abstract was performed by a third party and that the fee for this was only $120.00 indicating another markup of $250.00
• The disclosed fees above, added together, equaled $4,572
• Adding to $4,572.00 item #9 ($375.00), item # 13 ($120.00) gives us total points and fees of $5,067. Subtracting from $62,500 leaves $57,433. Dividing $5067 by $57,433 yields 8.82%.
• The loan meets “points and fees” trigger after all and is by covered by HOEPA.

 
 
 
 
 

Section 32 Notice 

• Section 32 notice
• the annual percentage rate
• the amount of the regular monthly payment
• If a Variable rate, a statement that the interest rate and monthly payment may increase, and the maximum amount of monthly payment based on the maximum interest rate allowed
• These disclosures must be given to the consumer not less than three business days prior to the consummation of the loan.

 
 
 
 
 

Regulation of Prepayment Penalties 

• HOEPA also prohibits prepayment penalties unless the following conditions are met:
• (1) At the time the loan is consummated the consumer is not liable for an amount of monthly payments including the amount of the credit extended or being extended under the mortgage transaction that is greater than 50 percent of the gross income of the consumer and the income and expenses of the consumer are verified by a credit report,
• (2) the penalty applies only to a prepayment made with amounts obtained by the consumer by means other than a refinancing by the creditor under the mortgage, or an affiliate of that creditor;
• (3) The penalty may not apply until after the end of a five-year period beginning on the date on which the mortgage is consummated, and
• (4) The penalty is not prohibited under other applicable (state) law.

 
 
 
 
 

Limitations after default 

• A HOEPA loan may not provide for an interest rate applicable after default that is higher than the interest rate that applies before default.
• If the date of maturity the loan is accelerated due to default and
• the consumer is entitled to a rebate of interest, that rebate shall be computed by any method that is not less favorable than the actuarial method.
• In other words no “Rule of 78^th’s

 
 
 
 
 

• No balloon payments
• A HOEPA loan having a term of less than 5 years may not include terms under which the aggregate amount of the regular periodic payments would not fully amortize the outstanding principal balance.
• No negative amortization
• A HOEPA loan may not include terms under which the outstanding principal balance will increase at any time over the course of the loan because the regular periodic payments do not cover the full amount of interest due.
• No prepaid payments
• A HOEPA loan may not include terms under which more than 2 periodic payments required under the loan are consolidated and paid in advance from the loan proceeds provided to the consumer.
• Extending credit without regard to the ability of the consumer to pay is prohibited.

 
 
 
 
 

Payments under home improvement contracts are regulated. 

• A creditor shall not make a payment to a contractor under a home improvement contract from amounts extended as credit under HOEPA loan other than—
• (1) in the form of an instrument that is payable to the consumer or jointly to the consumer and the contractor; or
• (2) at the election of the consumer, by a third party escrow agent in accordance with terms established in a written agreement signed by the consumer, the creditor, and the contractor before the date of payment.

 
 
 
 
 

Consequence of the creditor’s failure to comply with HOEPA 

• Any mortgage that contains a HOEPA prohibited provision is deemed a failure to deliver the material disclosures for the purpose of section 1635 of TILA. (Rescission)
• Regular TILA damages, including rescission damages
• Another measure of damages for each substantive HOEPA violation.
• Damages for each consumer.

 
 
 
 
 

Significance of HOEPA Coverage 
Summary 

• Rescission
• Enhanced damages
• Multiple Damages
• Damages for each consumer
• Strict Liability
• Assignee Liability
• Summary Judgment
• Attorneys Fees
• No Class Action Caps

 
 
 
 
 

Happy Hunting