By Julie Greenfield Esq.
(“Formerly General Counsel of New Century Mortgage and Option One Mortgage, and Senior Regulatory Counsel for Finance America and BNC Mortgage, two of Lehman Brothers’ subprime affiliates. She is presently in private practice specializing in mortgage banking and regulatory compliance and is an expert witness in litigation involving mortgage banking and loan modification issues. “)

What is Being Said to Consumers
Consumers are being charged $1,000.00-$3,000.00 (possibly more) for self-proclaimed Forensic Auditors, most of whom are not attorneys, DRE or DOC Licensees or compliance professionals, to review an entire package of Mortgage Loan Documents and Disclosures and are promised “a free house” if the reviewer finds even minor violations which consumers are told are “very likely” to be found.

What Are They Looking For?
Violations of the disclosure provisions of the federal Truth-in-Lending Act (“TILA”)(15 USC Section 1601 et seq.) implemented by Regulation Z (12 CFR Section 226.1 et seq.), violations of the federal Home Ownership Equity Improvement Act (“HOEPA”) which is Section 129 of TILA (15 USC Section 1639), implemented by Regulation Z Sections 226.31and 226.32 (12 CFR Sections 226.31 and 32), and violations of the anti-kickback and servicing provisions of the federal Real Estate Settlement Procedures Act of 1974, as amended (12 USC Section 2601 et seq.) implemented by Regulation X (24 CFR Section 3500.1 et seq.),

How Likely Is it to Find Such Violations?
Contrary to what is being said on loan modification websites and in the press, very unlikely, especially with regard to HOEPA and TILA numerical disclosure violations. Remember that Mortgage Lenders which sold or securitized their Mortgage Loans had to meet the due diligence standards of Wall Street Investors. They had the software, the procedures and the compliance and Quality Control teams to ensure that all federal and state Mortgage Loan Disclosures were accurate or they would not have been able to sell or securitize the Mortgage Loans. If errors were found post-closing, the QC departments corrected any errors in accordance with applicable federal and state requirements.

It would also be extremely difficult to find violations of Section 8 of RESPA (the anti-kickback provisions) based on the review of one set of Mortgage Loan Documents and Disclosures.

Can Anyone Determine the Accuracy of the TILA Federal Box Disclosures?
Not easily. Other than determining the accuracy of the Amount Financed by subtracting the Prepaid Finance Charges contained in the HUD-1 from the principal amount of the Mortgage Loan, anyone attempting to review the TILA Federal Box Disclosures for accuracy is going to need to know how to use APR Win or other compliance software or to have an account with ComplianceEase or Mavent.

Unless they are using ComplianceEase or Mavent, they will need to know what constitutes a Prepaid Finance Charge to be able to recognize one on the HUD-1. They would also need to be able to accurately determine the applicable range of Index values at the time of the loan closing to generate the TILA Federal Box Disclosures for Adjustable Rate Mortgage Loans.

Are There Other TILA Violations That Are Easier to Find But Still Subject to Rescission?
Yes, most definitely. It is far easier for a reviewer to find a Notice of Right to Cancel that has blank or incorrect dates in it. Even though these are technical violations, they still entitle the Borrower to rescind up to three years after the loan closing (Semar v. Platte Valley Savings and Loan Association, 791 F.2d 699 (9^th Cir. 1986)).

Although Borrowers are entitled to rescind their Mortgage Loans if it is determined that each Borrower did not receive two accurately-completed Notices of Right to Cancel, it is difficult for a Plaintiff to prove that they did not receive two copies each. It is much easier to prove that they were given inaccurate Notices of Right to Cancel.

What Are the Penalties for Such Violations?

TILA Disclosure Violations
Under the new Civil Liability provisions of Section 130(a) of TILA (15 USC Section 1640(a)) as recently amended by the Mortgage Disclosure Improvement Act of 2008, the civil liability provisions for individual TILA Disclosure violations are now $4,000.00 (previously $2,000.00). Class action liability remains the lesser of $500,000 or 1% of the creditor’s net worth. However, TILA Disclosure violations are subject to a one year statute of limitations.

TILA Rescission Violations
For TILA Rescission violations applicable to owner-occupied non-purchase money transactions under 15 USC Section 1635, the Borrower is entitled to rescind the Mortgage Loan up to three years after the Mortgage Loan closing by returning to the Mortgage Lender the original principal balance minus all of the interest and fees paid at the closing up to the tender of rescission. If, for example, the original principal balance was $500,000 and the Borrower rescinded after paying $5,000 in fees at the loan closing and $50,000 in interest up to the tender of rescission, the Borrower would have to refund to the creditor $500,000 minus $55,000 or $445,000. In this manner, the Borrower would be reimbursed all of the fees and interest paid to the Mortgage Lender/Servicer.

TILA also provides for attorneys’ fees and costs in connection with both Disclosure and Rescission violations.

HOEPA Violations
HOEPA Violations entitle the Borrower to rescind the Mortgage Loan and to damages in the amount of all of the Finance Charges and fees paid.(15 USC Section 1640(a)(4), 15 USC Section 1639(j) and 15 USC Section 1602(u)).

RESPA Section 8 Violations
Violations of Section 8 of RESPA, the anti-kickback provisions, entitle the Borrower to sue for up to three times the amount of the charge for the settlement service involved in the violation, plus attorneys’ fees and costs (12 USC Section 2607).

RESPA Section 6 Violations
Violations of the Servicing Disclosure and Qualified Written Request provisions of Section 6 of RESPA (12 USC Section 2605) entitle the Borrower to statutory damages of $1,000 for an individual action and the lesser of $500,000 or 1% of the creditor’s net worth for a class action, plus attorneys’fees and costs (12 USC Section 2605(f)). The statute requires the Plaintiff to prove that the Defendants engaged in a pattern or practice of noncompliance in order to be awarded statutory damages.

None of these penalties constitute getting a “free loan” or a “free house.”

What Statutes of Limitation Apply?

TILA Disclosure Violations
For TILA Disclosure violations, one year from the date of loan closing (15 USC Section 1640(e)). Most subprime and Alt A Mortgage Loans were made more than one year ago which leaves only Rescission under TILA as a viable cause of action for the vast majority of Mortgage Loans.

TILA Rescission
Rescission under Section 125 of TILA (15 USC Section 1635) can be effected up to three years after the Mortgage Loan closing provided that the Borrower has not sold or transferred the home.

HOEPA Violations
The one year statute of limitations under 15 USC Section 1640(e) applies to damages for HOEPA violations. However, the Borrower is entitled to rescind a HOEPA Mortgage Loan up to three years after the loan closing (15USC Section 1639(j) and 15 USC Section 1602(u)).

RESPA Section 8 Violations
For violations of Section 8 of RESPA which are the anti-kickback provisions, there is a one year statute of limitations.

RESPA Section 6 Violations
For violations of Section 6 of RESPA which include the Servicing Disclosure and Qualified Written Request requirements, there is a three year statute of limitations (12 USC Section 2614). However, with statutory damages of $1,000 and the fact that the Plaintiff must prove that the creditor had a pattern or practice of noncompliance, the threat of this kind of litigation is not one of great concern to Servicers.

Therefore, the only Disclosure violations that can result in substantial damages to be awarded to a Plaintiff are those disclosure violations that enable a Borrower to exercise their right of Rescission under TILA.

Why Is TILA Rescission Unavailable to Most Borrowers Even If They Find Technical Violations?
Because in order to effect a rescission under TILA, the Borrower is required to return the principal amount of the Mortgage Loan minus any fees and interest paid at closing and to the Servicer (See Palmer v. Wilson, 502 F.2d 860 (9^th Cir. 1974); Yamamoto v. Bank of New York, 329 F.3d 1167 (9^th Cir. 2003)).

Since most Borrowers today have secured properties that are underwater and/or have credit that is less than stellar, only a tiny fraction of Borrowers are going to qualify for a refinance transaction that would be needed in order for them to pay the principal minus the fees and interest back to the creditor. If they cannot refinance, there is no claim for rescission.

In summary, with the exception of a tiny fraction of Borrowers who have TILA Rescission violations and are able to refinance their Mortgage Loans, Forensic Audits costing $1,000 or more are a worthless scam.