A recent ruling issued by a Federal District Court judge in Minneapolis in an HPP case addresses a common problem which contributed to the housing market crash and the foreclosure epidemic: sloppy paperwork by mortgage lenders. In this case, a real estate broker operating fast and loose promised the homeowner refinance terms and then changed them for the worse at the closing. The particular legal problem was that the homeowner asserted that required financial disclosures were not provided in advance of the closing, but instead were provided for the first time at closing– in two inconsistent versions. When the homeowner lost her job and fell into default, HPP sued on her behalf to block the foreclosure. When the bank moved to dismiss, the Court dismissed several of the homeowner’s claims, but did uphold a key claim under the federal Truth In Lending Act (TILA).
TILA is a federal law designed to ensure that consumers fully understand the terms under which they are receiving consumer credit, including home mortgages. When a creditor violates TILA, one remedy available to the consumer is rescission of the loan, that is, an unwinding of the transaction so that the parties are placed back in the position they were prior to the credit transaction. In the case of a home mortgage, the option to rescind can put the homeowner in a powerful position to negotiate instead a modification of the loan so its terms are more affordable and foreclosure can be avoided.
In this case, the Bank argued that the two sets of disclosures were not inconsistent and not a violation of TILA. In a significant ruling that will affect many other cases, the Court held that the TILA claim must go to trial, because it was a question for the jury as to whether these two sets of disclosures were inconsistent and therefore a violation of TILA. The bank also argued that even if there was a TILA violation, the homeowner had not demonstrated an ability to rescind the loan because the homeowner had not shown how they would be able to return the loan proceeds. The Court issued a second important ruling, rejecting this argument of the bank as well. The Court held that a homeowner need not demonstrate upfront an ability to tender the loan proceeds back to the bank; that when and if the homeowner prevailed on the TILA claim at trial, the Court had the discretion to structure how rescission should happen, including the possibility of a monthly repayment plan by the homeowner as a means of accomplishing the rescission. These two important rulings under TILA are likely to help a significant number of other homeowners in similar situations.