Judges Resist Proactive Homeowners Challenging Servicers and Pretender Lenders

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see also 201306_cfpb_laws-and-regulations_tila-combined-june-2013

I’ve been busy dealing with Judges who are resisting meritorious defenses and proactive lawsuits challenging the validity of the mortgage, note, debt or assignments. I had one Judge order me to remove America’s Wholesale Lender — an entity that doesn’t exist — as a party Defendant.

But an increasing number of homeowners are seeking to challenge, rescind, or otherwise put the pretender lenders on defense, along with the “servicers” who have no authority and question the enforceability of a modification agreement in which the countersigning party is a “servicer” with dubious or nonexistent rights to enforce a modification agreement.

This is reminiscent of when I wrote in 2008 that the Courts are getting it wrong about rescission. I said then that rescission is a specific statutory remedy which is clear on its face and not subject to interpretation that the “borrower” is getting a free house. I said that applying common law rules on rescission was wrong. There was no requirement for the homeowner to file suit and no requirement for the homeowner to tender money to the “lender” (who can’t be known because of the lack of disclosure). Hundreds of state and Federal Courts all the way up to the appellate level disagreed with me. But I stuck to my guns and continued to advance the legal theory that the statute was explicit and that Courts did not have the right to legislate from the bench.

The US Supreme Court eventually agreed with me recently overturning hundreds of final judgments, orders on dismissal and discovery. The effective on past cases is not yet known. If they have already been concluded right through sale it might be that local law might make the wrong decision final anyway. But my opinion is that if we go by what the statute says, once the notice of rescission was sent, the mortgage and note were nullified “by operation of law.” And the effect is simple: there can be no foreclosure on a mortgage and note that don’t legally exist, even if the mortgage is still recorded in the chain of title. Closings — even short sales — are cast into doubt as to whether the title or the money was handled properly.

As a result, the general consensus about the borrower was turned on its head. The “enforcement” of the rescission was not required by the borrower, it was required to be challenged within 20 days of the notice of rescission. The tender of money by the borrower is similarly turned on its head — it is the lender who owes money (a lot of it) to the borrower. And the threat of foreclosure is totally removed. The statute of limitations doesn’t just apply to borrowers. it also applies to “lenders.”  Once the borrower gives notice of rescission, the “lender” must file a declaratory action contesting the rescission within 20 days. If they don’t file that action, they waive any potential defense to the rescission.

Many individuals are sending notices of rescission even on old loans based upon the premise that they only recently discovered the defects in the loan and defects in the loan closing procedures. If the lender fails to file a lawsuit saying that they are a “lender” and where they prove their status as a lender, they lose. If they can’t prove that the disclosures at closing were true and correct within the tolerances specified in the statute (TILA), they lose. If they fail to file within 20 days, they lose.

The requirement that the “lender” record a satisfaction of mortgage and return the canceled note is just to make it easier for the homeowner to get alternative financing. And the requirement that the “lender” disgorge or pay all money paid in the origination of the loan including brokers’ fees, together with all payments of interest and principal was also teeth in the law to level the playing field, reducing the amount that the homeowner might need to pay to the lender LATER.

The idea behind the law was to address predatory or wrongful lending or enforcement tactics by banks whose dubious business plans were far too sophisticated for any normal borrower to understand what was really happening. TILA and Regulation Z were written to level the playing field. Once the borrower discovered material defects in the loan or loan procedure, they are allowed to get rid of that loan and go get another loan. The primary impact, from a legal point of view, is that the mortgage is gone “by operation of law” and the note is nullified, leaving a bare debt for the “lender” to allege and prove. But whatever the debt might be, it is UNSECURED, and thus subject to discharge in bankruptcy.

Rescission is a drastic remedy that puts the “bank” at a  spectacular disadvantage. But it is the law. and the same holds true when you have fatal defects in the origination of the loan. If the named lender doesn’t exist or didn’t make the loan, the note and mortgage should not have been released to anyone, much less recorded. That means that the mortgage was essentially a wild deed. The mortgage is not voidable, it is void. And THAT means, just like in the case of rescission that the mortgage must be removed from the chain of title on the property. Like rescission, the note and mortgage are void or nullified by operation of law, if the Judges would only apply it.

My group has several of these cases on appeal and we are confident that the appellate courts will turn the corner on proactive cases where the homeowner is current on the so-called payments due (and which are extracted under threat of enforcement and foreclosure). The current thinking of the courts in many cases is neither based in fact nor logic. If the borrower is declared in default they are regarded as deadbeats. If they are current, they are regarded as greedy deadbeats. We think that like several cases have already shown, the “servicer” or “lender” will be forced to defend cases that were dismissed by trial judges.

In the end, we think that homeowners will not only get rid of the note and mortgage, but potentially also the debt because only someone who actually did the funding could come forward with a legal or equitable claim for unjust enrichment. Such creditors will have a difficult time making the claim because (a) they don’t know anything about the case and (b) in order to do so they would be required to track and prove the money trail to show that they are in fact the creditors. Modifications by volunteer intermeddlers — like servicers who lack actual authority to service the loan because they are relying on the Trust that is falsely claiming ownership of the loan — will in our opinion also be deemed a nullity.

Tags: canceled note, chain of title, disgorgement by lender to borrower, liability for debt, modifications, nullification of mortgage, nullification of note, proactive mortgage challenges, rescission, satisfaction of mortgage, TILA rescission
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