Lawsuits Target 'Illegal' Mortgages

The Record ( — Wednesday, April 8, 2009


With foreclosures on the rise, lawyers and homeowners are fighting back by arguing that lenders shouldn't be allowed to foreclose on mortgages that broke truth-in-lending and consumer laws.

"Not only do the banks want to be bailed out for making the most imprudent investments of modern economic times, but they want the courts to help them collect on illegal debt," said attorney Joshua Denbeaux of Westwood, who is representing about a dozen New Jersey homeowners. "This is outrageous."

Peggy Jurow, a senior attorney at N.J. Legal Services' anti-predatory lending program, said her agency is working with a number of distressed homeowners whose lenders broke the law. During the frenzy of the housing boom a few years ago, mortgage lenders and brokers used "sloppy practices, as well as downright fraud," Jurow said.

"It's not unusual at all for there to be Truth in Lending Act violations in a lot of these loans, and also consumer fraud," she said. "We're getting a ton of people." Almost 48,000 homeowners statewide faced foreclosure filings last year, according to state figures, and some housing advocates expect the number to rise this year.

Mortgage lenders take a different view of these cases.

"Lenders are reporting to us that they are seeing a significant increase in these types of lawsuits as the number of foreclosures continue to grow and borrowers look for any means possible to keep their homes," said John Mechem, a spokesman for the Mortgage Bankers Association. "What lenders are also telling us is that many of the suits are frivolous, expensive to defend and that, in the rare case that the borrower wins, the penalties against the lender are excessively harsh for what is often a very minor Truth in Lending Act violation or oversight."

Denbeaux's clients include Barbara and Kevin Blace, who are facing foreclosure proceedings on their home in Bogota. The Blaces say their mortgage broker, the Mortgage Zone, and lender, World Savings Bank, violated state and federal laws by changing the amount of interest and type of loan they agreed to — at the last minute and without warning.

"On June 5, [the lender] advised Mr. and Mrs. Blace that their total finance charge was going to be $481,488.09 over the life of the loan and that their total payments would come to $774,739.52," the Blaces' suit said. But a week later, at the closing, the finance charge turned out to be $619,556.42 with total payments of $914,664.42, the suit said.

In addition, the Blaces thought they were getting a regular adjustable rate mortgage, but they ended up with a negative-amortization mortgage with higher costs, the suit says. In a negative amortization loan, initial monthly payments are so low that the loan amount actually grows, instead of being nibbled away gradually as the homeowner makes monthly payments, as in a regular mortgage.

Finally, the broker charged the Blaces an illegal fee, the suit says.

The Blaces, feeling rushed, signed the new documents without examining them. "I did not read everything I should have," Barbara Blace acknowledged in court papers.

Wachovia, which bought World Savings Bank in 2006, declined to comment on the case because it is in litigation.

Denbeaux has also filed suit on behalf of his secretary, Alison May, and her husband, George, a housepainter. The Mays, who live in Westwood, fell behind on their mortgage payments when George's business slowed down and Alison had eye surgery that left her legally blind for months. They refinanced their mortgage in early 2007 with a company called Prime Finance, which according to court papers promised a fixed-rate loan at 8.25 percent.

But the loan, their suit says, included "a host of legal irregularities." The main problem, according to the suit, is that the broker charged the Mays a $7,200 fee, although Denbeaux says New Jersey does not allow brokers to collect fees from borrowers, except application fees and "points," which are paid upfront to lower the interest rate.

A lawyer for the Mays' lender, U.S. Bank National Association, declined to comment on the case.

A large percentage of New Jerseyans in foreclosure proceedings have flawed loans, Denbeaux said. It's not enough to say these homeowners should have known better, he added.

"What happened to convince a huge percentage of the population to enter into a terrible deal?" he asked. "Brokers stole from their clients" by charging illegal fees, he said. And the lenders who worked with those brokers, he added, are "complicit."

Jurow said many homeowners relied on mortgage brokers for advice, expecting the brokers to act in their best interest. But many of these brokers just pushed the loans that brought in the biggest commissions, rather than the loan that was best for the consumer, she said.

The laws that come into play in these cases are two federal laws, the Truth in Lending Act and the Real Estate Settlement Procedures Act; and New Jersey banking and consumer fraud statutes. Under the Truth in Lending Act, a homeowner in foreclosure after a refinancing has three years to rescind the loan if the finance charge was incorrectly calculated. That means homeowners who refinanced in 2006 will lose the right to rescind their loans this year.

Jurow recently had a victory in Somerset County, where a judge rescinded a mortgage because the homeowner had been overcharged on a fee to record the mortgage, and the fee was not properly disclosed. When a mortgage is rescinded under the Truth in Lending Act, basically, the whole transaction is undone: The lender returns the interest and fees that have been paid, and the homeowner returns the loan amount.

Jurow's Somerset County client, who had borrowed about $300,000, ended up having to return about $250,000 after her interest payments and fees were taken out; if the foreclosure had continued, Jurow said, she would have owed more than $400,000, including fees. The homeowner is selling the house to pay off the loan.

State consumer fraud laws are another tool that can be used against questionable mortgages. Jurow said that under New Jersey law, "it's a consumer fraud to lend to someone without regard to their ability to pay, or to give someone a loan that is destined to fail."

Such loans were "rampant" in the subprime market during the housing boom a few years ago, she said. She has filed a number of cases alleging violations of consumer fraud laws. With consumer fraud claims, a judge can order the lender to pay damages to the borrower, which would offset the amount owed on the mortgage, Jurow said.

Legal Services works with low-income people (which means a household of four with income of no more than about $44,000, or twice the federal poverty level) and refers others homeowners to private attorneys. But overall, Jurow said, there aren't enough lawyers to serve all the homeowners who were victimized by bad lending practices. She is trying to recruit private lawyers to take some of these cases.

A big obstacle to this kind of litigation is that homeowners who can't pay their mortgages are in no position to pay lawyers. Denbeaux said he is taking small monthly payments from clients and hoping to recover his fees from the lenders or brokers when the cases are settled or go to court.

Phyllis Salowe-Kaye, head of New Jersey Citizen Action, which counsels homeowners facing foreclosure, said that even when it's not possible to file a lawsuit, when counselors see a violation of the laws, "it lets us negotiate a better deal" when they talk to lenders about modifying a client's loan.

Fighting unfair foreclosures, said Jurow, is especially urgent in New Jersey because of the high cost of housing.

"If people get put out of their houses," she said, "it's not like there's another affordable place to live."

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