Court.gives.lenders.a.headache Homeowners.get.Ace.in.the.hole. Forbes.com.2013!09!29

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Court Deci sion Gives Lenders A Headache, Borrowers An Ace I n The Hole Daniel Fisher, Forbes Staff Personal Finance  2/07/2013 @ 9:30PM |3,906 views I cover finance, the law, and how the two interact. A recent decision by the Third Circuit Court of Appeals gives borrowers an indefinite period to rescind their home-equity loans, complicating life for lenders and setting up a conflict that may have to be resolved at the Supreme Court. Home buyers normally have three days to rescind a loan, and after that mortgages to purchase a property can’t be reversed. But federal law allows other types of loans to be rescinded for up to three years if the  borrower can prove violations of the Truth in Lending Act, such as an inaccurate interest rate or undisclosed finance charges. If they prevail — and have enough cash to repay the loan principal —  bor rowe rs c an g et a refu nd o f th eir int erest an d fe es. Most cou rts, incl udi ng t he N int h Ci rcui t Co urt of A ppea ls, have held that borrowers who want to do this also must sue the bank within the three-year deadline. But the Third Circuit, in Sherzer vs. Homestar , ruled that borrowers only have to send a letter of notice to the  bank . They can su e whenev er they w ant aft er that , leavi ng a pote nti al clou d on the lend er’s cla im aga ins t the  pro pert y that can on ly be reso lved if the lender gets a declaratory judg men t denyi ng the reci ssio n. Th e rulin g released Tuesday f ollows a similar de cision by the Fourth Circuit and gives borro wers ano ther ta ctic for de layin g lenders that want to seize the collateral backing their loan. “If you’re having trouble making payments and worried about foreclosure, you could fire off letter to the lender saying you believe there was a material TILA violation,” said  Martin Bryce Jr., a partner with Ballard Spahr in Philadelphia. “Then you get to sit back and hold that in your pocket.” In this case, Daniel and Geraldine Sherzer borrowed $705,000 in one loan and $171,000 on a second against their home in 2004. The loans were sold to HSBC, and in 2007 the Sherzers’ lawyer wrote HSBC and Homestar alleging TILA violations and seeking to rescind. HSBC rescinded the smaller loan but refused to rescind the larger one, and the Sherzers sued after the three-year deadline. The Consumer Financial Protection Bureau supported the Scherzers, saying the law only requires  borrowers to send notice of recission , with court action later merely a process for determining whether the lender needs to comply. But the American Bankers Association and other lenders opposed that reasoning, saying borrowers need to do more than just send a letter to the lender to reverse a loan. They need to sue, as the Ninth Circuit determined, so the court can decide whether recission is merited. The Supreme Court left the question open in a previous decision,   Beach vs. Ocwen , which otherwise rejected the idea that  borrowers can bring up alleg ations of TILA violation s after the three-year deadline.

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Court Decision Gives Lenders A Headache,

Borrowers An Ace In The Hole

Daniel Fisher, Forbes Staff 

Personal Finance 2/07/2013 @ 9:30PM |3,906 views

I cover finance, the law, and how the two interact.

A recent decision by the Third Circuit Court of Appeals gives borrowers an

indefinite period to rescind their home-equity loans, complicating life for lenders

and setting up a conflict that may have to be resolved at the Supreme Court.

Home buyers normally have three days to rescind a loan, and after that mortgages to purchase a propertycan’t be reversed. But federal law allows other types of loans to be rescinded for up to three years if the borrower can prove violations of the Truth in Lending Act, such as an inaccurate interest rate or undisclosed finance charges. If they prevail — and have enough cash to repay the loan principal —  borrowers can get a refund of their interest and fees. Most courts, including the Ninth Circuit Court of Appeals,have held that borrowers who want to do this also must sue the bank within the three-year deadline.

But the Third Circuit, in Sherzer vs. Homestar , ruled that borrowers only have to send a letter of notice to the

 bank. They can sue whenever they want after that, leaving a potential cloud on the lender’s claim against the property that can only be resolved if the lender gets a declaratory judgment denying the recission. The rulingreleased Tuesday follows a similar decision by the Fourth Circuit and gives borrowers another tactic for delayinglenders that want to seize the collateral backing their loan.

“If you’re having trouble making payments and worried about foreclosure, you could fire off letter to thelender saying you believe there was a material TILA violation,” said  Martin Bryce Jr., a partner with Ballard Spahr in Philadelphia. “Then you get to sit back and hold that in your pocket.”

In this case, Daniel and Geraldine Sherzer borrowed $705,000 in one loan and $171,000 on a second againsttheir home in 2004. The loans were sold to HSBC, and in 2007 the Sherzers’ lawyer wrote HSBC and Homestar alleging TILA violations and seeking to rescind. HSBC rescinded the smaller loan but refused to

rescind the larger one, and the Sherzers sued after the three-year deadline.

The Consumer Financial Protection Bureau supported the Scherzers, saying the law only requires borrowers to send notice of recission, with court action later merely a process for determining whether thelender needs to comply. But the American Bankers Association and other lenders opposed that reasoning,saying borrowers need to do more than just send a letter to the lender to reverse a loan. They need to sue,as the Ninth Circuit determined, so the court can decide whether recission is merited. The Supreme Courtleft the question open in a previous decision,  Beach vs. Ocwen, which otherwise rejected the idea that borrowers can bring up allegations of TILA violations after the three-year deadline.

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Bryce said the Third Circuit’s decision puts banks in a tough position: Once they receive a letter of recission, they either have to sue the borrower to determine whether the demand is valid, or face the

 possibility of a cloud on their claim to the collateral later.

“Loans still get bought and sold,” he said, but that process will be more difficult if a loan has anunresolved claim for recission hanging over it.

Most courts, he said, have taken a more practical approach to the question. If a borrower wants to rescind,

he also should be prepared to sue and put up the cash to pay off the principal balance. Absent that, Bryce

said, the demand for recission is “an exercise in futility.”

Under the reasoning adopted by the Third and Fourth Circuits (based in Philadelphia and   Richmond , respectively) borrowers don’t need to worry about whether they have the cash to pay off the loan, however.The smartest course is to fire off a letter demanding recission within three years and keep it on hand in casethey get in trouble. Then it becomes a bargaining chip with a lender who’s already facing a certain loss on the loan.

The question becomes how much more the lender wants to spend on legal fees to gain clear title to the collateral.

Other borrowers, of course, pay the price. Look for this case, or one like it, to percolate up to the Supreme Court.

http://Forbes.com/sites/danielfisher/2013/02/07/court-decision-gives-borrowers-an-ace-in-the-hole-lenders-a-headache

Rescission Returns in 3rd Circuit Opinion

Posted on September 29, 2013 by Neil GarfieldForbes has taken notice. There is a shift toward borrowers in mortgage litigation. The decision points back to the origination of the loan. This

decision follows a similar decision in the 4th circuit. It all comes down to what actually happened at closing? And we don’t actually know if thedecision to allow rescission indefinitely on second mortgages will extend to the first mortgage if it is all part of the same transaction. The result of 

rescission is that all payments of every kind must be returned to the borrower plus interest and attorney fees and potentially treble damages. All

 payments mean closing costs, fees, costs, expenses, principal interest, escrow and anything else. If the “lender” doesn’t do that the mortgage lienis expressly invalidated by operation of law, which is the same as being subject to a recorded satisfaction of mortgage. TILA is back!! — at least

until the Supreme Court gets to weigh in on this ongoing dispute.

TILA requires only a clear statement and communication that the borrower wishes to rescind the transaction. The statute is clear that the burden

shifts to the “lender” to ei ther agree to rescission or sue to disqualify the rescission that must be supported by allegations and proof that the lender violated disclosure requirements at the time of origination of the loan. To be sure, there is a loophole created by the courts — that the rescinding

 borrower have the money to give back to the lender. But that is exactly what is going to cause the problem for Foreclosers. If the borrower can

show some credible source of funds, the “lender” is screwed — because the lender is not the party who was named on the note and mortgage.

So the offer of the money will immediately cause an inquiry and discovery into the question who actually was the lender? We certainly don’t want to

give the rescission money to the named party on the note and mortgage when the source of funds was a party with no legal relationship to the named 

“lender.” The facts will show that the mortgage lien was never perfected —and that therefore rescission under TILA is potentially unnecessary.

Either way, the debt turns up unsecured and can be discharged in bankruptcy. The problem for Wall Street is how they will explain to investors

why the investors were not identified as the lenders in each closing. The answer is that Wall Street Banks wanted to use those loans as “assets”

they could trade, insure, hedge and even sell contrary to the prospectus and PSA shown to pension Funds and other investors who advanced funds

to investment banks as “payment” for mortgage bonds underwritten by those banks.

When the limelight is focused on the original closing, Pandora’s box will open for the bankers. It will show that they never used the money from

investors to buy bonds issued by a REMIC trust. It will show the trusts to be unfunded. It will show the unfunded trusts never bought or funded 

the loans. It will show that the disclosure requirements and the reason for TILA (borrowers’ choices in the marketplace) were regularly violated.That in turn will lead to the inquiry as to the balance of the loan that is now due. Rescission means giving back what you received. But what if, by

operation of law, you have already given back some or all of the money? The investment banker will be hard pressed to describe itself as

anything but the agent of the lender investors. As agent, it received payments from insurance, hedges and sales to the Federal Reserve. How willthe Wall Street Banks explain why those payments should not be applied to reduce the account receivable of the investor lenders? How many

times should the lender be paid on the same debt?

Remember that there is no issue of subrogation, contribution or other claims against the borrower here. They were expressly waived in the contracts

for insurance and credit default swaps. Hence the payments should equitably be applied to the benefit of the investors whose money was used to startthe false securitization scheme under false pretenses. Once the investors are paid or considered paid because their agents received the money from

third party co-obligors, what is left for the borrowers to pay? Will the court order the borrower to pay “back” a lender who never made the loan?

A court ruling gives borrowers an unlimited deadline for rescinding second mortgages.

Source: http://LivingLies.Wordpress.com/2013/09/29/rescission-returns-in-3rd-circuit-opinion