Rescission and HOEPA Claims in Bankruptcy

15 Dec Rescission and HOEPA Claims in Bankruptcy

Homeowners faced with foreclosure because of refinanced home loans with abusive terms can bring an adversary action in bankruptcy to rescind them if there are violations of the Federal Truth in Lending Act (TILA) or the Home Owner’s Equity Protection Act (HOEPA). They may also have claims under the Federal Real Estate Settlement and Practices Act (RESPA) and various state statutes. Two recent bankruptcy court decisions (Dawson v. Thomas, Lexis 1074, April, 2008) and Wentz v. Saxon Mortgage et al., Lexis 2578, September, 2008) demonstrate that real relief is possible for the debtor in bankruptcy court.

Dawson involves misclassification of a home refinance as a commercial loan. A lender and broker who normally made rehabilitation loans to investors selling rental properties approached an unsophisticated home owner whose primary residence was threatened with foreclosure, charging her more than $11,000 in fees for a $35,000 loan, at 16% interest, with a balloon payment of the entire balance six months after the loan closed.

When Dawson filed for bankruptcy and initiated an adversary proceeding based on violations of TILA and RESPA, the lenders countered with a number of defenses. They maintained, first, that only the bankruptcy Trustee had the authority to assert claims on behalf of the bankruptcy estate. The opinion contains a lengthy discussion of the law supporting the court’s ruling that the individual debtor does have standing to bring such an action.

Second, the lender pointed to the debtor’s statements and signature on documents as proof that the loan was commercial and had not been misclassified. The court pointed to other documents, and the debtor’s narrative of events that occurred during the closing, as evidence that the lender had failed to exercise due diligence in determining the actual status of the house and the borrower’s financial condition. The court concluded that the lender should have known this was not a commercial transaction. Based on a number of TILA and HOEPA violations, the loan was determined to be rescindable, and Dawson was awarded statutory damages and attorney’s fees.

The bankruptcy judge in Dawson also addressed a perennial problem in rescission cases, the choice between demanding that net loan proceeds be repaid before the lender releases security interest, or releasing security interest when the borrower is in bankruptcy and will have little or nothing to pay unsecured debt, by imposing an interim mortgage on the net proceeds, at 6% interest, for up to 18 months. While this is not the best possible result for the debtor, it provides the debtor an opportunity to refinance the loan and make the required repayment to the lender.

The court in Wentz found bankruptcy to be an appropriate place for litigation of the debtor’s rights and denied the lender’s motion to dismiss based on the normal one year statute of limitations for such claims. Ohio Bankruptcy Judge Guy Humphrey applied the equitable doctrine of Recoupment to extend the time for recovery by the debtor on her claims against the lender since the damages could be offset against the amount that she was determined to owe the lender on her home loan.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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