People who purchased homes some years ago, which have often appreciated dramatically, even in poor neighborhoods.

The increase in foreclosures generally and the proportion of foreclosures accounted for by subprime lenders is illustrated by the following numbers:

Mortgage foreclosures in N.E. Illinois Number by subprime lenders

1993 5,899 131

1999 14,282 4,958

Most foreclosures result in default or bankruptcy. Few result in any lawyer looking through the loan documents to see if the homeowner has any claims or defenses.

A June 20, 2000 report, “Curbing Predatory Home Mortgage Lending,” jointly issued by the Department of Housing and Urban Development and the Department of the Treasury noted that the evidence “suggested that minorities, women, and the elderly bear the brunt of abusive mortgage lending practices, particularly in predominantly minority or low-income neighborhoods that do not have access to mainstream sources of credit.”



Either of loan or home improvements

Many of the solicitations are deceptive

Advertising of reduced monthly payments as compared with existing loan without disclosure of the fact that taxes and insurance are included in payments on existing loan but not proposed loan, that the number of payments will be greater, and that the total of payments will be greater

Deceptive use of “teaser” rates on adjustable rate mortgages: broker represents the “teaser” rate as actual rate; borrower is unable to pay post-“teaser” rate


Bad work/ no work

Grossly overpriced

Brokers of work rather than contractors

Disbursement of loan proceeds in manner that facilitates contractor misconduct

Proceeds of loan subject to HOEPA cannot be paid to home improvement contractor. Must be check payable to both consumer and contractor, or into escrow to be released upon inspection

Illinois law requires completion certificate

Spiking (doing part of work immediately to negate rescission rights)

Two contract ploy: getting consumers to sign binding agreements prior to disclosure of all financial terms. In some cases, the initial agreements (a) represent that the financing terms will be other than the final terms, (b) provide for stiff penalties for cancellation

Steep discounts, “chopping” (home improvement contractor gets 75% of purported “amount financed”)


Some lenders have been paying money to borrowers’ mortgage brokers to increase the interest rate. Look for references to “yield spread premium” or “YSP” or “premium” on the HUD-1.

The Eleventh Circuit has held that a yield spread premium tied solely to the broker’s increasing the interest rate, as opposed to the extent of the services performed by the broker, is an illegal referral fee under RESPA. Culpepper v. Irwin Mtge. Corp., 253 F.3d 1324, 2001 WL 672825 (11th Cir., June 15, 2001).

In Culpepper, mortgagors brought a class action against their mortgage lender alleging a violation of RESPA in connection with the lender’s payment of yield spread premiums to mortgage brokers who had originated the loan for the borrowers. Id. at *1. The district court granted the plaintiffs’ motion for class certification, certifying a class defined as all persons who “obtained [a] FHA mortgage loan that was funded by Irwin Mortgage Corporation wherein the broker was paid a loan origination fee of 1% or more and wherein Irwin paid a ‘yield spread premium’ to a mortgage broker.” Id. The defendant appealed the granting of class certification, arguing that class certification was not appropriated because evidence specific to each individual loan transaction would have to be presented in order to determine liability under RESPA.

The Culpepper defendant argued that the 1999 HUD policy statement interpreting whether a payment is illegal under RESPA (1999-1, 64 Fed.Reg. 10080), mandated a case-by-case analysis into the reasonableness of the fee. Id. at *3. The Culpepper defendant further argued that the HUD policy statement, as to the legality of yield spread premiums, required courts to engage in a “two-step reasonableness test:(1) whether any services were preformed by the broker, and (2) whether the yield spread premium and the fees the borrower pays the broker to add up to a reasonable compensation for the broker’s work.” Id.

Rejecting defendant’s argument, the Culpepper court interpreted the 1999 HUD policy statement as requiring courts in determining liability to first engage in a two-part analysis as to not only whether the broker preformed some of the services described in the HUD Statement, but also whether the yield spread premium is payment for those services rather than a referral. Id. at *6.[Emphasis added] The court stated that “[t]he crux of § 8(a)’s liability test, even when the suggested referral fee is dressed up as something else, is whether the payment is to compensate a referrer for referrals; the answer to that question lies in the terms of the agreement between the referrer and the recipient of the referral. . . .Under § 8(a), a payment whose reason is to compensate for referrals is illegal, period.” Id. at * 5. [Emphasis added] The court concluded that only if it is shown that the yield spread premium was indeed for services actually provided only then is the reasonableness of the broker’s total compensation evaluated.

HUD has now issued a new policy statement, 2001-1, 66 Fed.Reg. 53051 (Oct. 18, 2001), expressing disagreement with Culpepper. Local judges have disagreed as to whether to follow Culpepper. Compare Schauf v. Mortgage Bankers Service Corp., 01 C 4442, 2001 WL 1654711 (N.D.Ill., Dec. 20, 2001), with Vargas v. Universal Mortgage, 01 C 87, 2001 WL 1545874 (N.D.Ill., Nov. 29, 2001).

Claims: RESPA, state consumer fraud, breach of fiduciary duty/ inducing same

HUD policy statement, Vento letter. Note that HUD policy statement, which is not a regulation issued pursuant to the Administrative Procedure Act, may not be effective to modify § 8. Echevarria v. Chicago Title & Trust Co., 256 F.3d 623 (7th Cir. 2001). The statute itself prohibits both the giving and the acceptance of “any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service…shall be referred to any person” 12 U.S.C. §2607(a). In Echevarria, the Seventh Circuit held that the text of RESPA takes precedence over “policy statements” of HUD, issued without compliance with the notice-and-comment rulemaking procedures of the Administrative Procedure Act. Interpretations such as those in policy statements are entitled to respect but only to the extent that those interpretations are consistent with the statutory text and have the power to persuade. See also, Glover v. Standard Federal Bank, 97-2068, 2000 U.S.Dist. LEXIS 20670, *10 n. 6 (D.Minn., March 22, 2000): “The test articulated in the HUD Policy Statement–as construed by the Defendants in this case and the courts of this District–simply makes no sense. Under such an interpretation, a lender could offer a broker an explicit kickback, but then justify that kickback post hoc by tying the “total compensation” to goods and services. Even if such an interpretation were not in conflict with the plain language of RESPA, it would surely qualify as irrational.”

Some lenders are providing “disclosures” relating to yield spread premiums in an effort to continue paying them. The disclosures are almost always materially incomplete (for example, no one tells borrowers that the impact of a 1% increase in the APR at typical subprime rates is $20,000 over the life of the loan) and in many instances affirmatively deceptive. We have seen one disclosure that prominently informs the borrower that if he doesn’t agree to the yield spread premium he must pay the broker’s fee. In Illinois, at least, a broker fee can only be paid from the loan proceeds. 38 Ill. Adm. Code §1050.1335 (regulations issued by Office of Banks and Real Estate under Illinois Residential Mortgage Act). In any event, these disclosures do not eliminate the character of the yield spread premium as in illegal referral fee.


Many lenders make both prime and subprime loans, often through separate divisions. The Bank of America, for example, makes prime loans through its Bank of America Mortgage division and subprime loans through Equicredit.

If a person who qualifies for a prime loan is placed in contact with the subprime unit of a lender that makes both prime and subprime loans, they often will get a subprime loan at a subprime rate. Mortgage brokers have an incentive to get the consumer to deal with the subprime unit because it can pay higher “yield spread premiums.”


The June 20, 2000 report, “Curbing Predatory Home Mortgage Lending,” noted that “While subprime lending involves higher costs to the lender than prime lending, in many instances the Task Force saw evidence of fees that far exceeded what would be expected or justified based on economic grounds, and fees that were ‘packed’ into the loan amount without the borrower’s understanding.”


What it is: credit life or disability insurance, the entire premium for which is charged at the outset of the loan, added to the loan balance, and financed

What it does: allows the lender to increase the amount of loan and amount on which interest is computed without actually disbursing the amount of loan. About 50% or more of the premium is the commission.

In many cases, borrowers are told that the credit insurance is mandatory (it cannot be), or it is simply included in the loan papers without any request or agreement, a practice known as “packing”.

Failure to refund same upon prepayment


Some mortgage broker agreements require the borrower to pay the broker fee if the borrower decides to cancel or not proceed with the transaction. If the lender is aware of the broker agreement, this contradicts the rescission notice and gives rise to an extended 3-year right to rescind, with all payments applied to principal.


Making loans without expectation of repayment for the purpose of acquiring the borrower’s equity. In many cases, such loans involve exorbitant “points” and other devices, so that the financing entity is getting a mortgage substantially in excess of the amount of cash actually disbursed to unrelated third parties.

Some lenders advertise that they make “no documentation” subprime loans. This is an open invitation to the making of unaffordable loans.


The June 20, 2000, HUD-Treasury report, “Curbing Predatory Home Mortgage Lending,” described “Loan flipping” as the practice of repeatedly refinancing a mortgage loan without benefit to the borrower, in order to profit from high origination fees, closing costs, points, prepayment penalties and other charges, steadily eroding the borrower’s equity in his or her home.”

A particularly egregious aspect of flipping is requiring the borrower to refinance low-rate first mortgages. Many homeowners who need to borrow for home improvements are steered to predatory lenders who will not simply make a second mortgage home improvement loan but insist on refinancing the balance on a 6-8% purchase money mortgage with a 10-13% loan.

Lenders also promote the use of mortgages to consolidate unsecured credit card and personal loan debt.


$75 for courier fees; $100 for wire transfers, etc.

Document preparation fees may be subject to challenge as involving unauthorized practice of law.

“Appraisal review” fees have been challenged by HUD as bogus

People were charged by a title company for recording a release when the lender also charged for recording the same release in the payoff letter.


Many mortgage loans (Household, Associates) contain a provision promising a rate reduction if the borrower pays on time for x period. These are required to be, but are often not, disclosed in the TILA disclosures. This gives rise to extended rescission rights (3 years), with the borrower being able to apply all payments to principal.

Spurious open end credit:

Deceptive use of open-end credit instruments: certain lender use open-end credit instruments for wholly inappropriate purposes, such as home improvement financing and to replace mortgages. (A credit card is a typical open-end credit arrangement. A 30-year home mortgage is a typically closed-end credit arrangement.) The effect of using open-end credit documentation is to evade certain Truth in Lending disclosure requirements:

Total finance charge

Whether, if you make the minimum required payments, the mortgage will fully amortize, i.e., will you have a large balloon payment

Avoid including “points” in the annual percentage rate.

Issuing two loans and two disclosure statements in single transaction: makes it impossible to calculate rate


These are limited by HOEPA. They are also restricted by Illinois law.

Many HOEPA loans have prepayment penalties that do not comply with the requirements of HOEPA, in that they do not by their terms preclude application if the prepayment is the result of refinancing by the same lender.

Don’t assume that if a prepayment penalty applies, the lender is correctly computing the amount.

Some lenders attempt to charge prepayment penalties after they have placed a loan in foreclosure. Generally, this is not permissible, even if the borrower resolves the situation by refinancing.


The “1-4 Family Rider” giving security interest in all personal property on the premises

Sometimes in text of mortgage


A common feature of predatory lending is structuring loans so that the borrower still owes most of the amount borrowed at the end of the loan. The homeowner is not able to pay the balloon payment at the end of the loan, and either loses the home after making years of high-interest payments or is forced to refinance.


Some loans provide that they can be accelerated in the sole discretion of the lender.


In some cases, the borrower actually owes more at the end of the loan than at the beginning, because the loan payments are insufficient to cover the interest.


Recently lenders have been promoting loans where the amount of the loan exceeds the fair market value of the home, often as much as 125%. Such loans are impossible to refinance except by another, similar loan, locking the borrower into high-rate loans.


Mandatory arbitration clauses require, as a condition of receiving a loan, that a borrower agrees to resolve any and all disputes arising out of the loan through arbitration, rather than litigation. The June 20, 2000, HUD-Treasury report found that “Mandatory arbitration may severely disadvantage HOEPA borrowers. Because of the potential for such clauses to restrict unfairly the legal rights of the victims of abusive lending practices, HUD and Treasury believe that Congress should prohibit mandatory arbitration for HOEPA loans.”

In many cases, these clauses also contain a waiver of substantive TILA rights, such as the right to attorney’s fees. Insisting on a waiver of such rights as a condition of making a loan should not only invalidate the arbitration agreement, Gilmer v. Interstate/ Johnson Lane Corp., 500 U.S. 20 (1991) but violates the Equal Credit Opportunity Act, 15 U.S.C. § 1691(a)(3), which prohibits discrimination “with respect to any aspect of a credit transaction . . . (3) because the applicant has in good faith exercised any right under the Consumer Credit Protection Act . . . .”


Forgery of deeds, coercion of elderly homeowners by family members, etc., are frequent occurrences. Loans have been made to persons who are clearly mentally incapacitated. Falsification or alteration of applications is a common means of making unaffordable loans.



Some mortgage companies do not apply payments as required by the note and mortgage. For example, a common form of note and mortgage states that payments will be applied to (i) prepayment charges, (ii) escrow deposits, (iii) interest, (iv) principal, and (v) late charges. In fact, the lender applies payments to late charges before principal. Interest is charged on unpaid principal, but not on unpaid late charges. The loan principal is not being reduced as fast as it should, resulting in excess interest.


Account in which mortgage company places payments without applying them

Not authorized


a. “Property inspection” or “property preservation” fees;

c. Post-acceleration late fees: probably illegal

d. Fees for accepting payments (speed pay and the like).


Late charges are assessed for timely payments


Obtain an account history and all rate change notices

Read the note and mortgage and all riders carefully to make certain that you understand the adjustment mechanism. Do not assume that it makes sense or is capable of application. In one case, we found that the note and a rider conflicted as to the frequency of adjustments. In another, we found such a short interval between the reference date and the change date that the lender could not apply the formula according to its terms.

There are serious servicing “errors” on perhaps half of all “subprime” adjustable rate mortgages. These include ignoring “caps” on rate increases (in one case the interest rate was increased 3% when the documents clearly limited increases to 1.5% on any one occasion). Examine any ARM for maladjustments.

Contract violation, TILA, consumer fraud, usury


Banks and mortgage companies typically treat payments Received within the grace period as having been received on the first. Consumer finance companies typically calculate interest on a daily basis through the day the payment is received.

Standard FNMA loan documents do not authorize daily interest

One of the most commonly used uniform promissory note forms employed by Fannie Mae and Freddie Mac is Form 3200, “Multistate Fixed Rate Note – Single Family – FNMA/FHLMC Uniform Instrument Form 3200 12/83,” that provides in pertinent part:

2. Interest

Interest will be charged on unpaid principal until the full amount of principal has been paid. I will pay interest at a yearly rate of %.

The Fannie Mae Servicing Guide, Part III, Ch. 1, § 101 (page 306) says that the language from Form 3200 means one-twelfth of annual interest with each monthly payment:

III, 101: Scheduled Mortgage Payments (09/30/96)

The interest portion of the fixed installment must be determined by computing 30 days’ interest on the outstanding principal balance as of the last paid installment date. For this calculation, always use the current interest accrual rate for the mortgage. Interest for second mortgages may be determined by a payment-to-payment calculation method if the mortgage instrument requires it. [Emphasis added.]

The Fannie Mae Servicing Guide, Part VI, Ch. 1, §102.01 (page 605) says much the same thing:

VI, 102.01: Interest Calculation (03/20/96)

Interest charged to the mortgagor should always be calculated on the outstanding principal balance of the mortgage as of the last paid installment date, using the current interest accrual rate. A full month’s interest should be calculated on the basis of a 360-day year, while a partial month’s interest should be based on a 365-day year.

Cases where a mortgage loan was transferred from one company to another and the new company began allocating more of the borrower’s payment to interest if it was received within the grace period but after the first. This typically happens where the loan is sold by a regular mortgage company to a consumer finance company. If a bank or mortgage company transfers a loan to a consumer finance company, the latter is not entitled to change the method of computing interest. The difference can amount to tens or hundreds of dollars per month.


All mortgages require the homeowner to insure the home against fire and casualty. If the homeowner fails to pay his insurance premiums (either directly or through an escrow account), the cheapest thing for the lender to do is to advance the premium and add it to the debt, thereby continuing coverage. Instead, some lenders “force place” their own insurance, which has much higher premiums. Often, a substantial portion of the premiums is paid as commissions to an affiliate of the lender.



Mortgage companies have a statutory obligation to respond to complaints and requests for explanations of accounts.


Short statutes of limitations: 1 year/ 2 years/ 3 years

Truth in Lending Act, 15 U.S.C. §§1601 et seq. (“TILA”), and FRB Regulation Z, 12 C.F.R. part 226, and Home Ownership & Equity Protection Act amendment, 15 U.S.C. §§1602(aa) and 1639 (“HOEPA”), 12 C.F.R. §§226.31, 226.32

Jurisdictional requirements

Is transaction “primarily” for personal, family or household purposes? Generally, what is determinative is use made of more than 50% of loan proceeds. Bokros v. Associates Finance, Inc., 607 F.Supp. 869 (N.D.Ill. 1984). Issues arise where loan is obtained to purchase a 2-4 unit building, 1 unit of which is occupied by the homeowner. Generally, a 2-flat should always be for “personal” use (because the money for the land and one dwelling unit will exceed 50% of the loan proceeds); the other situations present fact issues. If the purpose of acquiring the property was to obtain a residence and the borrower was not engaged in the business of owning property for rental or investment, the fact that the income from the additional units helped finance the acquisition should not be determinative.

The time at which the purpose is to be assessed is when the transaction was consummated. Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, and Clark, L.L.C., 214 F.3d 872 (7th Cir. 2000).

Number of loans needed to make one a “creditor”: 5 real estate secured loans; 2 HOEPA loans; 26 other extensions of credit per annum.

Congress “decided to effectively adopt a new national loan vocabulary that means the same in every contract in every state.” Mason v. General Finance Corp., 542 F.2d 1226, 1233 (4th Cir. 1976). “The legislative history [of TILA] makes crystal clear that lack of uniformity in the disclosure of the cost of credit was one of the major evils to be remedied by the Act.” (Id., 542 F.2d at 1231)

TILA and Regulation Z accordingly require disclosure of several key credit terms, computed in the precise manner prescribed by the Regulation and using precise terminology.

The “amount financed” is “the amount of credit provided to you [the consumer] or on your behalf.” 12 C.F.R. §226.18(b).

The “finance charge” is “the dollar amount the credit will cost you [the consumer].” 12 C.F.R. §226.18(d). Includes “any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.” 12 C.F.R. §226.4(a).

The “annual percentage rate” is the finance charge expressed as an annual rate

How to compute finance charge, APR

What items go in finance charge

General exclusions from finance charge

In real estate transactions, there is a special exclusion for certain charges in 15 U.S.C. §1605(e) and 12 C.F.R. §226.4(c)(7). The Federal Reserve Board has also determined that “a lump sum charged for conducting or attending a closing (for example, by a lawyer or a title company) is excluded from the finance charge if the charge is primarily for services related to items listed in section 226.4(c)(7) (for example, reviewing or completing documents), even if other incidental services such as explaining various documents or disbursing funds for the parties are performed.” 12 C.F.R. part 226 Supp. I, ¶4(c)(7)-2.

Very important qualification: Regulation Z requires that excluded fees be “bona fide and reasonable in amount”. 12 C.F.R. §226.4(c)(7).

HOEPA provisions, 15 U.S.C. §§1602(aa), 1639, 12 C.F.R. §§226.31, 226.32, 226.34 (added by 2001 amendment):

Determination of applicability of HOEPA

Interest rate trigger: just lowered by FRB, 66 FR 65604 (Dec. 20, 2001). Under new regulation, the APR trigger for first- lien mortgages is reduced to 8 percentage points above comparable Treasury securities (about 13%); the APR trigger for subordinate-lien loans remains at 10 percentage points (about 15%).

“Points and fees” trigger: recently amended

Treatment of yield spread premiums

Treatment of single premium credit insurance: now count towards trigger

Advance disclosures. New regulations make clear that when terms are changed, such as by inclusion of insurance, a new set of advance disclosures must be provided and a new waiting period applies. 12 C.F.R. §226.31(c)(1) and commentary.

Prepayment penalties and due on demand clauses restricted

Home improvement disbursements

Prohibition on making loans that cannot be repaid from income

Restriction on “flipping”: under 2001 regulation, within the first twelve months of originating a HOEPA loan to a borrower, the creditor is prohibited from refinancing that loan (whether or not the creditor still holds the loan) or another HOEPA loan held by that borrower.

Rescission rights

Notice of right to cancel (2x to everyone whose interest in their home is subjected to security interest, not just borrower)

Not limited to real property: mobile homes

Applies to HOEPA notice also. See footnote to 12 C.F.R. § 226.23, specifying what misdisclosures give rise to extended right to rescind.

Material financial disclosures


Extended rescission rights (3 years)

Common violations

Certain subprime mortgage lenders are at least sometimes using the wrong “notice of right to cancel” form on refinancings. (They are using the H-9 form where the H-8 is required.) This gives rise to a continuing three-year right to cancel, with all payments applied to principal.

Leaving the borrower’s copies blank. The relevant copy, of course, is the one delivered to the consumer, not the one retained by the lender. Reese v. Hammer Financial, 1999 U.S.Dist. LEXIS 18812 (N.D.Ill., Nov. 29, 1999).

Confirmation of non-rescission at same time loan is made: Rodash v. AIB Mortgage Co., 16 F.3d 1142 (11th Cir. 1994).

Contradicting information in notice of right to cancel: Jenkins v. Landmark Mtge. Corp., 696 F.Supp. 1089 (W.D.Va. 1988).

Misdating notice of right to cancel: Taylor v. Domestic Remodeling, Inc., 97 F.3d 96, 99 (5th Cir. 1996) (incorrect rescission date combined with disbursement of loan constitutes violation of TILA); Williamson v. Lafferty, 698 F.2d 767, 768-69 (5th Cir. 1983) (failure to fill in rescission expiration date violates TILA); Jackson v. Grant, 890 F.2d 118 (8th Cir. 1989); Semar v. Platte Valley Fed. Sav. & Loan Ass’n, 791 F.2d 699 (9th Cir. 1986); Williams v. Lafferty, 698 F. 2d 767 (5th Cir. 1983); Riopta v. Amresco Residential Mortgage Corp., 101 F. Supp.2d 1326 (D. Haw. 1999); Reynolds v. D&N Bank, 792 F. Supp. 1035 (E.D. Mich. 1992); New Maine Nat’l Bank v. Gendron, 780 F. Supp. 52 (D.Me. 1991); Smith v. Wells Fargo Credit Corp., 713 F.Supp. 354 (D.Ariz. 1989); Aquino v. Public Finance Consumer Discount, 606 F. Supp. 504 (E.D. Pa. 1985) (all involving missing or incorrect dates).

Long-distance transactions

In many cases, mortgage loans are made which are supposed to be just under the 8% HOEPA threshold on fees and charges. In fact, they are not, because the governmental fees are inflated or not paid over to governmental agencies. (This is apart from counting yield spread premiums toward the 8%.)

Who disclosures are given to: each person entitled to rescind

Certain mortgage companies have routinely excluded closing fees from the finance charge (Ameriquest, First Union).

Failure to disclose all payment levels

Improper prepayment penalty provisions


Statutory damages

Actual damages (rarely sought)

HOEPA damages

Assignee liability

Real Estate Settlement Procedures Act, 12 U.S.C. §§2601 et seq. (“RESPA”) and HUD Regulation X, 24 C.F.R. part 3500

Good Faith Estimate

Probably no private right of action

Escrow limitations

Also no direct private right of action, but actionable on other theories

Cranston Gonzales, 12 U.S.C. §2605

Transfer of servicing

Duty to respond to inquiries

Kickbacks, yield spread premiums, bogus charges: 12 U.S.C. §2607

“Preservation of claims rule” (16 C.F.R. part 433)

In 1976, the Federal Trade Commission promulgated a regulation, 16 C.F.R. part 433, intended to address the problem of consumer liability to financial institutions which finance the purchase of defective goods. As explained in the FTC’s Staff Guidelines on Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses, the purpose of the regulation was to make it impossible “for a seller to arrange credit terms for buyers which separate the consumer’s legal duty to pay from the seller’s legal duty to keep his promises.” Prior to the regulation, this could be accomplished in three ways: (1) “[T]he seller may execute a credit contract with a buyer which contains a promissory note,” which was then negotiated to a financing institution. (2) “[T]he seller may incorporate a written provision called a ‘waiver of defenses’ in the text of an installment sales agreement” and then assign the agreement to a financing institution. (3) “[A] seller may arrange a direct loan for his buyer” from the financing institution. (Id.)

The FTC regulation “is directed at all three of the above situations.” Seller-arranged direct loans were expressly included because “[i]n jurisdictions where efforts have been made to curtail the use of promissory notes and waivers of defenses, the Commission documented a significant increase in the use of arranged loans to accomplish the same end.” (Id.)

The FTC regulation has two parts. The first part, 16 C.F.R. §433.2(a), applies to situations (1) and (2) — where the seller and the consumer enter into an obligation which is then assigned or transferred to a financing institution. In that situation, the FTC regulation eliminates holder in due course status for the financing institution by requiring that the contract contain the following statement:


The second part of the regulation, 16 C.F.R. §433.2(b), applies to situation (3) — where the seller refers the consumer to a lender which proceeds to enter into a loan agreement with the consumer. Section 433.2(b) is triggered when a “creditor” makes a cash advance to a consumer which the consumer applies, “in whole or substantial part, to a purchase of goods or services from a seller who (1) refers consumers to the creditor or (2) is affiliated with the creditor by common control, contract, or business arrangement.” (16 C.F.R. §433.1(d)) It requires that “any consumer credit contract made in connection with such purchase money loan” — i.e., the contract between the consumer and the lender — contain the following notice:


The Fifth and Seventh Circuits have held that the FTC required notice does not overcome the limitation on assignee liability in the Truth in Lending Act, 15 U.S.C. §1641. Walker v. Wallace Auto Sales, 155 F.3d 927 (7th Cir. 1998).

Fair Debt Collection Practices Act, 15 U.S.C. §1692 et seq.

Company that acquires current debt for servicing – typical mortgage servicing company – is exempt: 15 U.S.C. §1692a(6)

However, purchaser of allegedly delinquent debt may constitute debt collector. Pollice v. National Tax Funding, L.P., 225 F.3d 379 (3d Cir. 2000).

Common violations that may be committed in mortgage context:

Complete omission of statutory notices, 15 U.S.C. §§1692e(11) and 1692g.

Contradicting or overshadowing statutory notices. This may often occur where the first communication from the collector is the summons and complaint. In re Martinez, 2001 WL 980277 (Bankr. S.D.Fla. 2001).

Failure to state amount of debt, 15 U.S.C. §1692g

Equal Credit Opportunity Act, 15 U.S.C. § 1691 et seq., and Federal Reserve Board Regulation B, 12 C.F.R. part 202.



Notice of credit denial

Discrimination: Fair Housing Act (Civil Rights Act, Title VIII) and 42 U.S.C. §§1981-1982

Fair Housing Act makes it unlawful:

“To refuse to sell or rent after the making of a bona fide offer, or to refuse to negotiate for the sale or rental of, or otherwise make unavailable or deny, a dwelling to any person because of race . . . .” (42 U.S.C. § 3604(a))

“To discriminate against any person in the terms, conditions or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of race . . ..” (42 U.S.C. § 3604(b))

“for any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race.” (42 U.S.C. § 3605(a)).

Fair Housing Act reaches any “discrimination that adversely affects the availability of housing.” Clifton Terrace Assocs. v. United Tech. Corp., 929 F.2d 714, 719 (D.C.Cir. 1991).

Fair Housing Act covers “disparate impact” as well as discriminatory intent. Metropolitan Housing Devel. Corp. v. Village of Arlington Heights, 558 F.2d 1283, 1287-90 (7th Cir. 1977).

Reverse redlining: targeting certain areas for credit on unfair terms. See Newton v. United Cos. Fin. Corp., 24 F.Supp.2d 444, 455 (E.D.Pa. 1998); Williams v. Gelt Fin. Corp., 237 B.R. 590, 594 (E.D.Pa. 1999); United Cos. Lending Corp. v. Sargeant, 20 F.Supp.2d 192, 203 n. 5 (D.Mass. 1998).

“Exploitation” theory: Clark v. Universal Builders, Inc., 501 F.2d 324, 328, 335-6 (7th Cir. 1973); Contract Buyers League v. F&F Investment, 300 F.Supp. 210, 216 (N.D.Ill. 1969), aff’d, 420 F.2d 1191 (7th Cir. 1970); Fairman v. Schaumburg Toyota, Inc., 94 C 5745, 1996 WL 392224 (N.D.Ill., July 10, 1996)(Andersen, J.).

Fair Credit Reporting Act, 15 U.S.C. § 1681

Notice of credit denial

S-2 violation (furnishing false information to credit bureau in response to verification request)

Illinois Consumer Fraud Act, 815 ILCS 505/1 et seq.


The basic elements of a deception claim are (1) a deceptive act or practice, (2) at least if an omission is concerned, defendant’s intent that the plaintiff rely on the deception, and (3) that the deception occurred in the course of conduct involving trade or commerce. Vance v. National Benefit Ass’n, 1999 U.S.Dist. LEXIS 13846 (N.D.Ill. 1999), *13; Shields v. Lefta, Inc., 888 F. Supp. 891 (N.D. Ill. 1995); Siegel v. Levy Org. Dev. Co., 153 Ill.2d 534, 607 N.E.2d 194, 198 (1992); Brandt v. Time Ins. Co., 302 Ill.App.3d 159, 704 N.E.2d 843, 946 (1st Dist. 1998); Bankier v. First Fed. Sav. & Loan Ass’n, 225 Ill.App.3d 864, 588 N.E.2d 391 (4th Dist.), leave to appeal denied, 146 Ill.2d 622, 602 N.E.2d 446 (1992).

The test of “deception” is whether a representation “creates the likelihood of deception or has the capacity to deceive” the persons exposed to the practice in the particular case. Elder v. Coronet Ins. Co., 201 Ill.App.3d 733, 558 N.E.2d 1312 (1st Dist. 1990), appeal withdrawn, Elder v. Coronet Ins. Co., 139 Ill.2d 594, 575 N.E.2d 913 (1991); Williams v. Bruno Appliance & Furniture Mart, Inc., 62 Ill.App.3d 219, 222, 379 N.E.2d 52, 54 (1st Dist. 1978); Beard v. Gress, 90 Ill.App.3d 622, 625, 413 N.E.2d 448 (1st Dist. 1980).

The Consumer Fraud Act imposes an affirmative duty to disclose material facts pertaining to a transaction. Connick v. Suzuki Motor Co., 174 Ill. 2d 482, 675 N.E.2d 584 (1996). “Under the Act the omission of any material fact is deceptive conduct.” Crowder v. Bob Oberling Enterprises, Inc., 148 Ill.App.3d 313, 317, 499 N.E.2d 115 (1st Dist. 1986); Simeon Mgmt. Corp. v. FTC, 579 F.2d 1137, 1145 (9th Cir. 1978) (“failure to disclose material information may cause an advertisement to be false or deceptive within the meaning of the FTCA [Federal Trade Commission Act] even though the advertisement does not state false facts”); J. B. Williams Co. v. FTC, 381 F.2d 884, 888 (6th Cir. 1967) (court found a violation of FTCA §5 based on the manufacturer’s failure to disclose that “Geritol” was useful only to individuals who were deficient in one of the vitamins or minerals contained in the product and required affirmative disclosure of “the negative fact that a great majority of persons who experience these symptoms do not experience them because there is a vitamin or iron deficiency”). Thus, material omissions are actionable even if no duty to disclose the omitted information, other than that imposed by the Consumer Fraud Act itself, exists. Connick v. Suzuki Motor Co., supra, 174 Ill.2d 482, 675 N.E.2d 584 (1996); Celex Group v. Executive Gallery, 877 F.Supp. 1114 (N.D. Ill. 1995), citing Totz v. Continental Du Page Acura, 236 Ill.App.3d 891, 602 N.E.2d 1374 (2d Dist. 1992) (car dealer has duty to disclose that vehicle has been previously damaged in an accident).

A matter is “material” if it might cause a consumer to act differently. Kleidon v. Rizza Chevrolet, Inc., 173 Ill.App.3d 116, 527 N.E.2d 374 (1st Dist. 1988), leave to appeal denied, 123 Ill.2d 559, 535 N.E.2d 402 (1988). “Materiality” is objective, to be determined according to the standard of the population to which the defendant’s practices are directed. Heastie v. Community Bank of Greater Peoria, 690 F.Supp. 716 (N.D.Ill. 1988), later opinion, 125 F.R.D. 669 (N.D.Ill. 1989), later opinion, 727 F. Supp. 1133 (N.D.Ill. 1989), later opinion, 727 F.Supp. 1140 (N.D.Ill. 1989); Mother Earth, Ltd. v. Strawberry Camel, Ltd., 72 Ill.App.3d 37, 52, 390 N.E.2d 393, 406 (1st Dist. 1979), appeal after remand 98 Ill.App.3d 518, 424 N.E.2d 758 (1st Dist 1981). Note that this does not mean that the consumer would not have entered into the transaction at all, just that something different would have happened. Thus, small overcharges obtained through deception or unfair practices are actionable. People ex rel. Hartigan v. Stianos, 131 Ill.App.3d 575, 475 N.E.2d 1024 (2d Dist. 1985).

Even the “unthinking, the ignorant and the credulous” are protected from deceptive conduct, Williams, supra, quoting from Rodale Press, Inc., 71 F.T.C. 1184, 1237-38 (1967). Accordingly, lack of due diligence on the part of the injured party is no defense. Zimmerman v. Northfield Real Estate, Inc., 156 Ill.App.3d 154, 168, 510 N.E.2d 409 (1st Dist. 1986), appeal denied, 116 Ill.2d 578, 515 N.E.2d 129 (1987); Beard v. Gress, supra, (“neither the mental state of the person making a misrepresentation nor the diligence of the party injured to check as to the accuracy of the misrepresentation [is] material to the existence of a cause of action for that misrepresentation”); Carter v. Mueller, 120 Ill.App.3d 314, 320, 457 N.E.2d 1335 (1st Dist. 1983).

Deception is evaluated from the perspective of an unsophisticated consumer. FTC v. Standard Education Society, 302 U.S. 112, 115 (1937) (“The fact that a false statement may be obviously false to those who are trained and experienced does not change its character, nor take away its power to deceive others less experienced. . . . Laws are made to protect the trusting as well as the suspicious”); Clomon v. Jackson, 988 F.2d 1314, 1318-1319 (2d Cir. 1993) (the law protects “the vast multitude which includes the ignorant, the unthinking and the credulous,” and “in evaluating the tendency of language to deceive,” courts and agencies “look not to the most sophisticated readers but rather to the least”); Gammon v. GC Services, 27 F.3d 1254, 1257 (7th Cir. 1994) (following Clomon, standard is that of the “unsophisticated” consumer and protects the average consumer “who is uninformed, naive, or trusting”).

Broker bribery: Browder v. Hanley Dawson Cadillac Co., 62 Ill.App.3d 623, 379 N.E.2d 1206 (1st Dist. 1978); Fox v. Industrial Cas. Ins. Co., 98 Ill.App.3d 543, 424 N.E.2d 839 (1st Dist. 1981); Fitzgerald v. Chicago Title & Trust Co., 72 Ill.2d 179, 380 N.E.2d 790 (1978) .

Unaffordable loans: Fidelity Financial Services, Inc. v. Hicks, 214 Ill.App.3d 398, 574 N.E.2d 15 (1st Dist. 1991).

§2B (door to door sales)

§2N (foreign language translations of documents)

Illinois Residential Improvement Loan Act, 815 ILCS 135/1 et seq.

Retail Installment Sales Act, 815 ILCS 405/1 et seq.

Illinois Residential Mortgage License Act, 205 ILCS 635/1-1 et seq., and regulations

Provides for licensing and regulation of mortgage lenders and brokers

Regulations require written agreement between broker and client, and provide that attorney’s fees are awardable in action for breach

Mortgage brokers must provide disclosure of their status as such

New predatory mortgage regulations, 38 Ill. Admin. Code part 1050, came into effect 5/17/01 and have been upheld against a preemption challenge. These lower the HOEPA triggers. There is no private right of action, but it may be possible to enforce them using the ICFA.

Cook County ordinance (no private right of action)

City of Chicago ordinance (no private right of action)

Usury: Illinois Interest Act, 815 ILCS 205/0.01 et seq.

No rate cap on mortgages (§4)

Points cap: not more than three points are permitted on “residential property” if the stated interest rate exceeds 8% (§4.1).

A junior lender who charges the maximum three points and also such separate items as a tax service fee may violate this prohibition.

Prepayment penalties: these are prohibited on “residential property” if the stated interest rate exceeds 8% (§4).

“Residential” is not defined in either statute. One case holds that an apartment building was not residential real estate when the borrower purchased the building to generate rental income and did not live in it. American Saving Ass’n v. Conrath, 123 Ill.App.3d 140, 462 N.E.2d 849 (5th Dist. 1984).

Unauthorized interest (§5)

Stiff penalties with good faith defense (§6):

Sec. 6. If any person or corporation knowingly contracts for or receives, directly or indirectly, by any device, subterfuge or other means, unlawful interest, discount or charges for or in connection with any loan of money, the obligor may, recover by means of an action or defense an amount equal to twice the total of all interest, discount and charges determined by the loan contract or paid by the obligor, whichever is greater, plus such reasonable attorney’s fees and court costs as may be assessed by a court against the lender. The payments due and to become due including all interest, discount and charges included therein under the terms of the loan contract, shall be reduced by the amount which the obligor is thus entitled to recover. Recovery by means of a defense may be had at any time after the loan is transacted. Recovery by means of an action may be had at any time after the loan is transacted and prior to the expiration of 2 years after the earlier of (1) the date of the last scheduled payment of the loan after giving effect to all renewals or extensions thereof, if any, or (2) the date on which the total amount due under the terms of the loan contract is fully paid. A bona fide error in connection with a loan shall not be a violation under this section if the lender corrects the error within a reasonable time.

No provision of this Section imposing any liability shall apply to any act done or omitted in good faith in conformity with any rule or regulation or interpretation thereof by the Department of Financial Institutions or any other department or agency of the State, notwithstanding that after such act or omission has occurred, such rule, regulation or interpretation is amended, rescinded or determined by judicial or other authority to be invalid for any reason.

Extensive federal preemption

DIDMCA: Depositary Institution Deregulation and Monetary Control Act of 1980, 12 U.S.C. §§ 1735f-7a and 1831d, and OTS regulations, 12 C.F.R. part 590 (points cap preempted on purchase money firsts; cases divided on non purchase money firsts)

AMTPA: Alternative Mortgage Transaction Parity Act, 12 U.S.C. § 3801 et seq. (preempts points and prepayment penalty restrictions on all balloon loans, ARMs)

OTS (FHLBB) regulations, 12 C.F.R. part 560: generally, prepayment penalties may be imposed notwithstanding state law on loans made by institutions supervised by OTS

National Bank Act, 12 U.S.C. §§ 85-6, 371, and Comptroller of the Currency Regulations, 12 C.F.R. parts 7, 34.



No longer any maximum interest rates

Rebate of unearned interest on prepayment

Regulation of credit life, disability and property insurance

Prohibition of charges not authorized by CILA

Disclosure requirements (satisfied by compliance with TILA)

Prohibition of small mortgage loans (under $3,000)

Fiduciary liability of mortgage broker

One who undertakes to find and arrange financing or similar products for another becomes the latter’s agent for that purpose, and owes statutory, contractual and fiduciary duties to act in the interest of the principal and make full disclosure of all material facts. “A person who undertakes to manage some affair for another, on the authority and for the account of the latter, is an agent.” In re Estate of Morys, 17 Ill.App.3d 6, 9, 307 N.E.2d 669 (1st Dist. 1973).

A mortgage loan broker is an agent procured by the borrower to obtain a loan. Wyatt v Union Mtge. Co., 24 Cal.3d 773, 782, 157 Cal.Rptr. 392, 397, 598 P.2d 45 (1979) (a mortgage broker owes a fiduciary duty of the “highest good faith toward his principal,” the prospective borrower, and “is ‘charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal’s decision’”). Accord: Allabastro v. Cummins, 90 Ill.App.3d 394, 413 N.E.2d 86, 82 (1st Dist. 1980); In re Dukes, 24 B.R. 404, 411-12 (Bankr. E.D.Mich. 1982) (“the fiduciary, Salem Mortgage Company, failed to provide the borrower-principal with any sort of estimate as to the ultimate charges until a matter of minutes before the borrower was to enter into the loan agreement”); Community Fed. Savings v. Reynolds, 1989 U.S. Dist. LEXIS 10115 (N.D.Ill. August 18, 1989); First City Mtge. Co. v. Gillis, 694 S.W.2d 144, 147 (Tex.Civ.App. 1985) (requirement of fiduciary duty forbids conduct on the part of the broker which is fraudulent or adverse to his principal’s interest and also imposes duty of full disclosure of facts material to his principal); In re Russell, 72 B.R. 855 (Bankr. E.D.Pa 1987); Langer v. Haber Mortgages, Ltd., New York Law Journal, August 2, 1995, p. 21 (N.Y. Sup.Ct.).

When lender is holder in due course: Adams v. Madison Realty & Development, Inc., 853 F.2d 163 (3d Cir. 1988) (“holder” is one who receives by endorsement on the note / mortgage or “allonge” physically affixed thereto; usual practice of executing assignment does not make recipient a “holder”).

An assignee of a note and mortgage who is not a holder in due course, takes it subject to whatever infirmities it has in the hands of the original obligee. “The rule is that the assignee of a contract takes it subject to the defenses which existed against the assignor at the time of the assignment.” Allis-Chalmers Credit Corp. v. McCormick, 30 Ill.App.3d 423, 424, 331 N.E.2d 832 (4th Dist. 1975); accord, Montgomery Ward & Co. v. Wetzel, 98 Ill.App.3d 243, 423 N.E.2d 1170, 1175 (1st Dist. 1981) (“the assignee thus takes the assignor’s interest subject to all legal and equitable defenses existing at the time of assignment”); Inland Real Estate Corp. v. Oak Park Trust & Savings Bank, 127 Ill.App.3d 535, 469 N.E.2d 204, 209 (1st Dist. 1983) (“It is a well established general rule that the assignee of a trust deed in the nature of a mortgage takes it subject to the same defenses that existed between the original parties to the instrument”); UCC§3-306, 810 ILCS 5/3-306 (“Unless he has the rights of a holder in due course any person takes the instrument subject to . . . all defenses of any party which would be available in an action on a simple contract”); Hirsh v. Arnold, 318 Ill. 28, 148 N.E. 882, 888 (1925) (usury case: “a purchaser of a mortgage or trust deed takes it subject to all the infirmities to which it is liable in the hands of the mortgagee, and in equity the mortgagor is entitled to every defense against the assignee which he would have made against the original mortgagee”); Chicago City Bank & Trust Co. v. Garvey, 1990 U.S.Dist. LEXIS 10903 (N.D.Ill., Aug. 17, 1990) (“The assignee of a mortgage takes it subject to the same equities it was subject to in the hands of the assignor . . . .”), aff’g, In re Radford, 1988 Bankr. LEXIS 1898 (Bank. N.D.Ill. Oct. 27, 1988); Cobe v. Guyer, 237 Ill. 568, 86 N.E. 1088, 1090 (1909) (usury was defense in suit by receiver of original creditor; “[s]o long as any part of the original debt remains unpaid, the debtor may insist upon the deduction of the usury”); House v. Davis, 60 Ill. 367, 370 (1871) (“if the assignee had notice of the usury, the defense could be made as to him,” and “so long as any part of the debt remains unpaid, the debtor may insist upon a deduction of the usury from the part remaining unpaid,” and may bring an affirmative action to restrain collection of amounts beyond that); Central Life Ins. Co. v. Sawiak, 262 Ill.App. 569, 577 (1st Dist. 1931) (defense of usury sustained against assignee).

The mortgagor has an affirmative claim, at least to the extent of a right to have title quieted and the mortgage removed. Chicago City Bank & Trust Co. v. Garvey, supra.


Foreclosure scams often take form of sale plus lease plus option to buy

When instrument purporting to be deed is treated as mortgage:

Consideration paid

Who has possession/ pays taxes

Was there extension of credit

See generally, Silas v. Robinson, 131 Ill.App.3d 1058, 477 N.E.2d 4(1st Dist. 1985); Robinson v. Builders Supply & Lumber Co., 223 Ill.App.3d 1007, 586 N.E.2d 316, 320 (1st Dist. 1992); McGill v. Biggs, 105 Ill.App.3d 706, 434 N. E.2d 772, 774 (3d Dist. 1982); First Illinois Nat’l Bank v. Hans, 143 Ill.App.3d 1033, 493 N.E.2d 1171 (2d Dist. 1986); Illinois Mortgage Foreclosure Law (Article XV of Code of Civil Procedure), §15-1207(c).

TILA implications: there will almost never be compliance: Redic v. Gary H. Watts Realty Co., 762 F.2d 1181 (4th Cir. 1985).



Brown v. C.I.L., Inc., 1996 U.S. Dist. LEXIS 4053 (N.D.Ill., March 29, 1996), adopting, 1996 U.S.Dist. LEXIS 4917 (N.D.Ill., Jan. 28, 1996)(motion to dismiss).

Cobb v. Monarch Fin. Corp., 913 F. Supp. 1164 (N.D.Ill. 1995), later opinion, 1996 U.S. Dist. LEXIS 2814 (N.D.Ill. 1996), later opinion, 1996 U.S. Dist. LEXIS 7776 (N.D.Ill. 1996), later opinion 1997 U.S. Dist. LEXIS 754 (N.D.Ill. 1997).

Carboni v. Arrospide, 2 Cal.App.4th 76, 2 Cal.Rptr. 2d 845 (1991), rehearing denied, Jan. 21, 1992 (200%)


If the borrower has a setoff or counterclaim that equals or exceeds the amount due, there is no default. Chicago Title & Trust Co. v. Exchange Nat’l Bank of Chicago, 19 Ill.App. 3d 565, 312 N.E.2d 11 (2d Dist. 1974) (“There is no default which would permit the mortgagor to accelerate the maturity of the debt when there is a set-off available which is equal to or exceeds the amount of the indebtedness due at the time of default”);Bank Computer Network Corp. v. Continental Illinois Nat’l Bank & Trust Co., 110 Ill.App.3d 492, 442 N.E.2d 586 (1st Dist. 1982).

Illinois recognizes equitable defenses such as unclean hands in a mortgage foreclosure, but the equities have to arise out of the transaction that gave rise to the note and mortgage. Northern Trust Co. v. Halas, 257 Ill.App.3d 565, 629 N.E.2d 158 (1st Dist. 1993); State Bank of Geneva v. Sorenson, 167 Ill.App.3d 674, 521 N.E.2d 587 (2d Dist. 1988). Conduct which makes the loan unaffordable, such as payment of yield spread premiums, may constitute a valid defense.

Noncompliance with HUD counseling requirements on FHA-insured mortgage. Bankers Life Co. v. Denton, 120 Ill.App.3d 576, 458 N.E.2d 203 (3d Dist. 1983); FNMA v. Moore, 609 F.Supp. 194 (N.D.Ill. 1985).

Redemption: Code of Civil Procedure, § 15-1603.

Statutory reinstatement right: Code of Civil Procedure, § 15-1602.


Act before default in state court foreclosures

Always get evidence of disbursement items on HUD-1

Standard form mortgage foreclosure complaints have numerous allegations that are “deemed” by statute to have been made. Look at the Mortgage Foreclosure Act (Article XV of the Code of Civil Procedure).

Many mortgage foreclosure cases appear to be brought by nominal parties who do not qualify as the “real party in interest.”

Jury trial on statutory claims (Consumer Fraud Act, etc.) is available in federal court, because of the Seventh Amendment, Inter-Asset Finanz AG v. Refco, Inc., 1993 U.S. Dist. LEXIS 11181, *8-9 (N.D.Ill. 1993); Cellular Dynamics, Inc. v. MCI Telecommunications Corp., 1997 U.S.Dist. LEXIS 7466 (N.D.Ill. 1997), but not in state court, Martin v. Heinold Commodities, 163 Ill.2d 33, 643 N.E.2d 734 (1994).