How many hoops do homeowners have to jump through to shake off a bad mortgage?
This question is at the heart of a growing area of law as judges across the country try to determine whether borrowers who took out loans at the height of the subprime bubble, under shady terms that they weren't told about, can cancel their mortgage and walk away debt-free.
Under the federal Truth in Lending Act, homebuyers who aren't properly informed of the terms of their mortgage have up to three years to cancel or "rescind" the loan. What's unclear now is whether borrowers, to ensure the debt is canceled, also have to file a lawsuit within that three-year window against whoever owns the loan.
On Tuesday, the Consumer Financial Protection Bureau weighed in, filing a friend of the court brief in a case involving a Denver woman who tried to rescind her mortgage, but instead is facing foreclosure because she didn't also sue the loan owner, HSBC. It is one of 10 such cases currently in federal appeals courts, according to court documents.
The CFPB, created under the Dodd-Frank financial regulation law, has announced a blizzard of initiatives in its short history to make student lending transparent, to better regulate debt collectors, and, especially, to make mortgage lending more fair.
In its brief, filed in the U.S. Court of Appeals for the 10th Circuit in Denver, the agency sided with homeowners, arguing that borrowers need only notify a lender that they want to cancel a loan within three years in order to successfully rescind a loan. Requiring a homeowner to also sue within that time frame "disregards the statutory and regulatory text, forces potentially unnecessary litigation on lenders, and wastes valuable judicial resources -- all in contravention of the statutory scheme to provide a private, non-judicial mechanism to rescind mortgage loans," the agency said.
The case involves Jean Rosenfield, who took out a $388,000 mortgage in 2006 from Ownit Mortgage Solutions, a now-defunct subprime lender. As was typical at the height of the subprime bubble, the loan was so expensive that it was almost certain to fail. Rosenfield took out a 50-year mortgage with a variable interest rate that her complaint said averaged 10.5 percent. It also included a balloon payment of $351,907 due in 30 years. Had Rosenfield somehow remained current on her payments for 30 years, she would have paid the lender a total of $813,812, with just $36,093 in principal.
In 2008, Rosenfield filed a notice with HSBC, which bought the loan from Ownit, stating the loan should be cancelled because the lender violated the Truth in Lending Act's disclosure requirements. The lender failed to notify her of her right to rescind the loan, provided incomplete disclosures regarding the variable interest rate, and inaccurately stated the total finance charges, she claimed.
John Nelson, Rosenfield's lawyer, said that his client tried to work out a solution with HSBC, but the bank wouldn't agree to a mortgage modification. Three years and one month after she took out the loan, Rosenfield sued HSBC to force the bank to cancel her debt. (An attorney for HSBC did not respond to a request for comment.)
Last year, a district court judge dismissed Rosenfield's case, ruling that the law requires borrowers to sue within the three-year window. She appealed.
It's not clear how many home loans are at stake. Nelson said he was aware of 43 cases at the federal district court level that involve the same time-limit issue. Nelson said that there could be many more homeowners with the potential for a recission, though if they haven't already filed a request with their lender it may be too late.
"In my experience, almost every loan packaged [during the housing bubble] contains deficiencies that would allow consumer to rescind if they wanted to follow that course of action," Nelson said.
The CFPB said in court documents that it plans to intervene in similar cases, trying to win rulings consistent with its view. But the bureau faces an uphill fight. So far, courts have mostly ruled in favor of lenders, which argue that the statute requires homeowners to not only inform a bank that they want to rescind a loan within three years from origination, but also sue in that timeframe in order to cancel the mortgage.