Lenders' Subtle Screw-Ups Letting Homeowners Off The Hook On Toxic Refinancings

Reporter Amir Efrati, of The Wall Street Journal, reports:

• Having buyer's remorse about a mortgage? It can pay to scrutinize the fine print. Amid the housing-market turmoil, homeowners have been increasingly turning to a little-known process for renegotiating or exiting a loan. Even seemingly minor paperwork slip-ups can be enough to get a "rescission" (basically, a loan cancellation) based on the Truth in Lending Act, a federal law requiring disclosure of a loan's key terms. Under a rescission, while a homeowner still owes the principal, the lender won't be able to foreclose. Plus, all loan-related fees and interest that were paid are subtracted from the principal, which can mean substantial savings for the borrower. After a rescission, the borrower must pay off the loan, typically with a new mortgage, or sell the house. Other times, lenders will modify the terms of a mortgage instead of doing a rescission.

• It isn't for everyone. Borrowers have just three years after the loan is made to make a rescission claim. It is available only to people who refinanced their original mortgage on their primary residences.

• People who haven't refinanced can still use a bevy of state laws to seek damages from lenders, mortgage brokers, real-estate agents or appraisers who committed similar mistakes (or outright fraud) during loan origination.

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• Consumer lawyers say rescissions are on the rise. Pamela Simmons of Simmons and Purdy says the Soquel [California] law firm has done more than 300 this year, up from 200 last year. Until recently, some judges were loathe to cancel loans where the only violations were paperwork mistakes, says Ira Rheingold of the National Association of Consumer Advocates, a group of consumer attorneys. Now that foreclosures are mounting, "courts have gotten more sensitive" to violations, he says.

• Many seemingly small foul-ups can qualify. If the APR, or annual percentage rate, is off by a fraction of a percent between the preliminary and final loan documents, the loan may be rescindable. Same goes if the total in fees is off by more than $100 (or $35, if the borrower is facing foreclosure).

In one case cited in the story, the lender's failure to provide the homeowner couple with two copies of a disclosure form informing them of their three day right to cancel the loan was enough to get a toxic loan canceled, saving the couple about $60,000. They were then able to refinance their way out of the bad loan with a mortgage with better terms from a different lender.

For more, see How minor mistakes can upend a mortgage (Many seemingly small discrepancies in paperwork can qualify for a loan rescission) (story appears in the Contra Costa Times - may require free registration; or try here - courtesy of the The Press Enterprise)

Go here for other posts on using the Truth In Lending Act to Undo Bad Mortgage Loans.

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For those stuck with bad loans who want to find out if their mortgage lender screwed up with the loan documents, and need a starting point for finding a consumer protection attorney to look over the paperwork, go here , or go here , or go here. (Don't hesitate to ask them if they work on a "contingency fee" basis - where they are entitled to their fee only if they succeed. In the context of consumer protection litigation, your attorney, if successful, will generally obtain a court order compelling the mortgage lender who screwed up to cough up the fee, therby costing you nothing out-of-pocket. Also ask the attorney if there is a charge for an initial consultation - don't be shy!)

These sources may also be a good place to begin a search for a consumer protection attorney if you're stuck with an unreasonable mortgage servicing company. Go here , go here , and go here for posts on questionable mortgage servicing practices and for those who think their mortgage servicing company is screwing them over. undo mortgage loans TILA alpha