Borrower Defenses Against Foreclosure and Right to Sue for Damages
Prior to the ATR Rule, borrower rights under the Truth in Lending Act (“TILA”) focused on disclosure issues. Under TILA and the ATR Rule, borrowers will now have rights based on suitability issues. The rights of borrowers and the related risks could have a significant impact on the value of a mortgage and the representations and warranties that will be sought in a transfer, collateralization or securitization transaction.
There are numerous issues regarding the potential exercise of borrower rights under the ATR Rule. Individual courts will be called on to make a wide range of decisions as to how borrower rights and claims involving QM Safe Harbor loans, QM Rebuttable Presumption loans and non-QM loans will be handled, and many of these decisions will be based on limited statutory or regulatory guidance. The treatment of borrower rights and claims may vary widely between particular jurisdictions.
Under the provisions of TILA that apply to the ATR Rule, borrowers will have two types of rights:
Direct Claims for ATR Violations. A borrower can bring a direct claim against a creditor for damages for an ATR Rule violation. Damages include general TILA damages and special statutory ATR damages that may be in an amount up to the sum of finance charges and fees paid by the borrower, subject to a three-year statute of limitations. Under TILA, assignees that acquire a loan from a creditor have certain protections from direct claims under TILA. It remains to be seen how these protections will apply in the case of borrower direct claims for damages based on ATR Rule violations.
Recoupment or Setoff in a Foreclosure Action. It is probably far more likely that borrower claims or rights will arise in the context of a foreclosure action. The rights provided to borrowers in connection with foreclosure are quite significant.
TILA, as amended by the DFA, generally provides that notwithstanding any other provision of law, when a creditor, assignee or other holder of a residential mortgage loan (or anyone acting on behalf of such creditor, assignee or holder) initiates a judicial or nonjudicial foreclosure of the residential mortgage loan, or any other action to collect a debt in connection with such a loan, the borrower may assert a violation by a creditor of the ATR Rule as a matter of defense by recoupment or setoff, without regard to the general three-year statute of limitations that applies to a private action for damages.
A borrower’s claim for recoupment or setoff is limited to the special ATR damages claim that the borrower could have brought, plus costs, provided that the special ATR damages claim may not exceed damages that accrued up to the day prior to the expiration of the statute of limitations.
This provision gives a loan purchaser, an RMBS holder or an investor in a firm with significant residential mortgage holdings, financial risk with respect to loans that are at risk of ATR violation determinations.
Under the ATR Rule, parties that are seeking to foreclose on a loan may find that they will experience substantial increases in expenses and processing delays in connection with the foreclosure process. As a practical matter, where a borrower is able to make a strong ATR Rule violation claim, the borrower may be able to effectively prevent a foreclosure and may be able to renegotiate the terms of the borrower’s loan. Problems with individual loans could raise questions about the collectability and value of other similar loans.
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