Business Law Chapter 31 Homework Hoepa Through Artificial Restructuring The Loan Transaction

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269

CHAPTER 31

MORTGAGES AND FORECLOSURES

AFTER THE RECESSION

ANSWERS TO QUESTIONS

AT THE ENDS OF THE CASES

CASE 31.1—QUESTIONS (PAGE 611)

THE LEGAL ENVIRONMENT DIMENSION

The Truth-in-Lending Act, HOEPA, and other consumer protection laws exist to protect purchasers from

unscrupulous lenders or sellers. As consumers become better informed about these issues, will these

laws still be needed? Discuss. Yes, because there will always be unscrupulous lenders or sellers to take

advantage of consumers, regardless of how informed they might be. No, because once the reason for

the laws no longer exists, there is no reason for the laws to exist.

WHAT IF THE FACTS WERE DIFFERENT?

If the lender had been dealing with a borrower who was a professor of finance at Harvard, would the

appellate judge have ruled the same way? Why or why not? No, because the level of the borrower’s

CASE 31.2—QUESTIONS (PAGE 615)

270 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

1A. What are the purposes of the notice provisions in the Louisiana code? Did this court stay true to

those purposes? Explain your answer. The purpose of the notice is to inform the debtor that the creditor

is exercising his or her rights under the terms of their agreement and the provisions of the law so that

the debtor can exercise his or her rights to protect the debtor’s interest in the property. The legal

underpinnings for the notice requirement include due process, as well as such concepts as good faith,

reasonable commercial standards, and fair dealing.

CHAPTER 30: BANKRUPTCY LAW 271

2A. How might the lender have avoided the dispute in this case? The dispute might have been

avoided if the lender had refused to go through with the sale until the borrower was personally served.

Assuming that the borrower might have then challenged the sale on other grounds, the lender might

have avoided the entire process by giving the borrower every opportunity to make good on their

agreement—staying in constant touch to remind her of the need to make payments, and staying

amenable to further renegotiation of the terms, for example. The lender might also have insisted on a

co–signer for the mortgage.”

ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE

AT THE END OF THE CHAPTER

1A. Coverage

With respect to real estate transactions, the Truth-in-Lending Act (TILA) applies to residential loans. The

Home Ownership and Equity Protection Act (HOEPA) covers mortgage loans that carry a high rate of

interest or impose high fees on borrowers. HOEPA applies if the annual percentage rate (APR) exceeds

the interest rate on Treasury bonds of comparable maturity by 8 points for a first mortgage, or when the

loan fees exceed the loan amount by 8 percent. In this problem, the mortgage is a residential loan, and

thus TILA applies. The loan is a first mortgage on which the APR exceeds the interest rate on Treasury

bonds of comparable maturity by 9 points. On these facts, HOEPA applies.

2A. Right to rescind

3A. Disclosures

When all required disclosures are provided, a borrower’s right to rescind is limited to three business

days (not including Sunday) after a loan is finalized. If the bank in this problem gave the borrowers all of

the required notices before the loan was completed, the borrowers’ right to rescind expired more than a

week before they “change their minds and want to rescind the loan.

4A. Deficiency

In most states, if the amount on a foreclosure sale is not enough to cover the loan, the lender can ask a

court for a deficiency judgment—a judgment against the borrower for the amount of the debt remaining

unpaid after the property was sold. This judgment requires the debtor to pay the difference to the

272 UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY

lender over time. In this problem, if the state in which the borrowers and their property are located

follows this rule, the bank can seek—and most likely recover—the remaining amount from the

borrowers.

ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE AT

THE END OF THE CHAPTER

Federal legislation enacted in the past few years has unfairly benefited homeowners who should

not have bought such expensive houses and taken on so much debt. Indeed, most homeowners

continued to pay on their mortgages throughout the latest recession. But those who imprudently

borrowed too much to buy houses that were too expensive were bailed out by the federal government

and some of the banks. This is grossly unfair, because it rewards speculative and unsound financial

behavior. Those who had no money down on their house purchases were 10 times more likely to

default on their mortgages than those who put down a normal down payment.

ANSWERS TO QUESTIONS AND CASE PROBLEMS

AT THE END OF THE CHAPTER

31-1A. Disclosure requirements

(Chapter 31—Pages 606 & 607–609)

Rancho cannot advertise its mortgage as fixed even if the product will have a fixed interest rate for a

certain period of time. If the mortgage has a variable rate during the life of the mortgage, the name of

31-2A. QUESTION WITH SAMPLE ANSWER: Real estate financing

The answer is likely no. A court would most likely find that this issue was novel and permitted the

31-3A. Lender’s options

(Chapter 31—Pages 612–616)

Bank of Town has a number of options. First, Bank of Town has a property interest in the home. At this

31-4A. Home Ownership and Equity Protection Act

(Chapter 31—Pages 608–610)

31-5A. Right of rescission

(Chapter 31—Page 608)

31-6A. Mortgage disclosure

(Chapter 31—Pages 607–608, 612 & 614–616)

To obtain a foreclosure order, a creditor has to prove that it is the owner of the note and mortgage and

31-7A. CASE PROBLEM WITH SAMPLE ANSWER: Wrongful foreclosure

The plaintiffs argued that the foreclosure was void and they were entitled to damages because the

$33,500 amount paid by the defendant-mortgagee for the property so shocked the conscience that it

could be considered a wrongful foreclosure or a breach of fiduciary duty. The fair market value of the

property at the time of the foreclosure is the key fact in deciding this issue. The defendant contends

that the fair market value of the property at the time of the foreclosure was the price bid at foreclosure,

that is $33,500.

The plaintiffs contend that the fair market value of the property was $65,000. The evidence is

uncontested and is overwhelming that the value of the property at the time of the foreclosure was the

same as the price paid at the foreclosure sale, that is $33,500. The only direct evidence that did not

agree that the fair market value of the property was $33,500 was Mr. Sharpe’s testimony. As the owner

of the property he is allowed to give his opinion of the value of the property. There are limitations

however. As the Court of Appeals for the Eleventh Circuit recognized, any testimony by an owner may

31–8A. Foreclosure on mortgage and liens

(Chapter 31—Pages 612 & 614–616)

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31-9A. A QUESTION OF ETHICS: Predatory lending

(a) Sutton should have a duty to read any agreement he signs. Simply because an agreement

has terms that prove unfair to him later does not mean that Sutton should be able to get out of the

agreement. However, it is arguable that Sutton should be not held responsible for terms in any