People who’ve lost their homes in foreclosure like to think they’ve been defrauded. As we’ve explained in another article on this web site, “Lawsuits - Fraud,” a valid fraud claim has several elements. It’s unusual to find all of them present in a residential mortgage transaction. The person accused of mortgage fraud must make a statement of fact known by the person to be false, and the defrauded person must reasonably rely on it and suffer damage as a result. If a loan officer or loan broker said that the real estate market would keep going up forever, would it be a statement of fact? No. It would be an opinion. And in any case would it be reasonable for anyone to rely on it? No. Anyone old enough to borrow money has seen the real estate market go down at least once in their lives.
Well, you say, what about all those poor people who were encouraged to borrow more money than they could ever repay? Again, loan officers and loan brokers who told people they would be able to make their payments did not make statements of fact. Once more we have opinions, or what you might call predictions. To qualify as a statement of fact, the statement would have to be something like this: no matter what happens, your interest rate will never be more than X%.
The problem here is that such statements would probably be true. Adjustable rate mortgages have caps on how high the rate can go. To find mortgage fraud you would have to find a loan officer or broker who intentionally misstated the cap. But the borrower still has a problem even then. Under federal law the borrower will receive “Truth in Lending” and other disclosures, the disclosures will state the cap and other loan terms correctly, and the lender will have a piece of paper in its file signed by the borrower saying that he received the disclosures.
On the other hand, with the disclosures we finally get to something that looks like it might help. The disclosures require precise calculations, and once in a blue moon the lenders get them wrong. However, the borrower usually doesn’t find out they’re wrong until some lawyer looks at them after the foreclosure is under way. Errors in the calculations do provide a right to rescind the loan. This may give the borrower some negotiating leverage, but without a settlement the borrower in the end has to pay back at least the outstanding principle. Since by now the borrower is by definition broke and the house is under water, doing so requires a miracle.
Finally there are the loan documents themselves. By definition they will state the true interest rate, the way the rate will adjust, and the true cap, and the borrower will sign them. To make matters worse, the borrower will have a three day right of rescission, during which the borrower can study the Truth in Lending disclosures and the loan documents and cancel the loan. This is usually called consumer protection, but you might as well call it lender protection. Once the three days expire, the lender can point to all the paperwork and say, don’t complain to us - you knew what you were doing.
But - you protest - what about predatory lending? Sorry, strictly speaking there is no such thing as predatory lending. Various federal statutes enacted over the past few decades required lenders to make a minimum number of loans to minorities, prohibit lenders from declining to make loans to borrowers in poorer neighborhoods solely for that reason (a practice called redlining), and encouraged lenders to come up with things like adjustable rate loans and stated income loans. What borrowers think of as predatory - making it too easy for people to borrow more money than they can repay, and offering hopelessly complicated loan programs - is to a large extent only the result of the government’s attempts to eliminate discriminatory (i.e., predatory) lending and make home ownership affordable for more and more people.True mortgage fraud is hard to find. Instead we have good intentions and wishful thinking paving the road to hell. As Pogo said, “We have met the enemy, and he is us.”