Tale behind change in disclosure law

NATION'S HOUSING

September 25, 1994|By Kenneth R. Harney

Washington -- The $226 in undisclosed fees that Marta Ro-- was charged at her home mortgage closing has triggered a Capitol Hill "truth-in-lending" brouhaha that could ultimately touch thousands of consumers across the country.

It also could cost Ro-- -- who has multiple sclerosis and lives on disability payments -- her house plus tens of thousands of dollars in legal fees.

Here's the story, and what it might mean to you. Three years ago Ro-- needed money for medical treatments that she otherwise couldn't afford on her $500-a-month disability income. To raise the cash, she refinanced her home in Miami, Fla., for $102,000 and netted approximately $11,000 in cash. That was enough, Ro-- calculated, to finance a trip to a medical clinic in Germany that specializes in multiple sclerosis.

What she didn't focus on sufficiently, she now concedes, were the terms of her refinanced mortgage: Monthly payments of $914, nearly double her income, and $7,600 in settlement charges -- including four points on the loan. (A point is equal to 1 percent of the amount borrowed.)

Since she couldn't afford the monthly payments, Ro-- quickly slipped into default. The mortgage company began foreclosure proceedings, jeopardizing the last major asset Ro-- possessed -- the $50,000 in equity she had in her home.

Frightened about ending up on the street, she contacted Charles M. Baird, an attorney then working with the Miami neighborhood legal services program and now in private practice. Baird said he immediately recognized the mortgage to be a rip-off.

To forestall foreclosure, Baird scoured the loan documents for any legal basis to challenge the mortgage contract itself. In the end, all he could find was a seemingly minor technical violation. The mortgage company had not provided proper advance "finance charge" disclosure of just two of the many items that ultimately ended up on Ro--'s settlement sheet: A $22 Federal Express fee for document delivery, and a $204 Florida state tax on the lender that was passed on to the borrower.

Under the Truth-in-Lending Act, Baird argued, the lender was required to include such charges in the "good faith estimate" it sent to Ro-- three days after application. Its failure to do so opened it to a suit that would force rescission of the entire transaction.

Though a federal district court ruled against Ro--, a federal appellate court reversed that decision earlier this year. The net effect was to send the case back to the lower court, and to halt the foreclosure against Ro--.

In the meantime, the federal appellate court's decision has sent legal shock waves far beyond Miami. Mortgage lenders in half a dozen states have been slapped with truth-in-lending class-action suits grounded on the same theory as Ro--'s: Improper advance disclosure of even minuscule fees -- like Federal Express delivery charges -- may allow borrowers to challenge and unravel their refinance transactions. With a three-year statute of limitations on truth-in-lending, the potential for a wave of suits "is nightmarish," in the words of one mortgage executive.

Some local attorneys, according to the Mortgage Bankers Association of America, already are advertising that they will bail borrowers out of loans they don't like, using a truth-in-lending attack.

To prevent a wave of litigation -- and multimillion-dollar settlements -- mortgage industry leaders are asking Congress to amend the Truth-in-Lending Act to eliminate the requirement for "finance charge" disclosure of courier fees and certain state taxes. They have persuaded Sen. Connie Mack, R-Fla., to push an amendment to the 1994 federal housing act that would accomplish this not only prospectively -- on all future loans -- but retroactively as well.

Draft language circulated by Senator Mack would apply to any court judgments "that are inconsistent" with the revised disclosure rule, if a lender requests such relief within a year after enactment.

This would not only throw land mines in the paths of class-action suits being filed across the country, but would also nullify the decision in Marta Ro--'s case. The foreclosure could then proceed, and Ro-- could be held liable to pay her lender's legal bills -- tens of thousands of dollars.

Lawyers who represent low-income homeowners, particularly legal services attorneys, are horrified at the prospect of Senator Mack's amendment sailing through an election-bound Congress.

"Truth-in-lending violations are often our most effective -- or only -- way to help keep people out of foreclosure," says Margot Saunders of the National Consumer Law Center. Before watering down the most important consumer protection law for mortgage borrowers, she says, Congress ought to at least hold public hearings, and not be stampeded by lenders.

Stay tuned.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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