What happens if a lender fails to comply with the TILA rules? The borrowers are allowed to RESCIND THE LOANS AND VOID THE MORTGAGES ON THEIR HOMES. The mortgage lender is then just another unsecured creditor, who must get in line behind everyone else who may have filed a lien on the property. Who ever files first (Credit card, auto finance, doctors, etc.) has first priority.
That makes the mortgage loan itself unsecuritized -- and worth a lot less -- due to the increased risk of loss of collateral:
Some borrowers drowning in escalating subprime mortgage payments are finding a way out. A growing number are suing lenders over inaccurate disclosure papers, and if they win they get to rescind the loans. While that's good news for individuals, it's a potential problem for investors exposed to subprime mortgages. These investors, are facing a new kind of risk. The risk that the mortgages supporting some of their investments may not be enforceable because of violations of state and federal consumer protection laws.
It's not clear yet how widespread the problem is, but it appears to be a large percentage of some lenders portfolio. The subprime market has been known for its lax standards in documentation and the proliferation of these loans in recent years is now fueling significantly more complaints. The subprime share of first mortgages rose to 13.4% in the first quarter of 2007 from 10.9% in the first quarter of 2004."
The Act Requires:
(1) SPECIFIC DISCLOSURES.--In addition to other disclosures required under this title, for each mortgage referred to in section 103(aa), the creditor shall provide the following disclosures in conspicuous type size:
(2) ANNUAL PERCENTAGE RATE.--In addition to the disclosures required under paragraph (1), the creditor shall disclose
(A) in the case of a credit transaction with a fixed rate of interest, the annual percentage rate and the amount of the regular monthly payment; or
(B) in the case of any other credit transaction, the annual percentage rate of the loan, the amount of the regular monthly payment, a statement that the interest rate and monthly payment may increase, and the amount of the maximum monthly payment, based on the maximum interest rate allowed pursuant to section 1204 of the Competitive Equality Banking Act of 1987.
(emphasis added)
This seems to be where many of the subprime 2/28 ARMs ran afoul: They failed to meet the disclosure laws regarding actual interest amounts and payments.
Who has gotten tagged with these cases so far? Subprime lender NovaStar Financial Inc. (NFI) in Kansas City settled a class action suit for $5.1 million. And, consumers in Wisconsin recently won a class-action TILA suit (its under appeal). Between 1998 and 2006, approximately 2.2 million (nominal) home owners with subprime loans are expected to lose their homes, according to the Center for Responsible Lending. The consumers in this group who a) could not afford those loans and b) did not receive the proper disclosures are "talking with lawyers in an effort to prevent foreclosures."
