Mortgage lenders often have a difficult time adhering to the requirements of the federal law called the Fair Credit Reporting Act, which may create liability for them when attempting to bring a foreclosure lawsuit or pursue a nonjudicial foreclosure. The Fair Credit Reporting Act (FCRA) creates requirements that lending institutions must adhere to when reporting consumer information to the credit bureaus.

Inaccurate reporting of information may cause damages to borrowers and create liability on the part of mortgage lenders for a large numbers of mistakes. The FCRA governs the reporting of all information to credit agencies, regardless of whether it be accurate or not. Whether or not the borrowers have defaulted on payments is irrelevant to application of the FCRA on information reported.

There are a number of specific regulations that mortgage lenders and all creditors must comply with when providing credit to a possible borrower and in the ongoing operation and servicing of the loan. Lenders often have a very difficult time following all of these regulations while also attempting to comply with all of the other federal and state lending laws and will often misreport information about consumers’ accounts to the credit rating agencies.

If a lender denies credit or even a loan modification on the basis of information received from a credit agency, the consumers must be provided with a statement indicating that they can obtain a copy of their credit report from the reporting agency at no charge. The request must be sent to the company which provided the credit information within 60 days of the denial of credit by the lender.

Also, the creditor (or servicing company ) may not report information to credit agencies that it knows or has reason to believe is false or inaccurate. With the poor quality control most banks seem to have in place in their collections and foreclosure departments, mistakes are made more often than many homeowners might believe. In case any errors are discovered, the creditor is also required to correct the mistake on the borrowers’ report.

There is a specific notice requirement for mortgage creditors when providing credit to borrowers. It is titled a “Notice to the Home Loan Applicant” and includes information for the borrowers’ use. This notice provides information regarding disclosure of credit scores, an explanation of the credit scoring system, and instructions to contact the lender if the borrowers have questions about the terms of the loan.

The credit bureaus themselves also have to follow guidelines in the Fair Credit Reporting Act, including verifying any information that a consumer disputes as inaccurate. The verification must be done within thirty days of receipt of the dispute. If a record can not be verified, it must be removed from the credit report.

Willful violations of the Fair Credit Reporting Act allow homeowners to recover damages in three ways. The first is actual damages between $100 and $1,000 for each violation of the law. The second is any punitive damages that the courts may award to the foreclosure victims. And third, homeowners are entitled to attorneys fees and the costs of any legal action they bring against the lender for violations under the FCRA.

In practical terms, violations of the FCRA may be used by homeowners to offset liability in a foreclosure action or lawsuit. When homeowners are drafting their answer to the foreclosure complaint, they may wish to add violations of the FCRA as counterclaims to sue the mortgage company for damages. Depending on the amount and type of violations, along with any legal representation the homeowners utilize, such violations can create significant liability for the mortgage company.

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When homeowners fall behind on their mortgage, the lender will eventually begin the legal process of foreclosing on the home. Depending on the state laws where the property is located, type of documents used in the loan, and the terms contained in the documents, banks may pursue a judicial or nonjudicial foreclosure process. Typically, if a mortgage is used to secure the lien on the property (as opposed to a deed of trust), judicial foreclosure will be used by the mortgage company to take the property back.

In a judicial foreclosure, the first step usually involves the mortgage company sending a notice to the homeowners informing them of their delinquent mortgage payments and stating an intent to foreclose on the property. If the borrowers do not work out another arrangement with the bank (such as a mortgage modification or repayment plan), refinance their home (with a foreclosure lender or hard money lender ), or sell at a short sale, the bank will refer the loan to its attorneys. These attorneys will be located in the state in which the property is located and they will file the initial lawsuit in the local court against the homeowners.

The complaint will almost always be served on the homeowners, either by personal service (dropped off by a sheriff’s deputy, in most cases) or sent via registered mail and borrowers will have to go to the post office and sign to pick up the documents. Once homeowners are served with the foreclosure complaint, they will usually be given twenty to thirty days to file their answer with the courts or file a Motion to Dismiss the case or a Motion for Extension of Time, if they need more time to file an answer. Banks rarely argue against a Motion for Extension of Time, as long as the additional time requested is reasonable.

Sadly, this is the time when most borrowers simply ignore the lawsuit and fail to file an answer. This is nearly always a mistake and borrowers may want to consult with a foreclosure lawyer to prevent from losing an opportunity to defend their home.

Although most answers are filed in the form of a proper legal document, some courts will accept almost anything as an answer. This may even just involve a letter from the homeowners explaining why they are behind and requesting more time to work out a solution or hold off on a sheriff sale. But when homeowners do not file anything, the bank is able to get a default judgment and have the home listed for auction very quickly, with no involvement or protest by the owners of the house.

Borrowers who mount a defense to a foreclosure lawsuit can often receive several additional months to stay in their home rent free. After all, the burden of proof is on the bank to show that the homeowners are behind on payments and that the bank has the legal right to collect those payments. Oftentimes, the borrowers have fallen behind, but the financial company suing them has no real legal right to the payments anyway, and the lawsuit can be thrown out or severely delayed, depending on the circumstances.

But most often, homeowners in foreclosure simply ignore the lawsuit and do not attempt to defend it in the courts. The bank wins a default judgment and a public auction of the property is scheduled at the first available opportunity. Some states may have a redemption period after the judgment and before the sale, but many will simply hold the foreclosure auction a few weeks to a couple of months later. After this, the new owners will be able to initiate an eviction lawsuit against the foreclosure victims and force them out of the house within weeks or a month.

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In nonjudicial foreclosure states, lenders can put a home in foreclosure to be auctioned without initiating a lawsuit. Borrowers have to bring a lawsuit against the bank to have the trustee’s sale stopped in court. States that have a nonjudicial foreclosure process typically use deeds of trust to show a lien on a home. In a few small cases, mortgages may be used that contain a specific Power of Sale clause. But in the majority of states that used nonjudicial foreclosure, deeds of trust are used instead of mortgages.

Deeds of trust act very similar to mortgages in that they record a lien against a property when homeowners take out a loan to purchase a home. However, they contain what is known as a Power of Sale clause, which gives the lender the right to sell the house if the loan goes into default.

The deed of trust will typically include the exact terms that must be met for the homeowners to be in default. It also describes exactly when and where the sheriff sale of the property will take place, if necessary. Homeowners who are facing foreclosure can learn a lot of the procedures the mortgage company will use to take the home back just by reading the original deed of trust documents.

The state foreclosure laws in nonjudicial states also determine, to a great extent, how the foreclosure itself will proceed. Numerous notices may have to be given to the homeowners, posted on the house, posted on the courthouse itself, posted in other public gathering areas, and published in local newspapers.

Names of the notices may differ by state: notice of default, notice of sale, notice of intent to foreclose and sell, among many others. But the state laws will dictate how the homeowners must be notified of the impending sale of the home. This is extremely useful information for borrowers to pay attention to, as any deviations the trustee or lender take from the law can result in the entire process being reversed. If this happens, the bank has to start the foreclosure all over again from the very start.

In nonjudicial foreclosure states, there will be no foreclosure lawsuit, and the owners will have no chance to fight back against the charge of breach of contract of the deed of trust. The bank simply declares the owners to be in default and proceeds to have the trustee of the deed of trust send out notice requirements as required by law until it is able to have the house auctioned off.

To defend against an unjust foreclosure or to delay it in court, homeowners will have to bring their own lawsuit against the bank. And then, the burden of proof is on the borrowers to show why the foreclosure should not be allowed to proceed. This process also costs homeowners more money than in judicial states because they will be responsible for filing fees and potentially posting a bond with the courts.

In fact, the borrowers may have to post a bond of several thousand dollars to get a restraining order against the lender. But the three orders that the owners must get from the court to successfully defend nonjudicial foreclosure are a Temporary Restraining Order, a Preliminary Injunction, and a Permanent Injunction.

The Temporary Restraining Order will bar the lender from selling the home until the courts have determined whether the owners have a case or not. The preliminary injunction prevents the bank from going forward with the foreclosure until the case has been heard by the court. And a permanent injunction bars the lender from taking the house back at all.

Many lawyers feel that this type of foreclosure is extremely unfair, in that borrowers are given no chance to defend against a foreclosure that may have been initiated improperly. In a pile of complicated loan documents, they sign away their right to a trial and due process in the case of delinquency. This is one more reason borrowers should learn about their rights in foreclosure and which exact laws and procedures the bank must follow to take the property back.

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Lenders who make mortgage loans on a discriminatory basis may face liability under the Equal Credit Opportunity Act, which punishes discrimination in credit. The Equal Credit Opportunity Act (ECOA) prohibits a variety of discriminatory actions on the basis of several factors. These include race, color, religion, national origin, sex, and marital status. Violations of the ECOA may also be violations of the Fair Housing Act.

Redlining and reverse redlining are practices that are prohibited by the ECOA. These involve offering different credit terms (or restricting lending products) to certain areas based on racial criteria. Red lining is when a mortgage company marks off certain neighborhoods or communities for restricted lending or higher cost loans on the basis of religition or other discriminatory standards. In effect, the bank puts a “red line” around such communities and potential borrowers from these areas are denied credit.

Reverse redlining works in the opposite manner. A mortgage company or bank would establish lending standards that encouraged many more loans to flow into a certain area or demographic. This may be part of a devious pump and dump plan, where lenders work to inflate the value of properties and provide funds to borrowers who can not pay the loans back. The lender then forecloses and is able to take the properties. Both redlining and reverse redlining are financially injurious to both borrowers and lenders, which is why the practice is somewhat uncommon.

Borrowers may have a very difficult time showing they have been the target of discrimination in a foreclosure case. If they suspect this, however, it may be worth their while to speak with an attorney who specializes in such cases. This is because liability under the ECOA may result in lenders being responsible for actual damages suffered by borrowers, punitive damages up to $10,000, and court costs. Some attorneys may take a case on contingency if a special instance of discrimination is presented. It may be best at least to consult with an attorney before raising this defense in an answer to a foreclosure complaint.

The statute of limitations for violations of the Equal Credit Opportunity Act is two years. If borrowers took out their mortgage more than two years ago, this law may not apply to their mortgage. Again, the best course of action in the case of suspected discriminatory lending would be for homeowners to consult with an attorney who specializes in this area of lending law.

The Home Mortgage Disclosure Act (HMDA) requires financial institutions to publicly release information related to ECOA lending. These reports are available online and show information on the percentage of loans offered to minorities by different lenders in various cities across the nation. The general public is able to look up zip codes, how many applications each lender took in the area, the racial characteristics of various groups, and the interest rate offered to each group. This can be a starting point for homeowners researching potential discriminatory or predatory lending practices.

Despite the fact that violations of the Equal Credit Opportunity Act may be somewhat uncommon in the mortgage lending industry, homeowners may want to make themselves aware of the law. However, the real estate boom of the past decade had been more a result of all markets being artificially inflated and anyone who could sign their name was given a loan. This makes actual discrimination more unlikely, as the Federal Reserve set up the markets for bad investment and banks simply took advantage of any borrower coming through the door.

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