Untimely disclosure by mortgage company voids application fees

Did the plaintiff disclose its practice of disposing of most of its mortgages to the defendant who was looking to refinance her mortgage before the transaction was completed? Should the plaintiff's decision to discontinue the transaction be honored?

These were just some of the questions before New York State Supreme Court Judge Andrew V. Siracuse in Rochester Home Equity, Inc. v. Linda A. Upton. The plaintiff filed this lawsuit with the hope of recovering application and lock-in fees in a mortgage application that was never completed. The defendant asserts that the plaintiff failed to make a federally mandated disclosure at a time when she could cancel the transaction without a penalty and thus she is not responsible for the fees the plaintiff seeks.

Judge Siracuse carefully reviewed the facts of the case and relevant law before dismissing the complaint. Specifically, the judge determined that the disclosure made after the defendant signed the lock-in agreement was untimely.

The Facts

The defendant, Linda A. Upton, lived in a suburb of Albany when she sought to refinance her home. The defendant dealt with the plaintiff, Rochester Home Equity, Inc., by telephone and fax. Documents signed by the defendant show receipt of a preapplication disclosure of $100 application fee and some other fees.

The defendant signed and faxed a lock-in agreement in compliance with 12 NYCRR Section 38.6. This document secured a fixed mortgage rate at 5.75 percent with no points. This was good for one month in consideration of $1,100 payment. She signed a credit card authorization for the fees.

Under the terms of the regulations the payment would be refunded at the closing of the loan, or if the loan was rejected due to the result of an appraisal, or the failure of a third party lender to cooperate or the credit worthiness of the applicant.

After the documents were exchanged, the plaintiff took the necessary information for a full mortgage application from the defendant over the telephone. The application was faxed to the defendant for her signature.

Around this time the plaintiff also sent a disclosure form, required by 12 USC Section 2605(a). It listed the number of mortgages routinely assigned or sold on the secondary mortgage by the plaintiff. This document showed that the plaintiff disposed of most of its mortgages, anywhere from 76 to 100 percent.

The defendant refused to sign the application based on this information and refused to pay the fees. She claims that she repeatedly told the plaintiff's employees that she did not want her mortgage assigned. This lawsuit followed.

Court's Analysis

In order to render a decision, Judge Siracuse reviewed the relevant New York State statutes.

There is nothing in the New York regulations concerning lock-in agreements that sets out what disclosures are required and when they must be made; nor does 3 NYCRR Section 38.1 et seq. provide any guidance on questions regarding the interplay between such agreements and the mortgage application, wrote Judge Siracuse in the decision for the court. It is necessary, then, to consult the two federal statutes that control such loans: the Truth in Lending Act, 15 USC Section 1601 et seq., and the Real Estate Settlement Procedures Act, 12 USC Section 2601 and the regulations under both these statutes.

The judge then noted that the Real Estate Procedures Settlement Act (RESPA) requires disclosure of the number of mortgage loans assigned or sold. However, other disclosure requirements are listed in the Truth in Lending Act (TILA).

Specifically, RESPA states that disclosures be made at the time an application for a mortgage servicing loan is submitted, or within three business days after the submission of the application, 24 CFR Section 3500.21[b][1]. In addition, it also states that the disclosure must be made at the time of the application when there is a face-to-face interview, 24 CFR Section 3500.21[c][1] and must be mailed within three days if the interview does not take place (24 CFR Section 3500.21[c][2]).

The parties have also debated whether a telephone application is one made face-to-face, Judge Siracuse noted. The court finds no merit in any claim that a transaction conducted between two parties in different buildings in different cities is somehow face-to-face because it happens in real time. Surely the letter of these regulations would be met under these circumstances by mailing the disclosure.

However, the judge noted that the discussion does not end here. RESPA does not address lock-in agreements and thus, the judge turned to TILA.

In keeping with the trends towards supplying consumers with more information that market forces alone would provide, TILA is meant to permit a more judicious use of credit by consumers through a 'meaningful disclosure of credit terms' (15 USC Section 1601[a]), Judge Siracuse wrote. For that reason the disclosures must be made conspicuously and in writing, and they must be made 'before consummation of the transaction' (12 CFR Section 226.17[b]).