Defending against a foreclosure for a client Lawyer Manual

Common defenses to foreclosure

Loan documents and the foreclosure complaint must be carefully reviewed to determine if there are any equitable or technical defenses. A list of some common law, statutory, and even equitable topics follow. Attorneys involved in foreclosure defense must at least familiarize themselves with the applicability and proper use of the following.

• Standing: Standing is a defense that is waived if not properly raised. With the secondary mortgage market, it may be difficult to discern whether the plaintiff actually has the standing to pursue foreclosure. The endorsements on the loan document should be reviewed along with any assignments of the mortgage to determine whether potential standing problems exist.
• Illinois Consumer Fraud and Deceptive Business Practices Act: ICFA allows recovery for not only deceptive conduct but also for conduct that is deemed “unfair.” ICFA also allows broad recovery for violations.
• RESPA Violations: The Real Estate Settlement Procedures Act and the regulation promulgated thereunder govern much of the process for notices of transferring servicing, maintaining escrow accounts, establishing force-placed insurance, application of payments, requests for information, notices of error, and loss mitigation procedures.
• Truth-in-Lending Act and HOEPA violations: TILA and HOEPA violations may be raised as a defense at any time. However, the most powerful remedy available, rescission i.e. voiding the mortgage, if a nonpurchase mortgage, is only available within three years of execution of the mortgage. An attorney must review the original disclosure documents to determine if there was a violation, but failure to disclose material terms in writing, or high-interest rates on a nonpurchase mortgage, almost always warrant careful investigation.
• Fair Debt Collection Practices Act: Third party debt-collectors, including attorneys who a file foreclosure, must comply with the FDCPA. While not a defense per se to the foreclosure action, it may give rise to a statutory and actual damages claim.
• Fair Credit Reporting Act: The FCRA regulates the collection, dissemination, and use of consumer information. Both the credit reporting agency and the furnisher of consumer information may face liability for inaccurate reporting or failure to correct inaccurate reporting. For instance, failure to accurately report or update a borrower’s credit report to reflect loss mitigation agreements may give rise to claims under the FCRA.
• FHA-Insured Loans: FHA loans have special servicing requirements, including a counseling notice mailed to the mortgagor within 45 days of default, a face-to-face meeting with the borrower prior to 3 missed payments, and a notice of available counseling. 24 C.F.R. §203.500 et. seq. Failure to comply with these rules is an affirmative defense. Bankers Life v. Denton, 120 Ill. App. 3d 576, 458 N.E. 2d 203 (3d Dist. 1983). This reasoning arguably extends to other government-insured loans with similar servicing requirements.
• Illinois Fairness in Lending and Illinois High-Risk Home Loan Act: Attorneys should be aware of the applicability and requirements of Illinois statutes governing mortgage loans. IFLA prohibits, for example, equity stripping and loan flipping – common “predatory” lending practices. Be aware of whether federal law preempts the application of an Illinois statute.
• Failure to attach note and mortgage to the complaint: If the note and mortgage are not attached to the complaint, the complaint is subject to a motion to strike. 735 ILCS 5/2-606. However, most courts allow a lender to cure this deficiency without striking the complaint. A lender is not required to attach any endorsements of the note or assignments of the mortgage and simply is required to allege that it is the holder of the indebtedness or the holder’s agent.
• Breach of contract: Perhaps most commonly used to enforce trial period modifications that the servicer failed to convert into a permanent loan modification. There may also be a breach of contract claims for violations of other loss mitigation agreements, or if the servicer has somehow failed to abide by the terms of the mortgage i.e. failing to apply for payments in the order prescribed in the mortgage.