Banking industry groups have launched an all-out legal blitz to overturn a court decision that lets some bankrupt borrowers cancel a home mortgage regardless of how old the loan is.
The American Bankers Association, America's Community Bankers, the Mortgage Bankers Association of America, and four other trade groups asked a federal judge this month to overturn the ruling, saying it would wreak havoc on lenders.
The groups said the decision casts doubt on the enforceability of "billions of dollars" worth of mortgages. The ruling also could upset the secondary mortgage market and cause banks to lose "tens of thousands of dollars on each rescinded loan."
"These factors may well increase the costs of borrowing by consumers who seek to finance or refinance their homes in the future," the groups warned.
The trade groups are fighting U.S. Bankruptcy Court Judge Joan N. Feeney, who ruled in May that borrowers who declare bankruptcy are not subject to the three-year statute of limitations for voiding a mortgage on Truth-in-Lending grounds.
Instead, Judge Feeney ruled, these borrowers may rescind their loans and get back all their interest payments regardless of when they got the mortgage.
"This jeopardizes every mortgage that is more than three years old," said C. Dawn Causey, general counsel for America's Community Bankers, the thrift trade group. "It is even worse than Rodash ... . It is pretty wild."
The case began in December 1989 when Dorothy Botelho of Westport, Mass., got a home equity loan from Citicorp Mortgage Inc. The lender, however, gave Ms. Botelho the Truth-in-Lending disclosures for someone who is adding credit, rather than getting a new loan.
Ms. Botelho told Citicorp on May 25, 1995, that she was rescinding her loan because of the faulty Truth-in-Lending disclosure. She demanded the return of all her monthly interest payments.
Citicorp, which had begun foreclosure on her home, objected. It argued that Truth-in-Lending allows rescissions only within three years of the lending date. Also, a similar state law imposes a four-year limit. Finally, it said, the document Ms. Botelho received included all the disclosures made in the standard new-loan form.
Judge Feeney, however, ruled that the so-called doctrine of recoupment applies. Recoupment is an English common law rule giving judges the right to cancel a contract to further the cause of justice.
In this case, Judge Feeney invoked recoupment to give Ms. Botelho the right to assert her Truth-in-Lending claim after the statute of limitations had expired.
Citicorp, which is appealing, argued that the outcome was unfair, noting that it forces the lender to give Ms. Botelho a seven-year, interest-free loan. "Liability would be open-ended and would escalate over time," the lender warned.
The mortgage company, represented by the Boston law firm of Goodwin, Procter & Hoar, also charged that the judge had overstepped her authority. It said the disclosure law specifically limits the amount of time a borrower has to raise a rescission issue. That limit supersedes the common law, it said.
Ms. Botelho "had no right to rescind the transaction because once her untimely claim expired it could not be resurrected for any reason whatsoever," Citicorp said.
U.S. District Judge Edward F. Harrington is expected to decide within a few weeks whether to let the trade groups join the case. A final decision on Citicorp's appeal is not expected for months.