Lenders and mortgage industry attorneys are concerned about the precedent that may have been set after the U.S. District Court for the Eastern District of Pennsylvania ruled a home equity lender violated Regulation Z, the Truth in Lending Act, by improperly disclosing a small lump-sum attorneys fee for a mortgage closed more than two years ago. The case, Brodo vs. Bankers Trust Co., Civil Action No. 93- CV-1858, was settled out of court in June, but the courts since-vacated decision established the lenders failure to include a portion of the attorneys fees in the loans finance charge amounted to a material violation of TILA and was suf-ficient grounds for a rescission. That decision may prove worrisome for lenders despite the cases out-of-court solution because the courts opinion was not withdrawn when the case was settledsomething real estate attorneys fear may help in forcing the rescission of hundreds of potential mortgages closed similarly. And although the opinion has no precedential value, it can still be cited in future liti-gation, analysts concluded. One problem this ruling causes is the rescission possibilities are potentially huge because so many lenders have excluded attorneys fees from finance charges. They [borrowers] will be able to throw this [opinion] out there every time a loan that goes into foreclosure, or if some other problem arises, said Len Bernstein, a partner with Reed Smith Shaw & McClay, a Philadelphia-based legal firm. Bernstein said it was the first such TILA case on record. The case stems from a $450 lump-sum charge for attorneys fees on a $48,500 home equity loan obtained by the plaintiff, Anthony Brodo, from Champion Mortgage Co., of Parssip-pany, N.J. Champion retained a law firm to prepare loan documents, security documents and loan disclosures, as well as inform borrowers about which documents to bring to closing, and that the firm also handled other closing-related duties, including completion of the TILA disclosure statement and the TILA itemization of the amount financed. Brodo contended Championwho later sold the loan to American Financial, of Tampa, Fla., which, in turn, sold it to Bankers Trust Co., also of Tampaviolated TILA by failing to disclose the proper finance charge for the loan, arguing the lender should have included part of the attorneys fees paid by the borrower to the law firm in the finance charge. The borrower claimed the fees for the two services should have been included in the finance chargeone for the firms notice to the borrower concerning the documents to be brought to closing and another for the fees paid for the preparation of the TILA disclosures. But Bankers Trust, which was joined in the case by American Financial and assignee-designate Champion, argued the entire fee paid to the law firm should have been excluded from the finance charge because the TILA statement preparation provided by the law firm were incidental to the document preparation items which are excludable under Regulation Z for residential loans. The court, however, determined just because the law firm, which was not mentioned in the complaint, billed the lender in a lump sum, it does not necessarily mean it prepared the TILA statements free of charge. The court added the official staff commentary to Reg Z states that fees for preparing a TILA disclosure statement must be included in the finance charge. Champion delegated some of the [closing] functions that would normally be handled by its employees to its attorney, assuming that the attorney would pass the fee on to the borrower, said Philip Bertocci, supervising attorney with Community Legal Services, the Philadelphia-based nonprofit legal group that represented Brodo. But most of the work the attorney really did is clerical, and theres no reason why [borrowers] should pay $100 or $200 an hour for the work of a clerical employee. Bertocci emphasized the courts opinion is nonbinding and the industrys concerns may not be as urgent as some believe. The purpose of TILA is to inform the borrower about the true cost of borrowing money, he said. Were not saying [Champion] couldnt have had an attorney do what he did, but they have to disclose the charge as a true cost. The [opinion] doesnt prohibit attorneys from performing those functions, it just requires that they disclose those charges as part of the loans finance charges. But the potentially precedent-setting opinion drew a sharp response from the lending industry. As a practical matter thats fine, Bernstein said of the added disclosure. But its going to represent a significant change in the way that lenders do business. Lenders will need to be more aware now, theyll need to consult with informed counsels, and the legal bills will have to be more detailed. As part of the settlement, Championwhich now owns the loanagreed it is not entitled to any interest or finance charges, and gave credit to Brodo for the $14,000 equity that had been built up since 1990. It also refinanced the loan from its 14% interest rate to a more modest 8%. Brodo and Community Legal Services filed the suit after the mortgage had gone into default and foreclosure proceedings had begun.
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