The mortgage banking industry has enlisted members of Congress in an effort to slow down the filing of class action suits based on a March appeals court decision that could result in the rescission of thousands of mortgages nationwide.

With no way of getting Congress to deal with the issue this year, the industry succeeded in getting Sens. Connie Mack, R-Fla., and Alfonse D'Amato, R-N.Y., to engage in a colloquy on the floor of the Senate Dec. 1 aimed at signaling to the plaintiff strike lawyer industry that spending money starting suits and finding potential clients might not be a profitable venture.

The purpose of Mack and D'Amato's comments was to indicate strong congressional concern that the ruling in Rodash vs. A.I.B. Mortgage may have been wrong, that it endangered lenders and that the Congress intends to move quickly when it resumes work in January to fix the problem through legislation. Mortgage bankers tried and failed to get a Democrat involved in order to show bipartisan support for a legislative fix to the situation. The colloquy took place as the Senate met to deal with legislation implementing the General Agreement on Tariffs and Trade.

A provision that would fix the problem was attached to legislation during the waning days of Congress in October, but parliamentary maneuvers resulted in Congress closing up shop before it could be passed. But there was strong support for the provision and a sentiment in Congress that efforts should be made to stop the filing of lawsuits aimed at allowing consumers to benefit from the situation.

The 11th U.S. Circuit Court of Appeals ruled March 21 that a $22 Federal Express charge for carrying a payoff of a pre-existing mortgage, and a $204 Florida intangibles tax assessed and collected at the time of a loan and passed through to the borrower at settlement were both finance charges under Regulation Z, the Truth In Lending Act, and needed to be disclosed as such in making the loan. Failure to do so entitled the borrower to rescind the mortgage for up to three years. The original suit has been settled by AIB Mortgage, but similar cases seeking class-action status have been filed in Florida, Illinois and Pennsylvania.

One version of the colloquy that had been prepared by lawyers and lobbyists for the mortgage banking industry would have stated the unfairness of the ruling, the possibility that it was wrong, and that the Congress would deal with the issue as part of its efforts to reform tort litigation practices in the United States.

A draft to the colloquy had Mack stating, The courts have liberally construed what constitutes a material mis-disclosure so that even minor discrepancies allow borrowers to exercise the right to rescind a loan or seek statutory penalties, but both Republican and Democratic congressional staffers were subjecting the draft to major revisions as the debate on GATT wore on.

The draft had Mack saying the Rodash decision would adversely affect both lenders and the securities market. A borrowers right to rescind may be asserted against subsequent owners of the loan, even if they did not make or contribute to the incorrect disclosure, he said. This aspect affects mortgages that have been resold as mortgage-backed securities. The mortgage lending industry faces dire consequences if loans are rescinded in significant numbers.

Mack added that the potential losses could reach into the billions, may effect the safety and soundness of thrifts and banks, and that the prepayments from the massive number of rescissions would have a severely detrimental effect on the MBS market. Support of the proposed TILA amendment among Senate republicans is reportably strong. The amendments would: Make clear that charges incurred by settlement, title and escrow agents which are not paid to the lender are not finance charges;

Contain a retroactive limit liability that relates to all transactions consummated before May 1, 1995, whether entered into before or after the date of the legislation.

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