How Mortgage Servicing Companies Escape Liability for Truth in Lending

One of the laws that give homeowners the most protection against mortgage lending abuses is the Truth in Lending Act (TILA). This act is designed to provide borrowers with adequate disclosures and to force lenders to make accurate disclosures of the cost of borrowing money. In many cases, if a mortgage company sells a loan to an investor or other lender, the new loan hold can still be held liable for any violations of the Act.

Mortgage servicing companies, however, operate in their own legal world far outside the bounds of morals, ethics, or prohibitions against evil, predatory actions. As many homeowners have discovered once they are pushed into foreclosure, they may have few remedies against mortgage servicing abuse. Another loophole in lending laws that servicers take advantage of is that TILA may not even apply to them.

While claims under the Truth in Lending Act can be powerful defenses to foreclosure and force banks to rescind loans completely, servicers are not treated as assignees of mortgage loans under the terms of the law. Unless the mortgage servicing company is also assigned ownership of the loan itself, the Act does not apply to it, and homeowners can not use violations of the law as defenses in a foreclosure case.

Even in some cases where the mortgage servicer does acquire the loan, it may not be treated as the assignee under the conditions of TILA. If the company acquires the mortgage solely for administrative purposes and convenience in the course of servicing the loan, it does not count as assignee. The only action the company has to take is to identify the actual owner if the borrowers request in writing.

Two cases may indicate that the servicing company does count as the assignee of the mortgage, despite its insistence that it does not. The first is if the company takes an interest in the loan beyond convenience of administration. The second case is if the company represents itself to the homeowners as the actual owner of the mortgage. In either case, the Truth in Lending Act may apply.

One final instance that homeowners may wish to research when defending foreclosure against a servicer is if the loan balance was misrepresented. In this case, there may be a violation of the TILA provision that requires properly disclosing account balances and other variable rate adjustments. When the servicer improperly charges servicing-related fees to a borrower's account, there may be a violation of TILA.

Unfortunately, homeowners may be best served by suing the owner of the loan directly when trying to stop foreclosure, if there are significant TILA violations. The servicing company may be joined to the lawsuit, but just going after the servicer based on TILA violations may result in the homeowners' claims being tossed out due to the inapplicability of the law itself. While there may be violations, the servicer is immune from liability.