Finding a legal escape clause / Attorney rescues homeowners from loans they can't afford Page 1 of 5
Finding a legal escape clause
Attorney rescues homeowners from loans they can't afford
Marni Leff Kottle, Chronicle Staff Writer
Sunday, April 22, 2007
Pamela Simmons has something to offer California homeowners who've been burned by the
mortgage industry meltdown: a way out.
The lawyer, who with a partner runs a seven-person practice out of cramped space in an office park
next to the freeway in the Santa Cruz County town of Soquel, is using a little-known law to help
hundreds of homeowners dump loans that have become toxic.
Simmons, who turns 50 next week, has found a legal defense in the Truth in Lending Act, a wide-
ranging federal statute that was passed in 1968. She says that many lawyers -- and judges -- are
unfamiliar with the kind of protection the law offers consumers.
As part of the statute, a lender has to provide a borrower with a right-to-cancel form indicating that
the borrower has three days to review and cancel the loan. The lender is required to disclose on that
form when the three-day waiting period begins and ends.
Failure to properly fill out those dates may extend the cancellation period to as much as three
years, granting the borrower the right to rescind the loan and have closing costs, interest and other
fees deducted from the balance, Simmons said.
As the booming real estate market fueled a booming mortgage market, lenders got sloppy with the
right-to-cancel document, she said.
"There was a period of time just a few years ago where virtually every loan I looked at was
The strategy won't work for every borrower who is in over his or her head. For one thing, this part
of the law applies only to a homeowner who is refinancing a loan. And even if a loan is rescinded,
the borrower must find new financing in what has become a tight market.
Nevertheless, business is brisk for Simmons. The number of calls from desperate homeowners has
reached about 100 a month, she said, as the rapid appreciation that fueled the housing market in
the early part of the decade has slowed to a crawl and the adjustable interest rates on loans taken
out in those heady times are starting to rise.
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"I used to do one of these cases every three months," Simmons said. "Now, it's all I do."
Melissa Pacheco and her husband, Carlos, wanted to own their own home -- so much so that they
were willing to take a subprime loan at about 9 percent interest and make $6,000-per-month
payments to buy a three-bedroom house in Soquel for $475,000 in 2004. They put no money
But with real estate prices skyrocketing in the area, the purchase seemed to be a good investment
for the couple, who owned a restaurant and grocery store.
"When we bought the house it was the best thing ever," Melissa Pacheco said. "It was a great
location and a great price and it meant a better life for us."
They moved into the house and began fixing it up. They painted the outside a greenish-gray and
added landscaping and stonework to the yard, which now includes calla lilies, palm trees and a blue
plastic swing for their son, who was born in late 2005.
Around that time, the Pachecos decided to refinance. They had improved their credit by making
their mortgage payments on time and were looking to lower their monthly costs.
"We knew we'd gotten a good deal on the house and all of a sudden it turned out we had a lot of
equity," she said.
In fact, the appraisal for the new loan put the house's worth at $760,000 -- nearly $300,000 more
than the Pachecos paid a year earlier.
They also wanted to take some cash out of the house. The couple had sold their business and
moved on to new jobs to help establish more predictable hours to care for their young son.
He now works as a rehabilitation technician at a local hospital. She works in vacation rentals and is
taking classes at night to become a property manager. A friend gave them the number of a
mortgage broker in Orange County and they looked at five possible loans.
"We picked the lowest one," she said.
Carlos Pacheco flew down to Orange County to sign the documents for the $607,000 loan at 1
percent interest with payments of less than $2,000 a month.
What the Pachecos say they didn't know at the time they signed the papers was that by paying so
little each month, they were allowing the balance on their loan to rise.
It wasn't until early this year, Melissa Pacheco said, that she realized something was amiss as the
balance -- and the interest rate -- with each monthly statement.
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By the time the Pachecos' statement arrived last month, the loan balance was $629,406.84. The
interest rate, which began rising just 38 days after the loan was issued, had climbed to 8.375
Melissa Pacheco called the mortgage broker, but he didn't return her calls. Calls by The Chronicle
to Real Estate Loan Center, the broker's employer in Apple Valley (San Bernardino County) were
Stephen Dupont, a spokesman for GMAC Mortgage, the parent company of the lender that
underwrote the loan, declined to comment on the Pachecos' case, citing federal privacy laws.
Carlos Pacheco has a friend who works for Simmons and suggested that the couple seek legal
Simmons reviewed their loan documents and agreed to take their case. She has sent a letter to the
lender saying that the right-to-cancel document was improperly filled out and demanding that the
loan be rescinded. She is waiting for a response.
Watchdog groups predict that more than 2.2 million Americans could lose their homes during the
next several years because they have been given loans for which they can't afford to make the
payments. Simmons' strategy offers a glimmer of hope for some of those people.
Already, data show that the number of homeowners who are falling behind on their mortgage
payments is growing, particularly among borrowers with poor credit scores.
Nationwide, the mortgage delinquency rate rose to 4.95 percent in the fourth quarter from 4.7
percent a year earlier, the Mortgage Bankers Association said last month. California has a
delinquency rate of 3.25 percent, according to the research, and delinquencies are also rising in the
But while subprime loans are a major cause of foreclosures nationwide, the Bay Area's struggles are
a bit different, economists say. Subprime loans account for just 10 percent of the loans in the
region, compared with 15.3 percent nationwide, according to data from First American
The Bay Area, however, has a disproportionately high number of adjustable-rate loans, according
to First American. About 35 percent of the loans in the Bay Area are adjustable, compared with 29
percent nationwide. While those loans made it possible for many Bay Area buyers to purchase a
home, they only delayed the inevitable, economists said.
The rates on those loans are rising, leaving some borrowers confused and painting a grim picture of
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"The payments increase and increase and increase and -- surprise -- the borrowers find you can't
buy something you couldn't afford," said Christopher Thornberg, a principal at the consulting firm
Beacon Economics in Los Angeles.
The Mortgage Bankers Association, a Washington trade group that represents the industry, said
that as foreclosures and defaults rise, they expect an increase in Truth and Lending Act right-to-
"It's always a concern, though, when there is a spike in lawsuits," said Ken Markison, senior
director and regulatory counsel for the group. "Defending against legal actions, meritorious or not,
has a dramatic effect on mortgage costs for all borrowers."
And indeed it's not just Simmons who says cases like the Pachecos' are on the rise. Around the
country a handful of attorneys in small firms who are willing to take the risk that they won't be paid
for their services if they lose say that they are being inundated with calls from troubled borrowers.
The Truth in Lending Act includes a provision that forces the lender to pay reasonable attorneys
The cases tend to be concentrated in the hands of a few lawyers, said Melissa Huelsman, a Seattle
lawyer, who uses the Truth in Lending Act to help clients, adding that the complexity of the cases
also makes them unappealing.
"It's an area of the law that not a lot of people understand," Huelsman said. "These cases are
document intensive, involve a lot of work and time, and are difficult to understand. All of that
works against people taking on these cases."
And the Truth in Lending Act isn't a magic bullet.
"A lot of these loans were made where there was fraudulent deception in the oral representation
and the Truth in Lending disclosures may have been fine," said Kathleen Keest, senior policy
counsel for the Center for Responsible Lending. "There are many cases where it just doesn't kick
Keest also pointed out that the law applies only to refinances, not purchase loans, and provides
limited time for borrowers to undo the loans -- one to three years, depending on which provisions
of the law have been violated.
But perhaps the greatest limitation of the Truth in Lending Act is that even when a loan is canceled,
borrowers still have to find a way to refinance that loan and make the monthly payments if they
want to keep their homes, said Alan Ramos, an attorney in Pleasanton who handles similar cases.
"The problem with that remedy is you have to come up with another loan," he said. "These are
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people who don't have sterling credit, for the most part."
Most lenders require that borrowers make a down payment of at least 10 percent.
"People with weak credit are finding tightening conditions," said Ken Rosen, chairman of the
Fisher Center for Real Estate Research and Urban Economics at UC Berkeley. "They are finding it
more difficult to borrow."
Still, Simmons said the Truth in Lending Act is a tool that she's had great success with and credits
it with having helped her undo hundreds of loans.
As she copes with floods of calls from homeowners and other attorneys seeking her advice,
Simmons, who worked in the Santa Cruz County district attorney's office prosecuting white-collar
crimes in the 1990s, said she's shocked by the extent to which the problem has grown.
"I had this area of expertise that was the width of a single hair," she said. "Now, all of a sudden, I'm
an expert in a field that everybody's aware of. It's amazing to me what has happened, and it's also
E-mail Marni Leff Kottle at email@example.com.
This article appeared on page D - 1 of the San Francisco Chronicle