As mentioned in a previous article, it can be very difficult for homeowners facing foreclosure to raise certain claims in court when the bank holding their loan has failed and been taken over by the Federal Deposit Insurance Corporation. Case law and federal statute give the FDIC broad immunity against a number of claims that could be raised by borrowers in regards to loans held by the failed institution.
However, there are also a number of exemptions to the broad immunity the FDIC enjoys. Four of them are significant and worth examining here, as homeowners in foreclosure may be able to use them to bring claims against the FDIC or successor financial institutions.
The first is called fraud in the factum, and refers to any case when one party to a transaction reasonably relies on a misrepresentation by another party. The misrepresentation will be as to the character or essential terms of the contract. Examples include alteration of a document or forgery. The FDIC nor its successor institutions are immune to claims of fraud in the factum, so homeowners may be able to bring these issues into court.
Second, Truth in Lending rescission claims are still allowed despite the FDIC’s immunity protection. In fact, the Truth in Lending Act states that a borrower’s rescission rights continue regardless of assignment of the loan or to whom the loan is assigned. This means that, even if the lender fails and the note is taken over by the government, rescission may still be an option if the other requirements under the statute are met. FDIC receivership of the bank’s assets will not affect the claim.
Also, the FDIC does not have immunity protection from any transaction that is void. The federal statute granting FDIC immunity is intended to protect the government’s interests in assets is acquires from the failed banks. A void transaction, though, does not create an interest in an asset, and the immunity protection can not be extended to assets in which the FDIC has no valid interest. In cases such as fraud in the factum, the transaction may be declared void, for instance.
Finally, there is a rule called the FTC Holder Rule that was designed to protect credit consumers from holder-in-due-course immunity, such as the FDIC has been granted. For this rule to apply, though, an FTC Holder Notice must be included in the consumer credit contract. It will be included in many transactions relating to a sales transaction. This might be a home improvement contract or other similar agreement. If the notice is included in the contract, the FDIC’s immunity may not apply.
While the above defenses to broad FDIC immunity have survived most course, other claims have survived in a smaller number of cases. These include such issues as breach of contract, failure of consideration, challenges to the validity of a lien, homestead issues, unreasonable foreclosure sale, and state statutes regarding Unfair and Deceptive Acts and Practices. Homeowners should do their own legal research to determine if their claims may survive, or consult with a competent foreclosure attorney.
When homeowners find that they have become a mortgage customer of the government, falling into foreclosure can become extremely complicated. While the FDIC has taken some steps to assist borrowers in stopping foreclosure, the agency is granted broad immunity from many claims that may have been used to defend against the loss of the home in the first place. Thus, borrowers should educate themselves in regard to the issues surrounding the FDIC’s administration of mortgage loans and foreclosure.