YOUR MORTGAGE : Undisclosed Fees Spark Truth-in-Lending Battle

The $226 in undisclosed fees that Marta Rodash was charged at her home mortgage closing have triggered a Capitol Hill “truth-in-lending” brouhaha that could ultimately touch thousands of consumers across the country.

It could also cost Rodash--who has multiple sclerosis and lives on disability payments--her house, plus tens of thousands of dollars in legal fees.

Here’s the story and what it might mean to you.

Three years ago Rodash needed money for medical treatments that she otherwise couldn’t afford on her $500-a-month disability income. To raise the cash, she refinanced her home in Miami for $102,000 and netted about $11,000 in cash. That was enough, Rodash calculated, to finance a trip to a medical clinic in Germany that specializes in multiple sclerosis.

What she didn’t focus on sufficiently, she now concedes, were the terms of her refinanced mortgage: Monthly payments of $914, nearly double her income and $7,600 in settlement charges--including four points on the loan. (A point is equal to 1% of the amount borrowed.)

Since she couldn’t afford the monthly payments, Rodash quickly slipped into default. The mortgage company began foreclosure proceedings, jeopardizing the last major asset Rodash possessed--the $50,000 in equity she had in her home.

Frightened about ending up on the street, she contacted Charles M. Baird, an attorney then working with the Miami neighborhood legal services program and now in private practice. Baird said he immediately recognized the mortgage to be a rip-off.

“It should never have been made. It was outrageous,” he said. “She absolutely did not qualify.”

To forestall foreclosure, Baird scoured the loan documents for any legal basis to challenge the mortgage contract itself. In the end, all he could find was a seemingly minor technical violation. The mortgage company had not provided proper advance “finance charge” disclosure of just two of the many items that ultimately ended up on Rodash’s settlement sheet: A $22 Federal Express fee for document delivery and a $204 Florida state tax on the lender that was passed on to the borrower.

Under the Truth-in-Lending Act, Baird argued, the lender was required to include such charges in the “good faith estimate” it sent to Rodash three days after application. Its failure to do so opened it to a suit that would force rescission of the entire transaction.

Although a federal district court ruled against Rodash, a federal appellate court reversed that decision earlier this year. The net effect was to send the case back to the lower court and to halt the foreclosure against Rodash.

In the meantime, the federal appellate court’s decision has sent legal shock waves far beyond Miami. Mortgage lenders in half a dozen states have been slapped with truth-in-lending class action suits grounded on the same theory as Rodash’s: Improper advance disclosure of even minuscule fees--like Federal Express delivery charges--may allow borrowers to challenge and unravel their refinance transactions.

With a three-year statute of limitations on truth-in-lending, the potential for a wave of suits “is nightmarish,” in the words of one mortgage executive. “We could have people crawling out of the woodwork, claiming that we didn’t properly disclose some $15 courier fee and wanting out of the deal. Hell, we never thought we had to disclose those fees as finance charges anyway.”

Some local attorneys, according to the Mortgage Bankers Assn. of America, already are advertising that they will bail borrowers out of loans they don’t like, using a truth-in-lending attack. One Boston law firm promised in a recent mailing to consumers that “if you were charged fees for overnight mail . . . or couriers or any other delivery fees, you are probably entitled to money damages under the federal Truth-in-Lending Act.”

An attorney in Jupiter, Fla., advertised in boldface type: “Do You Want Your Money Back?” and held out the possibility of “thousands of dollars in payment to you or increased equity in your home.”

To prevent a wave of litigation--and multimillion-dollar settlements--mortgage industry leaders are asking Congress to amend the Truth-in-Lending Act to eliminate the requirement for “finance charge” disclosure of courier fees and certain state taxes.

They have persuaded Sen. Connie Mack (R-Fla.) to push an amendment to the 1994 Federal Housing Act that would accomplish this not only prospectively--on all future loans--but retroactively as well.

Draft language circulated by Mack would apply to any court judgments “that are inconsistent” with the revised disclosure rule, if a lender requests such relief within a year after enactment.

This would not only throw land mines in the paths of class action suits being filed across the country, but would also nullify the decision in Marta Rodash’s case. The foreclosure could then proceed, and Rodash could be held liable to pay her lender’s legal bills--tens of thousands of dollars.

Lawyers who represent low-income homeowners, particularly legal services attorneys, are horrified at the prospect of Mack’s amendment sailing through an election-bound Congress.

“Truth-in-lending violations are often our most effective--or only--way to help keep people out of foreclosure,” said Margot Saunders of the National Consumer Law Center. Before watering down the most important consumer protection law for mortgage borrowers, she said, Congress ought to at least hold public hearings and not be stampeded by lenders.

Distributed by the Washington Post Writers Group .