Second mortgages and lines of credit

Arizona law prohibits a lender from filing a lawsuit to collect on a home loan where the loan represents “purchase money,” that is, money used to purchase the property. This includes purchase money loans that are technically denominated as “home equity lines of credit” taken out at the time of the original purchase of the home. It also includes first, second, and even third mortgages where the money was borrowed as part of the purchase of the property.

Consider the following illustration: You buy a $300,000.00 house. It is structured as two loans in what is common called an “80-20” transaction, meaning that the first loan is 80% of the purchase price, or $240,000.00, and the second loan is 20% of the purchase price, or $60,000. Because both of these loans are considered purchase money loans, the lenders cannot sue the borrower to recover the money in the event the borrower defaults. This is true even if the borrower has refinanced the original loan to get a better interest rate or other terms (note: the same may not be true, however, if the borrower has refinanced in order to withdraw some equity). This is also true even if the lender calls the second loan a “home equity line of credit.”

A common scenario in today’s real estate market is that the first mortgage forecloses. Ordinarily, this leaves the second lender without any remedy because they cannot file a lawsuit seeking to recover the difference. A number of lenders, however, are either unaware of, or deliberately ignoring, this prohibition by filing improper lawsuits. In many cases, the original loan has been sold to a different bank and the new bank fails to do its due diligence to determine whether the loan is a purchase money loan before filing a lawsuit. Because borrowers are unaware of the rules, in many cases they do nothing and let the lenders obtain substantial default judgments against them. Judgments to which the lenders otherwise would not be entitled except the borrower has forfeited his or her right to defend the lawsuit! In many cases, you may be entitled to recover your attorneys’ fees and costs if you are forced to defend such a lawsuit.

Don’t become a victim of predatory collection practices on the part of unscrupulous or unknowledgeable banks. If a bank has sued you on a second loan, we strongly advise you to consult with a lawyer to determine your legal rights. Contact the lawyers at the Dessaules Law Group today at 602-274-5400 to schedule a consultation.