In this Article, I advocate modification of the law governing home improvement financing. In section I, I discuss the prevalence of home improvement scams, the dual system of home improvement financing available to affluent and poor homeowners, and the social cost of home improvement scams. Despite attempts by lawmakers to protect homeowners from unscrupulous home improvement contractors and lenders, home improvement scams remain a significant consumer problem. Most victims of such scams are poor, minority, and elderly homeowners. These homeowners obtain home improvements and home improvement financing through a system with tremendous potential for abuse. In this system, contractors and lenders use high pressure tactics and fraud to induce homeowners into disadvantageous home improvement transactions. Ultimately, victims of home improvement scams may, like the Hogans, lose their homes.
In section II, I discuss the application of negotiable instruments law to home improvement loans. The Federal Trade Commission adopted its Holder in Due Course Rule to ameliorate some of the harshness of negotiable instruments law in consumer transactions. Other state and federal measures are also designed to protect consumers who borrow to improve their homes. In sections III and IV, I explain why these measures have not been sufficient to eliminate abuse by home improvement contractors and lenders. In cases of abuse, a homeowner who has executed a promissory note to evidence the obligation to pay a home improvement loan must prove defenses to payment. In most states,the homeowner also must initiate a lawsuit against the lender to enjoin foreclosure because foreclosure without judicial hearing is permitted. The burden of initiating suit is particularly onerous because a suit to obtain an injunction is likely to be expensive and require the assistance of an attorney. Placing these burdens on the homeowner is not appropriate when a relationship between the contractor and the home improvement lender exists because this circumstance increases the likelihood of a defense to payment. Therefore, in section V, I recommend prohibiting promissory notes and power of sale foreclosure in home improvement loans made by lenders who have a relationship to the contractor. This measure would shift the burdens of proof and initiating suit to the lenders.
Oregon Law Review
Julia Patterson Forrester, Constructing a New Theoretical Framework for Home Improvement Financing, 75 OR. L. REV. 1095 (1996)