For the past couple of years, it has become a fairly common practice for lenders and servicers to employ forensic loan audits on pools of mortgages, with the goal of uncovering patterns of noncompliance with federal and local regulations, the presence of fraud and/or the testing of high fee violations. Unfortunately, for these same lenders, the practice of forensic loan auditing has slipped over to the consumer side of the market and is now being used against the lenders themselves.
Homeowners, many of whom are facing foreclosures, have begun hiring forensic loan auditors to review their loan documents, and if violations are found, they are hiring attorneys to bring their case against the lenders. What do they hope to gain? At the very least, the homeowners are trying to forestall a foreclosure, push for a loan modification or, at the end of continuum, try to get the loan rescinded.
“The forensic loan review as we know it today came about two years ago, when the mortgage market started to melt down,” explains Jeffrey Taylor, co-founder and managing director for Orlando-based Digital Risk LLC. “The idea of the forensic review was to look for a breach of representations and warranties so the investor or servicer could put the loan back to the originator. This is when you had all the big banks reviewing nonperforming assets to see if there was any fraud material or breaches so as to put them back to the entity that sold the loan.”
Originally, and still today, most forensic loan reviews are done by institutions on nonconforming assets. Starting in about 2008, the concept morphed into a kind of consumer protection program. Forensic loan auditing companies have since sprouted up like weeds, and many advisors are now advocating the program as a best practice and the first step before bringing a lawsuit against the lender to get a “bad” mortgage rescinded or force a loan modification.
“Every constituent along the way is looking for their own get-out-of-jail-free card,” observes Frank Pallotta, a principal with Loan Value Group LLC of Rumson, N.J. “I’ve been seeing this for the last two years. It started with banks that bought loans from small correspondents, and when those loans were going down, they would look for anything in the loan documentss to put it back to the person they bought the loan from. Fannie and Freddie are doing it, too. Now you have borrowers going to the banks to see if they have all their documents in place; they want their own get-out-of-jail-free card.”
In some regards, lenders should be worried, as a swarm of potential lawsuits could fly in their direction. These might not always be hefty lawsuits, considering they mostly represent individual loan amounts, but they are annoying and the fees to defend the institution from these efforts can mount up very quickly. In addition, if homeowners are successful in the bids to rescind a loan, the lender has to pay back all closing costs and finance charges.
The industry should also be concerned because experts in mortgage loan rescissions say it is very hard for a bank to mount an effective defense against people who can prove that their loan contained violations.
“It is extremely difficult for lenders to defend against a lawsuit when they face a bona fide rescission claim,” says Seth Leventhal, an attorney with Fafinski Mark & Johnson PA in Eden Prairie, Minn., who often works with banks.
Additionally, in this age of securitization, many banks don’t own the loans they originated, but, says Leventhal, this is not a defense. “If they don’t own the loan anymore, they are going to have to get in touch with the servicer who does,” he says.
On the other hand, the homeowner’s cost to arrange a loan audit and hire an attorney can be prohibitive, so there is some balance.
Jon Maddux, principal and founder of Carlsbad, Calif.-based You Walk Away LLC, started one of the first companies offering forensic home loan audits for homeowners back in January 2008.
“We found that about 80% of the loans we audited had some type of violation,” he says. “And we thought it was going to be a great new tactic to help the distressed homeowner.”
However, it wasn’t. Homeowners would take the audit findings to their lender or servicer, only to find themselves pretty much as ignored as they were before they made the investment in the audit.
“We found lenders weren’t really reacting to an audit,” says Maddux, adding that lenders and servicers would only react to lawsuits based on audit information.
An audit by itself is not some magical way to make everything go away; it’s just the beginning, adds Dean Mostofi, the founder of National Loan Audits in Rockville, Md.
“Borrowers who contact lenders with an audit don’t get too far,” he says. “It’s in their best interest to go in with an attorney.”
The problem is, Mostofi states, that the first point of contact is the loss mitigation department, and “those people typically have no idea what you are talking about. To get past them sometimes requires lawsuits.”
The forensic loan audit lets the homeowner know if the closing documents contain any violations of the Truth In Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA), or if there was any kind of fraud or misrepresentation.
“We go through the important documents – in particular, the applications – TILA disclosure, Department of Housing and Urban Development forms, the note, etc., making sure that everything was disclosed properly to the borrower and that borrowers knew what they were getting into,” says Mostofi. “We also look at the borrower’s income to see if everything was properly disclosed. If the lender didn’t care about the borrower’s income, then we look further for other signs that it might be a predatory loan.”
According to August Blass, CEO and president of Walnut Creek, Calif.-based National Loan Auditors, a forensic loan audit is a thorough risk assessment audit performed by professionals who have industry and legal qualifications to review loan documents and portfolios for potential compliance or underwriting violations, and provide an informative, accurate loan auditing report detailing errors or misrepresentations.
Some elements of a forensic loan audit, says Blass, should include: a compliance analysis report based on data from the actual file; post-closing underwriting review and analysis; and summary of applicable statutes, prevailing case law and action steps that the attorney or loss mitigation group may chose to act upon.
TILA’s statute of limitations extends back three years, so most people who end up on their lender’s doorsteps are people who financed or refinanced during the boom period of 2005 through early 2007. If serious violations are discovered, the borrower can move to have the mortgage rescinded.
Not everyone appreciates the efforts of the forensic loan auditors working the homeowner side of the business.
“It began with a bunch of entrepreneurial, ex-mortgage brokers who learned how to game the system the first time, then started offering services to consumers to teach them the game,” Digital Risk’s Taylor says.
A year ago, most people didn’t know what a forensic audit was, but “now almost everyone knows,” says Mostofi. “The problem that we are having is that the banks are coming back and telling borrowers that everyone who is offering some kind of service to help them is a crook because they are charging a fee.”
Indeed, fees for a forensic audit often fall into the $2,000 to $5,000 range – but a hefty sum for someone facing foreclosure.
This could all be a desperate attempt to get a loan rescinded, but in regard to loan rescissions, there’s bad news and good news.
“Yes, it’s tough for lenders to defend themselves,” says James Thompson, an attorney in the Chicago office of Jenner & Block LLP who represents banks and finance companies. But, he adds, there is an exception: the plaintiff in this kind of lawsuit has to essentially buy back the loan, which means the plaintive (borrower) has to get new financing.
“The borrower has to be able to repay the amount he borrowed,” explains Thompson. “If the property is underwater, as many of these are, the borrower can’t go out and get a replacement mortgage that would give him the entire amount he would need to repay the lender.”
In some court cases, as part of the initial lawsuit, the plaintiff needs to prove that he or she is capable of getting a refinancing. What happens if the court grants a rescission but the consumer can’t find financing? Oddly, no one knows, because court cases haven’t gotten that far.
“Every one of these cases gets resolved,” says Thompson. “The borrowers are struggling to get the attention of the overworked loan servicers, who are scrambling with as many loan modifications and workouts they can come up with. You can get to the head of the line sometimes if you show up with an attorney and forensic loan examination, saying, ‘Here is a TILA violation; we want to rescind.’”
“I don’t see very many of these litigating,” National Loan Auditors’ Blass concurs. “It brings the settlement offer to the table a little faster. It’s not as if the lender would not have brought an offer to the table without the audit. It just seems to fast-track the process a little bit more.”
Forensic loan audits expose mistakes and unscrupulous lending practices that will assist the borrower in negotiation efforts, Blass adds. “Federal-, state- or county-specific lending violations and the legal guidelines for remedy, can pave the way to successful and expedient modification.”
Perhaps, the bigger nightmare of all is not the lawsuits brought by individual homeowners, but the big law firms finding all these individuals and bringing them together for a class action suit.
“The plaintiff bar is as active as ever. They have these big dragnets, trying to capture all the misdeeds of mortgage bankers, going after them with class-action lawsuits,” says David Lykken, president of Mortgage Banking Solutions in Austin, Texas.
This just aggravates the situation, adds Lykken. “I have not seen one class-action lawsuit bring about any positive change. Punitive damages just drain the cash-out of already cash-strapped companies.”
Steve Bergsman is a freelance writer based in Mesa, Ariz., and author of “After The Fall: Opportunities & Strategies for Real Estate Investing in the Coming Decade,” published by John Wiley & Sons.Read Full Post | Make a Comment ( None so far )
ERNESTO ORTIZ; ARACELI ORTIZ, Plaintiffs, v. ACCREDITED HOME LENDERS, INC.; LINCE HOME LOANS; CHASE HOME FINANCE, LLC; U.S. BANK NATIONAL ASSOCIATION, TRUSTEE FOR JP MORGAN ACQUISITION TRUST-2006 ACC; and DOES 1 through 100, inclusive, Defendants.
CASE NO. 09 CV 0461 JM (CAB)
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA
ORDER GRANTING MOTION TO DISMISS
Doc. No. 7
On February 6, 2009, Plaintiffs Ernesto and Araceli Ortiz (“Plaintiffs”) filed a complaint in the Superior Court of the State of California, County of San Diego, raising claims arising out of a mortgage loan transaction. (Doc. No. 1, Exh. 1.) On March 9, 2009, Defendants Chase Home Finance, LLC (“Chase”) and U.S. Bank National Association (“U.S. Bank”) removed the action to federal court on the basis of federal question jurisdiction, 28 U.S.C. § 1331. (Doc. No. 1.) Plaintiffs [*1162] filed a First Amended Complaint on April 21, 2009, naming only U.S. Bank as a defendant and [**2] dropping Chase, Accredited Home Lenders, Inc., and Lince Home Loans from the pleadings. (Doc. No. 4, “FAC.”) Pending before the court is a motion by Chase and U.S Bank to dismiss the FAC for failure to state a claim pursuant to Federal Rule of Civil Procedure (“Rule”) 12(b)(6). (Doc. No. 7, “Mot.”) Because Chase is no longer a party in this matter, the court construes the motion as having been brought only by U.S. Bank. Plaintiffs oppose the motion. (Doc. No. 12, “Opp’n.”) U.S. Bank submitted a responsive reply. (Doc. No. 14, “Reply.”) Pursuant to Civ.L.R. 7.1(d), the matter was taken under submission by the court on June 22, 2009. (Doc. No. 12.)
For the reasons set forth below, the court GRANTS the motion to dismiss.
Plaintiffs purchased their home at 4442 Via La Jolla, Oceanside, California (the “Property”) in January 2006. (FAC P 3; Doc. No. 7-2, Exh. 1 (“DOT”) at 1.) The loan was secured by a Deed of Trust on the Property, which was recorded around January 10, 2006. (DOT at 1.) Plaintiffs obtained the loan through a broker “who received kickbacks from the originating lender.” (FAC P 4.) U.S. Bank avers that it is the assignee of the original creditor, Accredited Home [**3] Lenders, Inc. (FAC P 5; Mot. at 2, 4.) Chase is the loan servicer. (Mot. at 4.) A Notice of Default was recorded on the Property on June 30, 2008, showing the loan in arrears by $ 14,293,08. (Doc. No. 7-2, Exh. 2.) On October 3, 2008, a Notice of Trustee’s Sale was recorded on the Property. (Doc. No. 7-2, Exh. 4.) From the parties’ submissions, it appears no foreclosure sale has yet taken place.
Plaintiffs assert causes of action under Truth in Lending Act, 15 U.S.C. § 1601 et seq. (“TILA”), the Perata Mortgage Relief Act, Cal. Civil Code § 2923.5, the Foreign Language Contract Act, Cal. Civ. Code § 1632, the California Unfair Business Practices Act, Cal. Bus. Prof. Code § 17200 et seq., and to quiet title in the Property. Plaintiffs seek rescission, restitution, statutory and actual damages, injunctive relief, attorneys’ fees and costs, and judgments to void the security interest in the Property and to quiet title.
A. Legal Standards
A motion to dismiss under Rule 12(b)(6) challenges the legal sufficiency of the pleadings. De La Cruz v. Tormey, 582 F.2d 45, 48 (9th Cir. 1978). [HN2] In evaluating the motion, the court must construe the pleadings in the light most favorable to the plaintiff, accepting as true all material allegations in the complaint and any reasonable inferences drawn therefrom. See, e.g., Broam v. Bogan, 320 F.3d 1023, 1028 (9th Cir. 2003). While Rule 12(b)(6) dismissal is proper only in “extraordinary” cases, the complaint’s “factual allegations must be enough to raise a right to relief above the speculative level….” U.S. v. Redwood City, 640 F.2d 963, 966 (9th Cir. 1981); Bell Atlantic Corp. v. Twombly, 550 US 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007). The court should grant 12(b)(6) relief only if the complaint lacks either a “cognizable legal theory” or facts sufficient to support a cognizable legal theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990).
In testing the complaint’s legal adequacy, the court may consider material properly submitted as part of the complaint or subject to judicial notice. Swartz v. KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007). Furthermore, under the “incorporation by reference” doctrine, the court may consider documents “whose contents are alleged in a complaint and whose authenticity [*1163] no party questions, but which are not physically attached to the [plaintiff's] pleading.” Janas v. McCracken (In re Silicon Graphics Inc. Sec. Litig.), 183 F.3d 970, 986 (9th Cir. 1999) [**5] (internal quotation marks omitted). A court may consider matters of public record on a motion to dismiss, and doing so “does not convert a Rule 12(b)(6) motion to one for summary judgment.” Mack v. South Bay Beer Distributors, 798 F.2d 1279, 1282 (9th Cir. 1986), abrogated on other grounds by Astoria Fed. Sav. and Loan Ass’n v. Solimino, 501 U.S. 104, 111, 111 S. Ct. 2166, 115 L. Ed. 2d 96 (1991). To this end, the court may consider the Deed of Trust, Notice of Default, Substitution of Trustee, and Notice of Trustee’s Sale, as sought by U.S. Bank in their Request for Judicial Notice. (Doc. No. 7-2, Exhs. 1-4.)
A. Truth in Lending Act
Plaintiffs allege U.S. Bank failed to properly disclose material loan terms, including applicable finance charges, interest rate, and total payments as required by 15 U.S.C. § 1632. (FAC PP 7, 14.) In particular, Plaintiffs offer that the loan documents contained an “inaccurate calculation of the amount financed,” “misleading disclosures regarding the…variable rate nature of the loan” and “the application of a prepayment penalty,” and also failed “to disclose the index rate from which the payment was calculated and selection of historical index values.” (FAC P 13.) In addition, Plaintiffs contend these violations are “obvious on the face of the loans [sic] documents.” (FAC P 13.) Plaintiffs argue that since “Defendant has initiated foreclosure proceedings in an attempt to collect the debt,” they may seek remedies for the TILA violations through “recoupment or setoff.” (FAC P 14.) Notably, Plaintiffs’ FAC does not specify whether they are requesting damages, rescission, or both under TILA, although their general request for statutory damages does cite TILA’s § 1640(a). (FAC at 7.)
U.S. Bank first asks the court to dismiss Plaintiffs’ TILA claim by arguing it is “so summarily pled that it does not ‘raise a right to relief above the speculative level …’” (Mot. at 3.) The court disagrees. Plaintiffs have set out several ways in which the disclosure documents were deficient. In addition, by stating the violations were apparent on the face of the loan documents, they have alleged assignee liability for U.S. Bank. See 15 U.S.C. § 1641(a)(assignee liability lies “only if the violation…is apparent on the face of the disclosure statement….”). The court concludes Plaintiffs have adequately pled the substance of their TILA claim.
However, as U.S. Bank argues, Plaintiffs’ TILA claim is procedurally barred. To the extent Plaintiffs recite a claim for rescission, such is precluded by the applicable three-year statute of limitations. 15 U.S.C. § 1635(f) “Any claim for rescission must be brought within three years of consummation of the transaction or upon the sale of the property, whichever occurs first…”). According to the loan documents, the loan closed in December 2005 or January 2006. (DOT at 1.) The instant suit was not filed until February 6, 2009, outside the allowable three-year period. (Doc. No. 1, Exh. 1.) In addition, “residential mortgage transactions” are excluded from the right of rescission. 15 U.S.C. § 1635(e). A “residential mortgage transaction” is defined by 15 U.S.C. § 1602(w) to include “a mortgage, deed of trust, … or equivalent consensual security interest…created…against the consumer’s dwelling to finance the acquisition…of such dwelling.” Thus, Plaintiffs fail to state a claim for rescission under TILA.
As for Plaintiffs’ request for damages, they acknowledge such claims are normally subject to a one-year statute of limitations, typically running from the date of loan execution. See 15 U.S.C. §1640(e) any claim under this provision must be made “within one year from the date of the occurrence of the violation.”). However, as mentioned above, Plaintiffs attempt to circumvent the limitations period by characterizing their claim as one for “recoupment or setoff.” Plaintiffs rely on 15 U.S.C. § 1640(e), which provides:
This subsection does not bar a person from asserting a violation of this subchapter in an action to collect the debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law.
Generally, “a defendant’s right to plead ‘recoupment,’ a ‘defense arising out of some feature of the transaction upon which the plaintiff’s action is grounded,’ … survives the expiration” of the limitations period. Beach v. Ocwen Fed. Bank, 523 U.S. 410, 415, 118 S. Ct. 1408, 140 L. Ed. 2d 566 (1998) (quoting Rothensies v. Elec. Storage Battery Co., 329 U.S. 296, 299, 67 S. Ct. 271, 91 L. Ed. 296, 1947-1 C.B. 109 (1946) (internal citation omitted)). Plaintiffs also correctly observe the Supreme Court has confirmed recoupment claims survive TILA’s statute of limitations. Id. at 418. To avoid dismissal at this stage, Plaintiffs must show that “(1) the TILA violation and the debt are products of the same transaction, (2) the debtor asserts the claim as a defense, and (3) the main action is timely.” Moor v. Travelers Ins. Co., 784 F.2d 632, 634 (5th Cir. 1986) (citing In re Smith, 737 F.2d 1549, 1553 (11th Cir. 1984)) (emphasis added).
U.S. Bank suggests Plaintiffs’ TILA claim is not sufficiently related to the underlying mortgage debt so as to qualify as a recoupment. (Mot. at 6-7.) The court disagrees with this argument, and other courts have reached the same conclusion. See Moor, 784 F.2d at 634 (plaintiff’s use of recoupment claims under TILA failed on the second and third prongs only); Williams v. Countrywide Home Loans, Inc., 504 F.Supp.2d 176, 188 (S.D. Tex. 2007) (where plaintiff “received a loan secured by a deed of trust on his property and later defaulted on the mortgage payments to the lender,” he “satisfie[d] the first element of the In re Smith test….”). Plaintiffs’ default and U.S. Bank’s attempts to foreclose on the Property representing the security interest for the underlying loan each flow from the same contractual transaction. The authority relied on by U.S. Bank, Aetna Fin. Co. v. Pasquali, 128 Ariz. 471, 626 P.2d 1103 (Ariz. App. 1981), is unpersuasive. Not only does Aetna Finance recognize the split among courts on this issue, the decision is not binding on this court, and was reached before the Supreme Court’s ruling in Beach, supra. Aetna Fin., 128 Ariz. at 473,
Nevertheless, the deficiencies in Plaintiffs’ claim become apparent upon examination under the second and third prongs of the In re Smith test. Section 1640(e) of TILA makes recoupment available only as a “defense” in an “action to collect a debt.” Plaintiffs essentially argue that U.S. Bank’s initiation of non-judicial foreclosure proceedings paves the path for their recoupment claim. (FAC P 14; Opp’n at 3.) Plaintiffs cite to In re Botelho, 195 B.R. 558, 563 (Bkrtcy. D. Mass. 1996), suggesting the court there allowed TILA recoupment claims to counter a non-judicial foreclosure. In Botelho, lender Citicorp apparently initiated non-judicial foreclosure proceedings, Id. at 561 fn. 1, and thereafter entered the plaintiff’s Chapter 13 proceedings by filing a Proof of Claim. Id. at 561. The plaintiff then filed an adversary complaint before the same bankruptcy court in which she advanced her TILA-recoupment theory. Id. at 561-62. The Botelho court evaluated the validity of the recoupment claim, taking both of Citicorp’s actions into account – the foreclosure as well as the filing of a proof of claim. Id. at 563. The court did not determine whether the non-judicial foreclosure, on its own, would have allowed the plaintiff to satisfy the three prongs of the In re Smith test.
On the other hand, the court finds U.S. Bank’s argument on this point persuasive: non-judicial foreclosures are not “actions” as contemplated by TILA. First, § 1640(e) itself defines an “action” as a court proceeding. 15 U.S.C. § 1640(e) (“Any action…may be brought in any United States district court, or in any other court of competent jurisdiction…”). Turning to California law, Cal. Code Civ. Proc. § 726 indicates an “action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property” results in a judgment from the court directing the sale of the property and distributing the resulting funds. Further, Code § 22 defines an “action” as “an ordinary proceeding in a court of justice by which one party prosecutes another for the declaration, enforcement, or protection of a right, the redress or prevention of a wrong, or the punishment of a public offense.” Neither of these state law provisions addresses the extra-judicial exercise of a right of sale under a deed of trust, which is governed by Cal. Civ. Code § 2924, et seq. Unlike the situation in Botelho, U.S. Bank has done nothing to bring a review its efforts to foreclose before this court. As Plaintiffs concede, “U.S. Bank has not filed a civil lawsuit and nothing has been placed before the court” which would require the court to “examine the nature and extent of the lender’s claims….” (Opp’n at 4.) “When the debtor hales [sic] the creditor into court…, the claim by the debtor is affirmative rather than defensive.” Moor, 784 F.2d at 634; see also, Amaro v. Option One Mortgage Corp., 2009 U.S. Dist. 2855, 2009 WL 103302, at *3 (C.D. Cal., Jan. 14, 2009) (rejecting plaintiff’s argument that recoupment is a defense to a non-judicial foreclosure and holding “Plaintiff’s affirmative use of the claim is improper and exceeds the scope of the TILA exception….”).
The court recognizes that U.S. Bank’s choice of remedy under California law effectively denies Plaintiffs the opportunity to assert a recoupment defense. This result does not run afoul of TILA. As other courts have noted, TILA contemplates such restrictions by allowing recoupment only to the extent allowed under state law. 15 U.S.C. § 1640(e); Joseph v. Newport Shores Mortgage, Inc., 2006 U.S. Dist. LEXIS 8199, 2006 WL 418293, at *2 fn. 1 (N.D. Ga., Feb. 21, 2006). The court concludes TILA’s one-year statute of limitations under § 1635(f) bars Plaintiffs’ TILA claim.
In sum, U.S. Bank’s motion to dismiss the TILA claim is granted, and Plaintiffs’ TILA claims are dismissed with prejudice.
B. Perata Mortgage Relief Act, Cal. Civ. Code § 2923.5
Plaintiffs’ second cause of action arises under the Perata Mortgage Relief Act, Cal. Civ. Code § 2923.5. Plaintiffs argue U.S. Bank is liable for monetary damages under this provision because it “failed and refused to explore” “alternatives to the drastic remedy of foreclosure, such as loan modifications” before initiating foreclosure proceedings. (FAC PP 17-18.) Furthermore, Plaintiffs allege U.S. Bank violated Cal. Civ. Code § 2923.5(c) by failing to include with the notice of sale a declaration that it contacted the borrower to explore such options. (Opp’n at 6.)
Section 2923.5(a)(2) requires a “mortgagee, beneficiary or authorized agent” to “contact the borrower in person or by telephone in order to assess the borrower’s [*1166] financial situation and explore options for the borrower to avoid foreclosure.” For a lender which had recorded a notice of default prior to the effective date of the statute, as is the case here, § 2923.5(c) imposes a duty to attempt to negotiate with a borrower before recording a notice of sale. These provisions cover loans initiated between January 1, 2003 and December 31, 2007. Cal. Civ. Code § 2923.5(h)(3), (i).
U.S. Bank’s primary argument is that Plaintiffs’ claim should be dismissed because neither § 2923.5 nor its legislative history clearly indicate an intent to create a private right of action. (Mot. at 8.) Plaintiffs counter that such a conclusion is unsupported by the legislative history; the California legislature would not have enacted this “urgency” legislation, intended to curb high foreclosure rates in the state, without any accompanying enforcement mechanism. (Opp’n at 5.) The court agrees with Plaintiffs. While the Ninth Circuit has yet to address this issue, the court found no decision from this circuit [**15] where a § 2923.5 claim had been dismissed on the basis advanced by U.S. Bank. See, e.g. Gentsch v. Ownit Mortgage Solutions Inc., 2009 U.S. Dist. LEXIS 45163, 2009 WL 1390843, at *6 (E.D. Cal., May 14, 2009)(addressing merits of claim); Lee v. First Franklin Fin. Corp., 2009 U.S. Dist. LEXIS 44461, 2009 WL 1371740, at *1 (E.D. Cal., May 15, 2009) (addressing evidentiary support for claim).
On the other hand, the statute does not require a lender to actually modify a defaulting borrower’s loan but rather requires only contacts or attempted contacts in a good faith effort to prevent foreclosure. Cal. Civ. Code § 2923.5(a)(2). Plaintiffs allege only that U.S. Bank “failed and refused to explore such alternatives” but do not allege whether they were contacted or not. (FAC P 18.) Plaintiffs’ use of the phrase “refused to explore,” combined with the “Declaration of Compliance” accompanying the Notice of Trustee’s Sale, imply Plaintiffs were contacted as required by the statute. (Doc. No. 7-2, Exh. 4 at 3.) Because Plaintiffs have failed to state a claim under Cal. Civ. Code § 2923.5, U.S. Bank’s motion to dismiss is granted. Plaintiffs’ claim is dismissed without prejudice.
C. Foreign Language Contract Act, Cal. Civ. Code § 1632 et seq.
Plaintiffs assert “the contract and loan obligation was [sic] negotiated in Spanish,” and thus, they were entitled, under Cal. Civ. Code § 1632, to receive loan documents in Spanish rather than in English. (FAC P 21-24.) Cal. Civ. Code § 1632 provides, in relevant part:
Any person engaged in a trade or business who negotiates primarily in Spanish, Chines, Tagalog, Vietnamese, or Korean, orally or in writing, in the course of entering into any of the following, shall deliver to the other party to the contract or agreement and prior to the execution thereof, a translation of the contract or agreement in the language in which the contract or agreement was negotiated, which includes a translation of every term and condition in that contract or agreement.
Cal. Civ. Code § 1632(b).
U.S. Bank argues this claim must be dismissed because Cal. Civ. Code § 1632(b)(2) specifically excludes loans secured by real property. (Mot. at 8.) Plaintiffs allege their loan falls within the exception outlined in § 1632(b)(4), which effectively recaptures any “loan or extension of credit for use primarily for personal, family or household purposes where the loan or extension of credit is subject to the provision of Article 7 (commencing with Section 10240) of Chapter 3 of Part I of Division 4 of the Business and Professions Code ….” (FAC P 21; Opp’n at 7.) The Article 7 loans referenced here are those secured by real property which [*1167] were negotiated by a real estate broker. 1 See Cal. Bus. & Prof. Code § 10240. For the purposes of § 1632(b)(4), a “real estate broker” is one who “solicits borrowers, or causes borrowers to be solicited, through express or implied representations that the broker will act as an agent in arranging a loan, but in fact makes the loan to the borrower from funds belonging to the broker.” Cal. Bus. & Prof. Code § 10240(b). To take advantage of this exception with respect to U.S. Bank, Plaintiffs must allege U.S. Bank either acted as the real estate broker or had a principal-agent relationship with the broker who negotiated their loan. See Alvara v. Aurora Loan Serv., Inc., 2009 U.S. Dist. LEXIS 50365, 2009 WL 1689640, at *3 (N.D. Cal. Jun. 16, 2009), and references cited therein (noting “several courts have rejected the proposition that defendants are immune from this statute simply because they are not themselves brokers, so long as the defendant has an agency relationship with a broker or was acting as a [**18] broker.”). Although Plaintiffs mention in passing a “broker” was involved in the transaction (FAC P 4), they fail to allege U.S. Bank acted in either capacity described above.
Although U.S. Bank correctly notes the authorities cited by Plaintiffs are all unreported cases, the court agrees with the conclusions set forth in those cases. See Munoz v. International Home Capital Corp., 2004 U.S. Dist. LEXIS 26362, 2004 WL 3086907, at *9 (N.D. Cal. 2004); Ruiz v. Decision One Mortgage Co., LLC, 2006 U.S. Dist. LEXIS 54571, 2006 WL 2067072, at *5 (N.D. Cal. 2006).
Nevertheless, Plaintiffs argue they are not limited to remedies against the original broker, but may seek rescission of the contract through the assignee of the loan. Cal. Civ. Code § 1632(k). Section 1632(k) allows for rescission for violations of the statute and also provides, “When the contract for a consumer credit sale or consumer lease which has been sold and assigned to a financial institution is rescinded pursuant to this subdivision, the consumer shall make restitution to and have restitution made by the person with whom he or she made the contract, and shall give notice of rescission to the assignee.” Cal. Civ. Code § 1632(k) (emphasis added). There are two problems with Plaintiffs’ theory. First, it is not clear to this court that Plaintiffs’ loan qualifies as a “consumer credit sale or consumer lease.” Second, the court interprets this provision not as a mechanism to impose liability for a violation of § 1632 on U.S. Bank as an assignee, but simply as a mechanism to provide notice to that assignee after recovering restitution from the broker.
The mechanics of contract rescission are governed by Cal. Civ. Code § 1691, which requires a plaintiff to give notice of rescission to the other party and to return, or offer to return, all proceeds he received from the transaction. Plaintiffs’ complaint does satisfy these two requirements. Cal. Civ. Code § 1691 (“When notice of rescission has not otherwise been given or an offer to restore the benefits received under the contract has not otherwise been made, the service of a pleading…that seeks relief based on rescission shall be deemed to be such notice or offer or both.”). However, the court notes that if Plaintiffs were successful in their bid to rescind the contract, they would have to return the proceeds of the loan which they used to purchase their Property.
For these reasons discussed above, Plaintiffs have failed to state a claim under Cal. Civ. Code § 1632. U.S. Bank’s motion to dismiss is granted and Plaintiffs’ claim for violation of Cal. Civ. Code § 1632 is dismissed without prejudice.
D. Unfair Business Practices, Cal. Bus. & Prof. Code § 17200
California’s unfair competition statute “prohibits any unfair competition, which means ‘any unlawful, unfair or fraudulent [*1168] business act or practice.’” In re Pomona Valley Med. Group, 476 F.3d 665, 674 (9th Cir. 2007) (citing Cal. Bus. & Prof. Code § 17200, et seq.). “This tripartite test is disjunctive and the plaintiff need only allege one of the three theories to properly plead a claim under § 17200.” Med. Instrument Dev. Labs. v. Alcon Labs., 2005 U.S. Dist. LEXIS 41411, 2005 WL 1926673, at *5 (N.D. Cal. Aug. 10, 2005). “Virtually any law-state, federal or local-can serve as a predicate for a § 17200 claim.” State Farm Fire & Casualty Co. v. Superior Court, 45 Cal.App.4th 1093, 1102-3, 53 Cal. Rptr. 2d 229 (1996). Plaintiffs assert their § 17200 “claim is entirely predicated upon their previous causes of action” under TILA and Cal. Civ. Code §§ 2923.5 and § 1632. (FAC PP 25-29; Opp’n at 9.)
U.S. Bank first contend Plaintiffs lack standing to pursue a § 17200 claim because they “do not allege what [**21] money or property they allegedly lost as a result of any purported violation.” (Mot. at 9.) The court finds Plaintiffs have satisfied the pleading standards on this issue by alleging they “relied, to their detriment,” on incomplete and inaccurate disclosures which led them to pay higher interest rates than they would have otherwise. (FAC P 9.) Such “losses” have been found sufficient to confer standing. See Aron v. U-Haul Co. of California, 143 Cal.App.4th 796, 802-3, 49 Cal. Rptr. 3d 555 (2006).
U.S. Bank next offers that Plaintiffs’ mere recitation of the statutory bases for this cause of action, without specific allegations of fact, fails to state a claim. (Mot. at 10.) Plaintiffs point out all the factual allegations in their complaint are incorporated by reference into their § 17200 claim. (FAC P 25; Opp’n at 9.) The court agrees there was no need for Plaintiffs to copy all the preceding paragraphs into this section when their claim expressly incorporates the allegations presented elsewhere in the complaint. Any argument by U.S. Bank that the pleadings failed to put them on notice of the premise behind Plaintiffs’ § 17200 claim would be somewhat disingenuous.
Nevertheless, all three of Plaintiffs’ predicate statutory claims have been dismissed for failure to state a claim. Without any surviving basis for the § 17200 claim, it too must be dismissed. U.S. Bank’s motion is therefore granted and Plaintiffs’ § 17200 claim is dismissed without prejudice.
E. Quiet Title
In their final cause of action, Plaintiffs seek to quiet title in the Property. (FAC PP 30-36.) In order to adequately allege a cause of action to quiet title, a plaintiff’s pleadings must include a description of “[t]he title of the plaintiff as to which a determination…is sought and the basis of the title…” and “[t]he adverse claims to the title of the plaintiff against which a determination is sought.” Cal. Code Civ. Proc. § 761.020. A plaintiff is required to name the “specific adverse claims” that form the basis of the property dispute. See Cal. Code Civ. Proc. § 761.020, cmt. at P 3. Here, Plaintiffs allege the “Defendant claims an adverse interest in the Property owned by Plaintiffs,” but do not specify what that interest might be. (Mot. at 6-7.) Plaintiffs are still the owners of the Property. The recorded foreclosure Notices do not affect Plaintiffs’ title, ownership, or possession in the Property. U.S. Bank’s motion to dismiss is therefore granted, and Plaintiffs’ cause of action to quiet title is dismissed without prejudice.
For the reasons set forth above, U.S. Bank’s motion to dismiss (Doc. No. 7) is GRANTED. Accordingly, Plaintiffs’ claim under TILA is DISMISSED with prejudice and Plaintiffs’ claims under Cal. Civ. Code § 2923.5, [*1169] Cal. Civ. Code§ 1632, and Cal. Bus. & Prof. Code § 17200, and their claim to quiet title are DISMISSED without prejudice.
The court grants Plaintiffs 30 days’ leave from the date of entry of this order to file a Second Amended Complaint which cures all the deficiencies noted above. Plaintiffs’ Second Amended Complaint must be complete in itself without reference to the superseded pleading. Civil Local Rule 15.1.
IT IS SO ORDERED.
DATED: July 13, 2009
/s/ Jeffrey T. Miller
Hon. Jeffrey T. Miller
United States District JudgeRead Full Post | Make a Comment ( None so far )
A car buyer whose damages under the Truth in Lending Act were slashed by the Supreme Court is nevertheless entitled to attorneys’ fees for that portion of his otherwise “successful action,” the 4th U.S. Circuit Court of Appeals has held.
The decision affirms a fee award of more than $80,000 to Bradley Nigh, who claimed Koons Buick Pontiac GM Inc. pressured him into signing multiple loan documents and purchasing an “alarm silencer” he hadn’t ordered.A federal jury in Alexandria, Va., awarded Nigh about $25,000, or twice the financing charges he had paid, in May 2001.
Koons appealed to the 4th Circuit, which affirmed, and then to the Supreme Court, which likewise affirmed on liability but capped the TILA damages at $1,000.Koons appealed again after the U.S. District Court awarded Nigh fees on remand. Last week, the 4th Circuit affirmed. Despite the cap, the 4th Circuit said, Nigh brought a “successful action” under TILA, receiving the maximum amount allowed by the federal law.
Congress, which set the $1,000 cap, likewise included the fee-shifting provisions because it believes it is in the best interest of society for big companies to act honestly, Judge Roger Gregory wrote for the appeals court; but unless the injured consumer has hope of having his costs covered by the guilty defendant, he will never bring the case.Read Full Post | Make a Comment ( 1 so far )
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND. Hon. Mary M. Lisi, U.S. District Judge.
Melfi v. WMC Mortg. Corp., 2009 U.S. Dist. LEXIS 1454 (D.R.I., Jan. 9, 2009)
COUNSEL: Christopher M. Lefebvre with whom Claude F. Lefebvre and Christopher M. Lefebvre, P.C. were on brief for appellant.
Jeffrey S. Patterson with whom David E. Fialkow and Nelson Mullins Riley & Scarborough, LLP were on brief for appellees, Deutsche Bank National Trust Company, N.A. and Wells Fargo Bank, N.A.
JUDGES: Before Boudin, Hansen, * and Lipez, Circuit Judges.
Of the Eighth Circuit, sitting by designation.
OPINION BY: BOUDIN
BOUDIN, Circuit Judge. In April 2006, Joseph Melfi refinanced his home mortgage with WMC Mortgage Corporation (“WMC”). At the closing, Melfi received from WMC a notice of his right to rescind the transaction. The notice is required for such a transaction by the Truth in Lending Act (“TILA”), 15 U.S.C. § 1635(a) (2006). Assuming that the notice complies with TILA, a borrower is given three “business days” to rescind the transaction; otherwise, the period is much longer. Id. The question in this case is whether the notice given Melfi adequately complied.
The three-day period aims “to give the consumer the opportunity to reconsider any transaction which would [*2] have the serious consequence of encumbering the title to his [or her] home.” S. Rep. No. 96-368, at 28 (1979), reprinted in 1980 U.S.C.C.A.N. 236, 264. Under TILA, the requirements for the notice are established by the Federal Reserve Board (“the Board”) in its Regulation Z. 12 C.F.R. § 226.23 (2007). Failure to provide proper notice extends to three years the borrower’s deadline to rescind. Id. § 226.23 (a)(3).
About 20 months after the closing, Melfi attempted to rescind the transaction. The incentives for a borrower to do so may be substantial where a new loan is available, especially if rates have fallen or substantial interest has been paid during the period of the original loan. “When a consumer rescinds a transaction . . . the consumer shall not be liable for any amount, including any finance charge” and “the creditor shall return any money or property that has been given to anyone in connection with the transaction . . . .” 12 C.F.R. 226.23(d)(1), (2).
Melfi argued that the notice of his right to cancel was deficient because it left blank the spaces for the date of the transaction (although the date was stamped on the top right corner of the notice) and the actual deadline to [*3] rescind. WMC and co-defendants Deutsche Bank and Wells Fargo (the loan’s trustee and servicer, respectively) refused to allow the rescission, and Melfi then brought this action in the federal district court in Rhode Island.
The district court, following our decision in Palmer v. Champion Mortgage, 465 F.3d 24 (1st Cir. 2006), asked whether a borrower of average intelligence would be confused by the Notice. Melfi v. WMC Mortgage Corp., No. 08-024ML, 2009 U.S. Dist. LEXIS 1454, 2009 WL 64338, at *1 (D.R.I. Jan. 9, 2009). The court ruled that even if the omissions in the notice were violations, they were at most technical violations that did not give rise to an extended rescission period because the notice was clear and conspicuous despite the omissions, and it dismissed Melfi’s complaint. 2009 U.S. Dist. LEXIS 1454, [WL] at *3.
Melfi now appeals. Our review is de novo, accepting all of the well-pleaded facts in the complaint as true and drawing reasonable inferences in favor of Melfi. Andrew Robinson Int’l, Inc. v. Hartford Fire Ins. Co., 547 F.3d 48, 51 (1st Cir. 2008). We may consider materials incorporated in the complaint (here, the notice Melfi received) and also facts subject to judicial notice. In re Colonial Mortgage Bankers Corp., 324 F.3d 12, 14 (1st Cir. 2003).
TILA [*4] provides that “[t]he creditor shall clearly and conspicuously disclose, in accordance with regulations of the Board, to any obligor [here, Melfi] in a transaction subject to this section the rights of the obligor under this section.” 15 U.S.C. § 1635(a). Regulation Z says what the notice of the right to cancel must clearly and conspicuously disclose; pertinently, the regulation requires that the notice include “[t]he date the rescission period expires.” 12 C.F.R. § 226.23(b)(1)(v). The Board has created a model form; a creditor must provide either the model form or a “substantially similar notice.” 12 C.F.R. § 226.23(b)(2). The use of the model form insulates the creditor from most insufficient disclosure claims. 15 U.S.C. § 1604(b). WMC gave Melfi the model form, but the spaces left for the date of the transaction and the date of the rescission deadline were not filled in. The form Melfi received had the date of the transaction stamped at its top (but it was not so designated) and then read in part:
You are entering into a transaction that will result in a mortgage/lien/security interest on your home. You have a legal right under federal law to cancel this transaction, without cost, [*5] within THREE BUSINESS DAYS from whichever of the following events occurs LAST:
(1) The date of the transaction, which is ; or
(2) The date you receive your Truth in Lending disclosures; or
(3) The date you received this notice of your right to cancel.
. . . .
HOW TO CANCEL
If you decide to cancel this transaction, you may do so by notifying us in writing. . . .
You may use any written statement that is signed and dated by you and states your intention to cancel and/or you may use this notice by dating and signing below. Keep one copy of this notice because it contains important information about your rights.
If you cancel by mail or telegram, you must send the notice no later than MIDNIGHT of (or MIDNIGHT of the THIRD BUSINESS DAY following the latest of the three events listed above). If you send or deliver your written notice to cancel some other way, it must be delivered to the above address no later than that time.
. . . .
Melfi’s argument is straightforward. Regulation Z requires in substance the deadline for rescission be provided; one of the three measuring dates–the date of the transaction–was left blank (the other two are described but have no blanks); and therefore the notice [*6] was deficient and Melfi has three years to rescind. A number of district court cases, along with two circuit court opinions, support Melfi’s position, n1 although one of the circuit cases also involved more serious substantive flaws.
- – - – - – - – - – - – - – Footnotes – - – - – - – - – - – - – - -1
E.g., Semar v. Platte Valley Fed. Sav. & Loan Ass’n, 791 F.2d 699, 702-03 (9th Cir. 1986); Williamson v. Lafferty, 698 F.2d 767, 768-69 (5th Cir. 1983); Johnson v. Chase Manhattan Bank, USA N.A., No. 07-526, 2007 U.S. Dist. LEXIS 50569, 2007 WL 2033833, at *3 (E.D. Pa. July 11, 2007); Reynolds v. D & N Bank, 792 F. Supp. 1035, 1038 (E.D. Mich. 1992).
- – - – - – - – - – - – End Footnotes- – - – - – - – - – - – - -
The circuit cases are now elderly and may be in tension with later TILA amendments, but the statements that “technical” violations of TILA are fatal has been echoed in other cases. This circuit took a notably different approach in Palmer to determining whether arguable flaws compromised effective disclosure process. See also Santos-Rodriguez v. Doral Mortgage Corp., 485 F.3d 12, 17 (1st Cir. 2007). Following Palmer, district court decisions in this circuit concluded that failing to fill in a blank did not automatically trigger a right to rescind. n2
- – - – - – - – - – - – - – Footnotes – - – - – - – - – - – - – - -2
Bonney v. Wash. Mut. Bank, 596 F. Supp. 2d 173 (D. Mass. 2009); Megitt v. Indymac Bank, F.S.B., 547 F. Supp. 2d 56 (D. Mass. 2008); [*7] Carye v. Long Beach Mortgage Co., 470 F. Supp. 2d 3 (D. Mass. 2007).
- – - – - – - – - – - – End Footnotes- – - – - – - – - – - – - -
In Palmer, the plaintiff received a notice of her right to cancel that followed the Federal Reserve’s model form but the form was not received until after the rescission deadline listed on the notice. 465 F.3d at 27. Nonetheless, Palmer held that the notice “was crystal clear” because it included (as in the Federal Reserve’s model form) the alternative deadline (not given as a date but solely in descriptive form) of three business days following the date the notice was received, so the plaintiff still knew that she had three days to act. Id. at 29.
Palmer did not involve the blank date problem. Palmer, 465 F.3d at 29. But the principle on which Palmer rests is broader than the precise facts: technical deficiencies do not matter if the borrower receives a notice that effectively gives him notice as to the final date for rescission and has the three full days to act. Our test is whether any reasonable person, in reading the form provided in this case, would so understand it. Here, the omitted dates made no difference.
The date that Melfi closed on the loan can hardly have been unknown to him and was in fact hand stamped [*8] or typed on the form given to him. From that date, it is easy enough to count three days; completing the blank avoids only the risk created by the fact that Saturday counts as a business day under Board regulations, 12 C.F.R. § 226.2(a)(6), and the borrower might think otherwise. Lafferty, 698 F.2d at 769 n.3 (“[T]he precise purpose of requiring the creditor to fill in the date [of the rescission deadline] is to prevent the customer from having to calculate three business days”).
Nor does completing the blank necessarily tell the borrower how long he has to rescind. Where after the closing the borrower is mailed either the notice or certain other required information, the three days runs not from the transaction date but from the last date when the borrower receives the notice and other required documents. Melfi himself says he was given the form on the date of the closing and does not claim that there was any pertinent delay in giving him the other required disclosures. So the blanks in no way misled Melfi in this case.
So the argument for allowing Melfi to extend his deadline from three days to three years depends on this premise: that any flaw or deviation should be penalized automatically [*9] in order to deter such errors in the future. If Congress had made such a determination as a matter of policy, a court would respect that determination; possibly, this would also be so if the Board had made the same determination. See Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 844, 104 S. Ct. 2778, 81 L. Ed. 2d 694 (1984). Melfi argues at length that we owe such deference to the Board.
The answer is that there is no evidence in TILA or any Board regulation that either Congress or the Board intended to render the form a nullity because of an uncompleted blank in the form or similar flaw where, as here, it could not possibly have caused Melfi to think that he had months in order to rescind. The central purpose of the disclosure–the short notice period for rescission at will–was plain despite the blanks. Melfi’s argument assumes, rather than establishes, that a penalty was intended.
Some cases finding a blank notice form to be grounds for rescission even though harmless were decided under an earlier version of TILA. In 1995, Congress added a new subsection to TILA, titled “Limitation on Rescission Liability.” It provided that a borrower could not rescind “solely from the form of written notice [*10] used by the creditor . . . if the creditor provided the [borrower] the appropriate form of written notice published and adopted by the Board . . . .” Truth in Lending Act Amendments of 1995, Pub L. No. 104-29, § 5, 109 Stat. 271, 274 (1995) (codified at 15 U.S.C. § 1635(h)).
Read literally, this safe harbor may not be available to WMC because, while it used the Board’s form of notice, it did not properly fill in the blanks. But the TILA amendments were aimed in general to guard against widespread rescissions for minor violations. McKenna v. First Horizon Loan Corp., 475 F.3d 418, 424 (1st Cir. 2007). To this extent, Congress has now leaned against a penalty approach and, perhaps, weakened the present force of the older case law favoring extension of the rescission deadline.
In any event, in the absence of some direction from Congress or the Board to impose a penalty, we see no policy basis for such a result. Where, as here, the Board’s form was used and a reasonable borrower cannot have been misled, allowing a windfall and imposing a penalty serves no purpose and, further, is at odds with the general approach already taken by this court in Palmer.
Affirmed.Read Full Post | Make a Comment ( None so far )
My new book, Mortgage Wars, will guide you, step by step, through a war plan of engagement that has been followed by many homeowners who have won their mortgage wars. You will meet them and their attorneys throughout the book. You will learn about how you were defrauded and why; why the government cannot help you; and why and how you can win your war. The law is squarely on your side. Even if you have received a sales date; even if your foreclosure has occurred and you are awaiting eviction, there is plenty you can do to stay in your home and keep it from the predators!
Now, if you do nothing, you will lose your home. You do not have the option of doing nothing. You must study your loan and your lender, or have a mortgage auditor do so for you. You can get referrals to qualified auditors at www.yourmortgagewar.com. Once your loan is audited, you will learn what fraudulent acts were committed by your broker and lender. Fraud is the intentional inducement into a contract without all the material facts. There are laws against fraud and the penalties are severe. You will have a clear picture of how you were defrauded and how your lender established a pattern of conduct in which it abandoned it’s fiduciary right to advise you. You may have been defrauded at any stage of the process: during the solicitation, origination, processing, closing and servicing of your loan. Fraud must be argued with specificity in the courtroom, and the audit is your weapon.
You will also learn if your loan was securitized, i.e. sold on the secondary market. If it was, your lender has no legal right to foreclose, as it is not a current holder of your note. This is extremely good news, and the legal approach involves filing a “quiet title action” as well as a claim for fraud and other violations. This will get your lender off your title and get you your house free and clear, if your lender cannot produce the current holders of your note. Most likely, it cannot do so at the level that will satisfy a judge in a court of law. And judges are not lenient in this matter. They are livid at the way homeowners have been defrauded. They understand completely, that this is not some chair you bought at a garage sale, this is your home! The roof over your head! The shelter that provides you with safety and security and protects your family!Read Full Post | Make a Comment ( 3 so far )
Homeowners, welcome to Paradise Lost, the fate of millions of financially strapped boomers. A simultaneous loss of life savings, job income and foreclosure has many of them wondering, “Whose America is this, anyway? The bankers got bonuses to defraud us, and our industries and economy are in the pits. We worked for decades to live the American dream, and now we are out of work, saddled with debt and thrown out on the streets! What retirement? When I’m too old to enjoy it? More like I’m living a nightmare.”
You might be quite inclined to agree. However, there is light at the end of the tunnel, even for those that have already been foreclosed and evicted from their precious homes.
Although lately, while it feels like we are in the same boat as a third world country, we still have a little document on our side called The United States Constitution, which states, among other things that, “Citizens of the United States shall not be deprived of life, liberty or prosperity without due process of law.”
Now, there’s a mouthful. So don’t despair! And don’t get left out in the cold! Baby, it’s warm inside!
Homeowners, listen up! It is time to begin a reversal of your misfortune by gearing up and waging your mortgage war. Even if you have wearily given up your keys and angrily moved out, there are legal remedies that can make you whole. Your lender has broken so many laws that you may end up with more money than you had in cash and equity in your home!
And, no, this is not a pipe dream. But it is the repossession of your American dream. And the statute of limitation is greater than three years if your lender committed fraud.
How to tell if you are a victim of illegal foreclosure and unlawful eviction? Read on. Hint: you are in good company. Your platoon is millions strong.
If you have an adjustable rate mortgage and your loan has been securitized, there is a high probability that the securitization was done illegally. Further, if you have been defrauded by a predatory lender or broker, it’s time to fight back and go to court.
I recently asked Ohio attorney Dan McCookey, an expert in foreclosure defense and offense, what traumatized and victimized homeowners can do even after they have lost their homes, and find themselves figuratively and literally, out on the street. He provided some strategic counsel and laid out two hopeful options for now homeless homeowners:
Option #1: the “void judgment defense.” Your attorney files a motion to set aside the judgment, as the court never had proper jurisdiction to begin with.
What does this mean to you? If your loan was securitized, your lender sold your note and quite profitably, retained the mortgage servicing rights. When your note was sold, your lender gave up its legal ownership of your note and was paid in full for your loan, and then some. Therefore, your lender had no legal standing to foreclose! And no matter how many times your servicer was acquired, it has no right to foreclose!
In fact, your lender is not considered by the Court, a “true party of interest” or a “holder in due course.” Since the Court’s jurisdiction was never evoked, any and all proceedings found by the Court are void. That right is given to the current holder of the note. If only your lender could remotely identify whom that is.
Your lender has no idea where your original note currently is, as it traveled the globe, during its metamorphosis from a secured interest in your property to a mere shadow of its former self. The poor thing was sliced and diced multiple times by the depositor and a series of trustees, each earning profits and fees along the way.Read Full Post | Make a Comment ( 4 so far )
Pamela D. Simmons
Ten years ago, I represented the borrower in a case that stemmed from a title company’s failure to secure a loan on all of the borrower’s land. (The title company had listed only one of several parcels of land and the lender was unable to non-judicially foreclose on the property as a result.) The complaint had already been filed, and listed among the many causes of action was one entitled “Violation of Reg Z.” One day an attorney for one of the defendants asked me: “What is this Reg Z? I’ve never even heard of it.” So began my love affair with the Federal Truth in Lending Act.
Most attorneys know the Federal Truth in Lending Act (TILA) as the group of laws requiring certain disclosures about the cost of borrowing money. You have seen the disclosures every time you have received a new credit card. Many readers may also be aware that consumers who are borrowing against their homes have a three-day right to cancel the transaction—another feature of TILA. However, few real estate attorneys know that TILA’s right to cancel can last for as long as three years after the loan is made. Moreover, under certain circumstances, TILA can govern individual lenders making a first loan secured by residential property. And even fewer practitioners know that the cost of rescission to the lender is all of the interest, fees, costs, and any other charges not directly for the benefit of the borrower.
I have personally seen the loss to the lender exceed $280,000. In this article I will discuss the history of TILA, describe rescission (its most important provision), and offer some tips on avoiding its pitfalls and attorney malpractice.Read Full Post | Make a Comment ( None so far )
|||UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE|
|||Civil No. 07-cv-074-JD|
|||July 23, 2007|
|||ROSEMARY A. GILROY
AMERIQUEST MORTGAGE COMPANY, ET AL.*FN1
|||The opinion of the court was delivered by: James R. Muirhead United States Magistrate Judge|
|||Pro se plaintiff Rosemary A. Gilroy brings this diversity action against Ameriquest Mortgage Company (“Ameriquest”) and AMC Mortgage Services, Inc. (“AMC”), alleging that defendants engaged in predatory lending activities in violation of New Hampshire state law (document no. 1). The complaint is before me for preliminary review to determine, among other things, whether plaintiff has properly invoked the subject matter jurisdiction of this court. See United States District Court of the District of New Hampshire Local Rules (“LR”) 4.3(d)(1)(B)(I). For the reasons stated below, I order the complaint served on the defendants.|
|||Standard of Review|
|||In reviewing a pro se complaint, this court must construe the pleading liberally. See Ayala Serrano v. Gonzalez, 909 F.2d 8, 15 (1st Cir. 1990)(following Estelle v. Gamble, 429 U.S. 97, 106 (1976) and construing pro se pleadings liberally in favor of that party). At this preliminary stage of review, all factual assertions made by plaintiff and inferences reasonably drawn therefrom must be accepted as true. See Aulson v. Blanchard, 83 F.3d 1, 3 (1st Cir. 1996)(explaining that all well-pleaded factual averments, not bald assertions, must be accepted as true). This review ensures that pro se pleadings are given fair and meaningful consideration. See Eveland v. Director of CIA, 843 F.2d 46, 49 (1st Cir. 1988). I apply this standard in reviewing plaintiff’s complaint.|
|||Plaintiff resides at 107 Ponemah Road, Unit 1, Amherst, New Hampshire. Ameriquest allegedly is a mortgage company located in the State of Delaware with its principal place of business in Orange, California, and AMC is a debt servicing corporation located in the State of California with its principal place of business in Orange, California. This action arises out of defendants’ alleged predatory lending practices in connection with plaintiff’s purchase and subsequent refinance of five commercial condominiums located at 107 Ponemah Road, Amherst, New Hampshire (“Units 1-5″). Plaintiff purchased the premises on March 1, 2000 with the intent of receiving rental income to support a $600,000 mortgage. Subsequently, she converted Unit 1 from a commercial condominium to a residential condominium, where she has resided since May 1, 2000. Unable to lease the remaining condominiums, plaintiff decided to convert them to residential condominiums. She received zoning approval for the site plan review in March 2004.|
|||In order to complete the conversion, plaintiff refinanced the premises with Ameriquest. In July 2004, Ameriquest refinanced Units 1, 2 and 4 in the amount of $790,000, thereby increasing her mortgage in the amount of approximately $190,000.*fn2|
|||Plaintiff repeatedly advised Ameriquest that she did not want to encumber her residence, Unit 1, and that she was unwilling and unable to repay the increased mortgage amount. As a condition of the refinance, however, Ameriquest allegedly insisted on including Unit 1 in the refinance and increasing plaintiff’s mortgage amount. By including Unit 1, Ameriquest allegedly charged her $15,000 in additional points and closing costs. Further, by refinancing three condominiums instead of two, Ameriquest allegedly forced plaintiff to incur an additional debt of approximately $65,000. At all relevant times, Ameriquest allegedly knew that plaintiff’s sole source of income was $697.00 per month (or $9,000 per year) in social security benefits and that her low income was insufficient to support the debt.|
|||According to plaintiff, Ameriquest provided mortgages to her with the sole intention of foreclosing on her property and acquiring $500,000 that she had invested in the property prior to refinancing with Ameriquest. From July 2004 through March 2007, plaintiff allegedly paid in interest to Ameriquest, or owed in arrears, the sum of $225,000. She alleges that as a result of Ameriquest’s predatory lending practices, she will lose $500,000 that she had invested in her property. Plaintiff further alleges that Ameriquest increased her mortgage payments to an amount greater than that required to successfully complete the conversion of her property, thereby unnecessarily increasing her mortgage and interest payments. According to plaintiff, Ameriquest “repeated the same illegal actions in March 2005,” when it again refinanced Unit 2 in the amount of $375,000, thereby increasing her total indebtedness to $937,000.|
|||When plaintiff contacted another mortgage company in 2005 to refinance Units 3 and 5, the lender refused on the basis that the units were encumbered and plaintiff was unable to provide clear title. Plaintiff then refinanced Units 3 and 5 with Ameriquest in October 2005, at which point Ameriquest allegedly increased her original mortgage of $600,000 to $1,114,000, an increase of more than $500,000. Because of Ameriquest’s practices in excessively financing plaintiff’s property, she allegedly was unable to obtain additional financing in 2006 and “lost equity and cash in the approximate amount of $200,000 in carrying costs.” As a result, plaintiff was unable to complete the improvements required for an occupancy certificate and therefore unable to sell the condominiums. Because of Ameriquest’s alleged predatory lending practices, plaintiff is in danger of losing her equity in her property, amounting to approximately $1,200,000.|
|||Plaintiff now brings the instant complaint, alleging that defendants’ actions violate New Hampshire state law. She alleges the following theories of recovery: (1) fraud; (2) intentional infliction of emotional distress; (3) unfair debt collection practices; and (4) unfair and deceptive lending practices.*fn3 She seeks, among other things, $937,000 in damages, plus treble damages and attorneys’ fees and costs. She also seeks reimbursement or wavier of all arrears paid and/or owed to the defendants.|
|||I. Diversity Jurisdiction|
|||A party seeking relief in district court must at least plead facts which bring the suit within the court’s jurisdiction. See Fed. R. Civ. P. 8(a)(1)(requiring a plaintiff to set forth in the complaint “a short and plain statement of the grounds upon which the court’s jurisdiction depends”). For the reasons stated below, plaintiff has properly invoked diversity jurisdiction pursuant to 28 U.S.C. § 1332.|
|||To establish diversity jurisdiction, a complaint must allege complete diversity of citizenship between plaintiff and defendants as well as an amount in controversy in excess of $75,000, exclusive of interests and costs. See 28 U.S.C. § 1332. See also Straughn v. Delta Air Lines, Inc., 170 F. Supp. 2d 133, 146 (D.N.H. 2000)(citations omitted). “Diversity jurisdiction exists only when there is complete diversity, that is, when no plaintiff is a citizen of the same state as any defendant.” Gabriel v. Preble, 396 F.3d 10, 13 (1st Cir. 2005). “For diversity purposes, a corporation is a citizen of both the state where it is incorporated and the ‘State where it has its principal place of business.’” Diaz-Rodriguez v. Pep Boys Corp., 410 F.3d 56, 58 (1st Cir. 2005)(citing 28 U.S.C. § 1332(a)).|
|||Here, plaintiff alleges that she is a resident of New Hampshire. She further alleges that Ameriquest is a Delaware corporation with its principal place of business in Orange, California, and AMC is a California corporation with its principal place of business in Orange, California. Accordingly, she has alleged diversity of citizenship between the parties. Plaintiff also alleges an amount in controversy in excess of $937,000, therefore, the amount in controversy exceeds the minimum required for diversity jurisdiction. I conclude, therefore, that plaintiff has pled diversity jurisdiction under 28 U.S.C. § 1332.|
|||II. State Law Claims|
|||Plaintiff alleges that Ameriquest and AMC’s predatory lending practices constitute fraud under New Hampshire law (Count 1). Defendants’ actions allegedly caused, or will cause, her to lose $500,000 in cash that she had invested into her property prior to financing the property with Ameriquest in July 2004 (Count 4). Plaintiff further alleges that as a result of defendants’ actions, she is at risk of losing “hundreds of thousands of dollars of accumulated equity” that she accrued as a result of the condominium conversion.|
|||To establish fraud under New Hampshire law, “a plaintiff must prove that the defendant made a representation with knowledge of its falsity or with conscious indifference to its truth with the intention to cause another to rely upon it.” Snierson v. Scruton, 145 N.H. 73, 76, 761 A.2d 1046, 1049 (2000)(citations omitted). A plaintiff must also establish justifiable reliance. Id. “A plaintiff cannot allege fraud in general terms, but must specifically allege the essential details of the fraud and the facts of the defendants’ fraudulent conduct.” Id.|
|||Here, the complaint alleges that Ameriquest committed fraud by:|
|||* providing plaintiff with three mortgages on Units 1, 2 and 4 in July 2004 in the amount of $794,000;|
|||* refinancing Unit 2 in March 2005, thereby increasing plaintiff’s indebtedness to $949,000;|
|||* refinancing Unit 2 as plaintiff’s residence when she resided in Unit 1;|
|||* completing plaintiff’s mortgage application to falsely state her income as $9000 per month rather than $675 per month;|
|||* subsequently refinancing plaintiff’s two remaining unencumbered condominiums, Units 3 and 5, on or about October 2005, thereby increasing her original mortgage of $600,000 to $1,114,000, an increase of more than $500,000;|
|||* providing the aforementioned mortgages to plaintiff while knowing that she lacked the requisite income to support the debt and lacked the experience to convert commercial property;|
|||* financing plaintiff’s premises, consisting of five condominiums, when Ameriquest’s license permitted the company to mortgage properties with no more than three condominiums;|
|||* illegally causing a cloud to appear on the title to plaintiff’s premises when it financed her premises in July 2004 and March 2005;|
|||* illegally encumbering plaintiff’s premises, Units 1-5;|
|||* employing Advent Appraisal Company to appraise plaintiff’s property and provide fraudulent appraisals that were in excess of market value;|
|||* causing plaintiff to rely of the fraudulent appraisals and preventing her from selling the condominiums at a time when market values were at an historic high; and|
|||* charging plaintiff excessively high interest rates with regard to Unit 1, plaintiff’s residence, when residential mortgage rates were at an historic low.|
|||The complaint further alleges that AMC committed fraud by:|
|||* placing plaintiff at risk of foreclosure by initially financing her premises as described above, subsequently refinancing Unit 2 and collecting escalated interest payments from her;|
|||* escalating plaintiff’s mortgage payments, thereby causing her to use the cash she had received from refinancing to pay AMC interest payments in order avoid going into arrears;|
|||* causing plaintiff to pay AMC $150,000 in interest payments from July 2004 through February 2006;|
|||* causing plaintiff to incur a debt of $340,000 in order to obtain only $64,000 in cash for purposes of completing the condominium conversions and improvements;|
|||* financing plaintiff’s premises, consisting of five condominiums, when AMC’s license permitted the company to mortgage properties with no more than three condominiums;|
|||* financing plaintiff’s premises in July 2004 and March 2005, when Advent Appraisal Services informed AMC and Ameriquest that the premises were vacant;|
|||* charging plaintiff excessive closing costs;|
|||* providing mortgages to plaintiff with the sole intention of foreclosing on her property and obtaining $500,000 that she had invested in the property; and|
|||* providing mortgages to plaintiff and obligating her to pay $7500 or nearly 100% in interest payments.|
|||Based on the foregoing and accepting plaintiff’s allegations as true, I conclude that she has alleged the elements of fraud under New Hampshire law by specifically alleging the essential details of the fraud and the facts surrounding defendants’ alleged fraudulent actions. In addition, plaintiff has alleged reasonable reliance on defendants’ alleged misrepresentations. Accordingly, for purposes of preliminary review, I conclude that plaintiff has stated cognizable state law claims for fraud against Ameriquest and AMC.|
|||B. Intentional Infliction of Emotional Distress|
|||Plaintiff alleges that Ameriquest intentionally inflicted emotional distress on her by subjecting her to predatory lending practices and causing her to experience emotional distress and related physical harm (Count 3).|
|||“The New Hampshire Supreme Court has adopted the provisions of section 46 of the Restatement (Second) of Torts and recognized that ‘one who by extreme and outrageous conduct intentionally causes severe emotional distress to another is subject to liability for that emotional distress.’” Amatucci v. Hamilton, Civil No. 05-cv-259-SM, 2007 WL 1825177 at *6 (D.N.H. June 25, 2007)(quoting Konefal v. Hollis/Brookline Coop. Sch. Dist., 143 N.H. 256, 260, 723 A.2d 30, 33 (1998)). A plaintiff must “point to conduct on the part of the defendant that is ‘so outrageous in character, and so extreme in degree, as to go beyond all possible bounds of decency, and to be regarded as atrocious, and utterly intolerable in a civilized community.’” Id. (citing Restatement (Second) of Torts § 46, cmt.d.).|
|||Here, plaintiff alleges that Ameriquest’s predatory lending practices caused her to experience emotional and physical harm, including three strokes that required hospitalization, and related leg pain, an inability to walk, memory problems and high blood pressure. To the extent she alleges that defendant’s actions were extreme and outrageous and caused her emotional distress and related physical harm, I conclude that plaintiff has stated a cognizable state law claim against Ameriquest.|
|||C. Unfair Collection Practices|
|||Plaintiff alleges that Ameriquest harassed her by repeatedly telephoning her to collect late mortgage payments (Count 5). Construed liberally, the complaint alleges a violation of New Hampshire’s Unfair Collection Practices Act, RSA Ch. 358-C (1995 & Supp. 2006).|
|||RSA-C:3, I(a) provides that “any debt collection or attempt to collect a debt shall be deemed unfair, deceptive or unreasonable” where the debt collector “[c]ommunicates or attempts to communicate with the debtor, orally or in writing” by “causing a telephone to ring or engaging any person in telephone conversation repeatedly or continuously or at unusual times or at times to be inconvenient with the intent to abuse or harass any person at the called number.”|
|||Here, plaintiff alleges that Ameriquest repeatedly harassed her to collect late mortgage payments. Construed liberally, the complaint alleges that Ameriquest attempted to collect payments in an unfair, deceptive and unreasonable manner. For purposes of preliminary review, I conclude that plaintiff has stated a cognizable state law claim against Ameriquest based on unfair debt collection practices.|
|||D. Unfair and Deceptive Lending Practices|
|||Plaintiff alleges that Ameriquest and AMC engaged in a pattern of unfair and deceptive practices in violation of the New Hampshire Consumer Protection Act (“CPA”), N.H. Rev. Stat. Ann. (“RSA”) Ch. 358-A (1995 & Supp. 2006) (Count 6 ).|
|||“RSA 358-A:2 declares it ‘unlawful for any person to use any unfair method of competition or any unfair or deceptive act or practice in the conduct of any trade or commerce in this state.’”|
|||Hughes v. DiSalvo, 143 N.H. 576, 577, 729 A.2d 422, 424 (1999). The CPA defines trade and commerce:|
|||“Trade” and “commerce” shall include the advertising, offering for sale, sale, or distribution of any services and any property, tangible or intangible, real, personal or mixed, and any other article, commodity, or thing of value wherever situate, and shall include any trade or commerce directly or indirectly affecting people of this state.|
|||Id. “A practice is unfair if (1) it is ‘within at least the penumbra of some common-law, statutory, or other established concept of unfairness,’ (2) ‘it is immoral, unethical, oppressive, or unscrupulous,’ or (3) it causes substantial injury to consumers.’” Chroniak v. Golden Inv. Corp., 983 F.2d 1140, 1146 (1st Cir. 1993).|
|||Here, plaintiff alleges that Ameriquest and AMC violated the CPA by engaging in predatory lending practices, as described more fully above, when it mortgaged and refinanced her property. Specifically, she alleges that defendants’ actions were “deceptive, willful, fraudulent, [in bad faith and used] unfair and illegal practices against the plaintiff.” For purposes of preliminary review, I conclude that plaintiff has stated cognizable state law claims under the CPA against Ameriquest and AMC.|
|||For the reasons stated above, I conclude that plaintiff has invoked this court’s subject matter jurisdiction. Accordingly, I order the complaint to be served on defendants Ameriquest and AMC. See LR 4.3(d)(1)(B)(iii).|
|||As plaintiff has completed a summons form for each defendant, the Clerk’s Office shall issue the summonses against the defendants and forward to the United States Marshal for the District of New Hampshire (“U.S. Marshal’s Office”) the summonses, copies of the complaint (document no. 1) and this order. Upon receipt of the necessary documentation, the U.S. Marshal’s Office shall effect service upon the defendants. See id.; Fed. R. Civ. P. 4.(c)(2) and (h).|
|||Defendants are instructed to answer or otherwise plead within twenty days of service. See Fed. R. Civ. P. 12(a)(1)(A).|
|||Plaintiff is instructed that all future pleadings, written motions, notices, or similar papers shall be served directly on the defendants by delivering or mailing the materials to them or their attorney(s), pursuant to Fed. R. Civ. P. 5(b).|
|||*fn1 This court notes that Ameriquest is a defendant to five actions and six potential tag-along actions pending in seven district courts and alleging predatory lending practices by Ameriquest, or a related entity, in the solicitation and closing of residential mortgage transactions. See In re Ameriquest Mortg. Co. Mortg. Lending Practices Litig., 408 F. Supp. 2d 1354 (J.P.M.L. 2005).|
|||*fn2 Without providing specific dates, plaintiff alleges that Ameriquest employed Advent Appraisal Company to appraise Units 1, 2 and 4 and provide quotes that exceeded the market value of the property.|
|||*fn3 In addition, plaintiff broadly alleges that defendants discriminated against her on the basis of marital status and age, however, she fails to identify any federal or state law basis for her claims (Count 2). It is unclear whether she intends to allege a violation of the Equal Credit Opportunity Act, 15 U.S.C. § 1691, et seq., making it unlawful for a creditor to discriminate against any applicant, with respect to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex or marital status, or age.|
|||UNITED STATES DISTRICT COURT DISTRICT OF MAINE|
|||Civ. No. 06-123-B-W|
|||December 3, 2007|
|||JOSEPH AND ROXANNE DARLING, PLAINTIFFS,
INDYMAC BANK, F.S.B., AND WESTERN THRIFT & LOAN, DEFENDANTS.
|||The opinion of the court was delivered by: Margaret J. Kravchuk U.S. Magistrate Judge|
|||MEMORANDUM OF DECISION ON MOTION TO EXCLUDE OR LIMIT EXPERT TESTIMONY|
|||The plaintiffs, Joseph and Roxanne Darling, have designated TJ Henderson, a consumer advocate and self-styled “auditor” of consumer mortgage loans, to offer expert testimony to the effect that, among other things, the Darlings “are unsophisticated borrowers [who] had no idea what was taking place” with a loan issued by defendant IndyMac Bank and brokered by co-defendant Western Thrift & Loan, that the loan in question was fraudulent and predatory due to the way in which the defendants made, or failed to make, required disclosures in various closing documents and other communications, and that these circumstances give rise to “a continuing right to rescind the loan transaction.” (Aff. of TJ Henderson ¶¶ 1-3, Doc. No. 18-2.) In addition to these opinions, Mr. Henderson would testify that the defendants’ conduct violated a number of state and federal laws. (Id. ¶ 3.) The defendants ask the Court to exclude any such testimony on the grounds that the opinions impermissibly intrude upon the Court’s duty to instruct on the law, the designated expert is not qualified to testify about the standard of care that applies to mortgage lenders and brokers, the opinions impermissibly and unhelpfully characterize the plaintiffs’ mental capacity, and the designation fails to fully comply with Rule 26(a)(2)(B). (Mot. to Exclude, Doc. No. 18.) The motion is GRANTED IN PART.|
|||The Darlings assert that they have filed their lawsuit under the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq.*fn1 (“TILA”) in order to rescind a consumer credit transaction, void the IndyMac Bank’s security interest in their home, and recover statutory damages, fees and costs based on alleged violations of the TILA and Regulation Z, 12 C.F.R. § 226. They have joined the mortgage loan broker Western Thrift & Loan as an additional defendant to pursue claims of unfair and deceptive business practices, breach of fiduciary duty, fraud, and negligent misrepresentation arising from statements allegedly made by a Western agent*fn2 in order to induce a closing on the mortgage loan. (Am. Compl., Doc. No. 3.)|
|||Discovery in this case has essentially proceeded without incident. There have been two limited extensions to date and discovery remains open until December 31 for the limited purpose of conducting certain depositions. On June 12, 2007, the Darlings timely designated TJ Henderson as an expert witness. According to Mr. Henderson’s resume, he appears to be someone who has made a career out of consumer advocacy related to the TILA. He does not appear to have a law degree, though his resume includes as relevant experience the “practice of law” in certain county courts in the State of Washington. Mr. Henderson also reports years of unspecified education in consumer protection law and recent professional experience as an auditor (presumably unlicensed as no licenses are disclosed) who has worked to combat predatory lending on behalf of companies named Co3m, Premier Mortgage Auditing, Consumer Guardian, and Advocates for Justice. Mr. Henderson identifies his current position as president for Consumer Guardian and also as someone who provides paralegal services, including mortgage auditing services. Business tools at his disposal include West Law and a consumer library made available by the National Consumer Law Center. (See TJ Henderson Resume, Doc. No. 18-2 at 4-5.)|
|||The Darlings also attached to their disclosure an affidavit prepared by TJ Henderson in support of their claims. (TJ Henderson Aff, Doc. No. 18-2 at 6-10.) The affidavit recites a number of legal conclusions or characterizations concerning the Darlings and their mortgage transaction. These include the following statements:|
|||1. That the Darlings “are unsophisticated borrowers” (id. ¶ 2);|
|||2. That, “based upon my audit and study of the [closing] documents . . ., the Darlings had no idea what was taking place with the loan or that they could reasonably determine what the loan cost or finance charge would consist of,” which is described as an “unreasonable tactic” (id.);|
|||3. That the HUD-1 statement issued by IndyMac was “deceiving” because of the way it characterized a yield spread premium paid to Western as a “Broker Comp.” to be paid from the Darlings funds at closing and because of the location on the form where this reference was made (id.);|
|||4. That a second group of disclosure forms were issued without including a new notice of the Darlings’ right to cancel (id.);|
|||5. That these and other irregularities or misstatements give rise to “a continuing right to rescind the loan transaction” (id.);|
|||6. That due to his training and experience TJ Henderson was able to perform a “proper audit” which disclosed the following additional violations of law:|
|||a. failure to make all disclosures required by the TILA, including a failure to disclose the existence of yield spread premium (YSP) or to explain its significance and a failure to make disclosures required by 12 C.F.R. §§ 226.17, 226.18 and 226.19;|
|||b. an overstatement of the loan’s annual percentage rate, referencing 12 C.F.R. § 226.22;|
|||c. an understatement of the loan’s finance charge, referencing 12 C.F.R. § 226.18(d)(1)(i);|
|||d. failure to inform the Darlings where to find the appropriate contract documents and clause for information about non-payment, default, and the lender’s right to accelerate payments, referencing 12 C.F.R. § 226.18(p); and|
|||e. failure to provide the required HUD booklet on loans, referencing 12 U.S.C. § 2406 et seq.|
|||(id. ¶ 3);|
|||7. That, in his opinion, “this loan is fraudulent and consists of unjust enrichment and is predatory in nature (id. ¶ 3(i)); and, finally;|
|||8. That these violations expose the lender to severe penalties, which he then characterizes (id. ¶ 5).|
|||Western challenges TJ Henderson’s proposed testimony on Rule 26 and Rule 702 grounds. (Mot. to Exclude, Doc. No. 18.) I address the Civil Rules issue first and then turn to the evidentiary challenge.|
|||A. Rule 26 of the Federal Rules of Evidence|
|||Western argues that Mr. Henderson’s testimony should be excluded because it “consists almost entirely of unsupported legal conclusions that merely advocate the positions of his retainers,” without articulating any industry standards or other reasons in support of his conclusions. (Mot. to Exclude at 12.) Western also notes that the Darlings failed to disclose the expert compensation they are providing to Mr. Henderson. (Id.) Rule 26 and the Court’s scheduling order require that an expert disclosure set forth a “complete statement of all opinions . . . and the basis and reasons therefor.” Fed. R. Civ. P. 26(a)(2)(B); Scheduling Order at 2, Doc. No. 13. Both the Rule and the scheduling order also call for a disclosure of, among other things, the compensation to be paid to the expert for his or her work and testimony.|
|||In regard to Mr. Henderson’s compensation, the Darlings report that they made no disclosure because they had engaged and paid Mr. Henderson to conduct an audit of their mortgage loan prior to commencing this litigation, that no fee has been requested for the Henderson affidavit that comprises Mr. Henderson’s “report” because it is just a restatement of his audit, and that the defendants have not deposed Mr. Henderson so there has been no occasion to determine what compensation he would require for services as an expert witness. (Pl.’s Opposition at 4, Doc. No. 23.) Although this manner of proceeding is unorthodox, I can discern no prejudice to the defendants from the mere fact that they do not yet know what, if any, compensation Mr. Henderson will receive for his litigation-related services. This failure of disclosure does not independently warrant the exclusion of Mr. Henderson’s opinions. The Darlings are required, however, to make a supplemental disclosure setting forth the terms of Mr. Henderson’s compensation as soon as they are established, or by the close of discovery, whichever occurs sooner.|
|||The second aspect of Western’s Rule 26 argument is that Mr. Henderson’s opinions should be excluded because the Darlings have not, in Western’s view, disclosed the basis and reasons for the opinions, only “unsupported legal conclusions.” (Mot. to Exclude at 12.) I conclude that this issue is best addressed as an evidentiary matter under Rule 702 of the Federal Rules of Evidence, rather than as a disclosure matter under Rule 26. The Darlings have made a disclosure of Mr. Henderson’s opinions and the reasons he offers for them. To the extent the Darlings are able to demonstrate that the basis and reasons they offer satisfy the standards of Rule 702 they will to that same extent meet the disclosure requirement of Rule 26.|
|||B. Rule 702 of the Federal Rules of Evidence|
|||Pursuant to Rule 702 of the Federal Rules of Evidence: If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.|
|||In Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), the Supreme Court discussed the gate-keeping role federal judges play under Rule 702 in screening unreliable expert opinion from introduction in evidence. Id. at 597. That role is “to ensure that an expert’s testimony ‘both rests on a reliable foundation and is relevant to the task at hand.’” United States v. Mooney, 315 F.3d 54, 62 (1st Cir. 2002). The proponent of the expert opinion must demonstrate its reliability, but need not prove that the opinion is correct. Id. at 63. “Once a trial judge determines the reliability of the expert’s methodology and the validity of his reasoning, the expert should be permitted to testify as to inferences and conclusions he draws from it and any flaws in his opinion may be exposed through cross-examination or competing expert testimony.” Brown v. Wal-Mart Stores, Inc., 402 F. Supp. 2d 303, 308 (D. Me. 2005). “Vigorous cross examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.” Daubert, 509 U.S. at 596. It has been said that, ultimately, the Court must determine simply whether “the testimony of the expert would be helpful to the jury in resolving a fact in issue.” Cipollone v. Yale Indus. Prods., 202 F.3d 376, 380 (1st Cir. 2000).|
|||1. Legal conclusions cannot be countenanced, but testimony concerning regulatory compliance should be facilitated rather than barred where regulatory compliance is at the heart of the case and the plaintiffs are not independently qualified to discuss the regulatory framework.|
|||Western’s overarching theme is that the proposed opinion testimony is riddled with statements of legal standards and legal conclusions that are not really opinions at all. (Mot. to Exclude, passim.) It is the Court’s duty, naturally, to instruct the jury*fn3 concerning the applicable legal standards that govern this action. Nieves-Villanueva v. Soto-Rivera, 133 F.3d 92, 99-100 (1st Cir. 1997). It will fall to the fact witnesses to provide the jury with evidence of the facts and circumstances that gave rise to this action. The question, then, is whether Mr. Henderson, by dint of his mortgage auditing experience and any specialized knowledge he possesses, might be able to help the jury better understand the evidence to determine a fact in issue. Id. at 100. The Darlings assert in their opposition that Mr. Henderson will be able to articulate “various improprieties with the loan/mortgage transaction and documentation,” listing his observations that certain required documentation was missing and that the APR and finance charge calculations were erroneous. (Pls.’ Opposition at 1-2.) However, they acknowledge the appearance of a problem, noting, “if and to the extent that Mr. Henderson has gone beyond those factual observations and opined that same represent violation(s) of law, his testimony can be easily limited/prescribed at trial to conform to an appropriate scope.” (Id. at 2.) I fail to understand why this particular problem should not be addressed ahead of trial. Mr. Henderson should not be permitted to take the witness stand and simply state such things as “this loan is fraudulent and consists of unjust enrichment and is predatory in nature.” (TJ Henderson Aff. ¶ 3(i).) However, in fairness, it does not appear likely that that would be the extent of his testimony. Although Mr. Henderson’s affidavit is peppered with recitations of legal conclusions, his material opinions are really quite straightforward: (1) certain required TILA disclosures and/or documents were missing and (2) certain required disclosures were false. He is able to draw the first conclusion based on an audit of the closing documents. He has articulated which documents were missing. He is able to draw the second conclusion based on independent calculations. It is not difficult to conclude that the typical layperson would be unable to review a set of mortgage loan closing documents to assess whether a particular, required document was present or not. Nor is it difficult to imagine that the typical layperson would not be familiar with calculating finance charges and annual percentage rates. In other words, there does not appear to be anything inherently wrong with having an expert state that certain required documents were missing from the closing documents of a transaction or that certain calculations were erroneous, without straying into the territory of legal conclusions such as that the loan is “unjust” or “predatory,” or that it gives rise to liability or justifies any particular remedy. Thus, I conclude that the “legal conclusion” argument for exclusion does not entirely undermine Mr. Henderson’s audit or his opinions as to regulatory compliance. It does, however, call for a limitation to be placed on Mr. Henderson’s testimony. There is no reason apparent in this case why Mr. Henderson should need to tell the jury what the penalties of noncompliance are, what remedies are appropriate (such as contract rescission, which is an equitable remedy reserved to the Court, in any event), that the circumstances demonstrate unjust enrichment, predatory lending or fraud. Those particular opinions are hereby excluded on the ground that they are inappropriate legal conclusions and, as such, would not really help the jury make sense of the facts.|
|||There remains the matter of how to best address testimony to the effect that certain conduct was “in violation of TILA” or other federal or state laws and regulations. The issue of how to handle testimony concerning regulatory compliance is not as easy to resolve as either party suggests. In this case, although an expert might need to speak in terms of the TILA’s regulatory framework in order to discuss regulatory compliance, that is not necessarily the same thing as instructing the jury on issues of law or merely reciting legal conclusions. On the other hand, for testimony about noncompliance to have meaning there is a need to convey to the fact finder that there exists a regulatory framework that mandates compliance. Probably the most appropriate way to handle a situation like this one is not to preclude the testimony altogether, but to provide the jury with preliminary instructions concerning the regulatory framework and require the expert to couch his compliance testimony in terms of the Court’s instructions on the law, rather than in terms of his private characterizations of the law. See, e.g., United States v. Caputo, 382 F. Supp. 2d 1045, 1053 (N.D. Ill. 2005) (taking this approach in a criminal case involving FDA regulatory “enforcement policies”). Alternatively, the Court could leave for trial the task of drawing the “fine” distinction between proper expert testimony and legal conclusions, to avoid setting an over-exacting standard in a case that appears to turn almost entirely on regulatory compliance. See, e.g., TC Sys. Inc. v. Town of Colonie, 213 F. Supp. 2d 171, 181-82 (N.D. N.Y. 2002) (“[T]he Court is reluctant to preclude all testimony regarding FCC criteria at this early stage. If a proper foundation is laid and Kravtin can establish a nexus between the FCC criteria and the facts here, her testimony may be appropriate.”).|
|||2. The Darlings’ expert disclosure is sufficient to qualify Mr. Henderson to testify about regulatory compliance matters, but not about the customs and practices of mortgage loan brokers and lenders.|
|||Western’s next argument is that Henderson should not be permitted to testify about any deviation from customary practice because he is not a broker with experience in mortgage lending or any professional license in that commercial practice area. (Mot. to Exclude at 9-10.) The Darlings respond that it is “premature” for the Court to conclude that Mr. Henderson lacks the qualifications “to render opinions describing the applicable yield rate, actual and stated percentage interest rates and the presence of hidden and undisclosed charges.” (Pls.’ Opposition at 3.) They say that they are not required to retain a “blue-ribbon practitioner,” quoting United States v. Malone, 453 F.3d 68, 71 (1st Cir 2006). (Id. at 3-4.) They do not expand upon the qualifications set forth in Mr. Henderson’s resume and affidavit.|
|||Based on a review of the expert disclosure materials, Mr. Henderson has been obtaining education in law and consumer protection since 1989, practiced law for five years in certain county courts in Washington, participated in at least eight seminars and workshops on the TILA between 2002 and 2006, and has been active with four “companies” in organized efforts to combat predatory lending. The companies in question are Co3m, Premier Mortgage Auditing, Advocates for Justice, and Consumer Guardian. Henderson is currently the president and owner of Consumer Guardian. Mr. Henderson’s affidavit indicates that he has been “in the mortgage auditing business for 9 years and legal industry for the past 15 years.” (TJ Henderson Aff. at 1.) Henderson’s affidavit does not otherwise elaborate on any of the qualifications sketched out in his resume, such as by better describing the work performed by the companies he has worked for or the type of legal work he used to perform in Washington.|
|||An expert’s qualifications, like other issues addressed to the admissibility of an expert’s opinions, “should be established by a preponderance of proof.” Daubert, 509 U.S. at 592 n.10. The proponent of the challenged evidence carries the burden of proof. The proponent must not assume that an evidentiary hearing will be held; the Court has the discretion to decide the motion on briefs and with reference to expert reports, depositions and affidavits on record. United States v. Diaz, 300 F.3d 66, 73-74 (1st Cir. 2002).|
|||The trouble here is that the Darlings have designated an unconventional expert and given short shrift to Western’s arguments that their designee has questionable qualifications. The fact that Mr. Henderson is an unconventional expert is not a bar in itself, but there needs to be some reassurance here that Mr. Henderson’s specific training and experience make him a suitable person to educate the jury about issues of fact. Instead, the Darlings rest on Mr. Henderson’s resume and affidavit and casually argue that the record does not in its present state prove he is not qualified, partly because Western has not deposed Mr. Henderson. (Pls.’ Opposition at 3.) I conclude on this record that Mr. Henderson’s qualifications to address the specific issue flagged here by Western, i.e., the customs and practices of mortgage lenders and brokers, are not adequately established. That does not mean, however, that Mr. Henderson is unqualified to serve as an expert witness regarding compliance with the TILA regulatory framework and related consumer law. Mr. Henderson has made a practice of educating himself on consumer law matters, including the requirements of the TILA, and he has worked for several years consulting with borrowers to determine whether the mortgage loans they have entered into have complied with that law and others. Thus, he appears to be suited to the task of helping to shepherd the Darlings’ regulatory compliance claims through the trial process, provided he does so within appropriate parameters set by the Court to prevent him from purporting to state the law to the jury.*fn4 He may not, however, speak to what is customary practice among mortgage lenders and brokers, only to what is required by the regulatory framework.|
|||3. Mr. Henderson’s views concerning the Darlings’ relative sophistication and their understanding of the terms of the loan are unreliable and unhelpful and must be excluded.|
|||Western challenges Mr. Henderson’s basis and qualifications to offer opinions about the Darlings’ level of sophistication or their level of knowledge about the terms of the transaction they entered into. (Mot. to Exclude at 11.) The Darlings do not even attempt to preserve these facets of their expert disclosure. As there is no apparent basis to support a finding that Mr. Henderson is qualified to testify-or possesses specialized knowledge enabling him to testify-about the Darlings’ level of sophistication or their understanding of the loan’s terms, these opinions are excluded. Mr. Henderson may discuss what he considers to be noncompliant disclosures without having to opine that the Darlings were actually misled.|
|||For the reasons stated above, Western’s motion to exclude the testimony of TJ Henderson is GRANTED, IN PART. Mr. Henderson is precluded from testifying about the penalties and remedies available in cases of regulatory noncompliance. He is also precluded from testifying that the circumstances of this case demonstrate unjust enrichment, predatory lending or fraud. Additionally, Mr. Henderson is precluded from testifying about the customary practices observed by mortgage lenders and brokers. Finally, Mr. Henderson is precluded from characterizing the Darlings’ level of sophistication or their level of knowledge about the terms of the transaction they entered into.|
|||Any objections to this Order shall be filed in accordance with Fed.R.Civ. P. 72. So Ordered.|
|||*fn1 Components of the Truth in Lending Act are distributed throughout the United States Code. The sections cited here, as cited by the Darlings in their pleadings, refer to the TILA’s consumer credit cost disclosure provisions.|
|||*fn2 The Darlings originally named the agent as an additional defendant but have since voluntarily dismissed the claims against him. (Voluntary Dismissal, Doc. No. 17.)|
|||*fn3 Because the Darlings’ plea for relief requests more than equitable remedies, there is a legal component to their TILA claim that is properly submitted to a jury in light of their jury demand. See Franklin v. Hartland Mortgage Ctrs., Inc., No. 01 C 2041, 2001 U.S. Dist. LEXIS 24238 (N.D. Ill. June 18, 2001) (order on motion to strike jury demand) (concluding in a TILA action that the plaintiff had the right to have his claim for statutory damages submitted to the jury and quoting Beacon Theaters, Inc. v. Westover, 359 U.S. 500, 510 (1959)) (“[W]hen legal and equitable claims are joined in one action, absent exceptional circumstances, a litigant has a right to have the issues common to the legal and equitable claims tried first to a jury”)). Additionally, the claims against Western are traditional tort claims appropriately tried to a jury.|
|||*fn4 In its reply, Western argues for the first time that Mr. Henderson’s percentage rate calculations and finance charge calculations should be excluded because there are merely factual matters for which no expert testimony is needed or which should be presented by an accountant. (Def.’s Reply at 1, Doc. No. 24.) I disagree with Western’s contentions. Mr. Henderson discloses that performing these calculations is part of his auditing function and it seems plain that the average layperson is not accustomed to computing annual percentage rates or even finance charges. Having someone other than the plaintiffs articulate the process is apt to save time at trial and prove beneficial to the jury.|
|||SUPREME COURT OF THE UNITED STATES|
|||124 S.Ct. 1741, 541 U.S. 232, 158 L.Ed.2d 450, 2004 Daily Journal D.A.R. 4821, 4 Cal. Daily Op. Serv. 3433, 04 Cal. Daily Op. Serv. 3433, 2004.SCT.0000066< http://www.versuslaw.com>|
|||April 21, 2004|
|||HOUSEHOLD CREDIT SERVICES, INC. AND MBNA AMERICA BANK, N. A., PETITIONERS
SHARON R. PFENNIG
|||SYLLABUS BY THE COURT|
|||OCTOBER TERM, 2003|
|||Argued February 23, 2004|
|||The Truth in Lending Act (TILA) regulates, inter alia, the disclosures that credit card issuers must make to consumers, 15 U. S. C. §1637(a), and provides consumers with a civil remedy for creditors’ failure to comply, §1640. Among other things, the creditor’s periodic balance statement to the consumer must include “[t]he amount of any finance charge,” §1637(b)(4), which is defined as an amount “payable directly or indirectly by the [consumer], and imposed directly or indirectly by the creditor as an incident to the extension of credit.” §1605(a). Section §1604(a) expressly gives to the Federal Reserve Board (Board) expansive authority to prescribe regulations containing “such classifications, differentiations, or other provisions,” as, in the Board’s judgment, “are necessary or proper to effectuate [TILA's] purposes … , to prevent circumvention or evasion thereof, or to facilitate compliance therewith.” The Board’s Regulation Z interprets §1605(a)’s “finance charge” definition to exclude “charges … for exceeding a credit limit” (over-limit fees).|
|||Respondent holds a credit card issued by one of the petitioner financial institutions and in which the other holds an interest. Although the parties’ agreement set respondent’s credit limit at $2,000, she was able to make charges exceeding that limit, subject to a $29 over-limit fee for each month in which her balance exceeded $2,000. While her monthly billing statement disclosed the over-limit fees, the amount was not included as part of the “finance charge,” consistent with Regulation Z. Respondent filed suit alleging that petitioners violated TILA by failing to classify over-limit fees as “finance charges,” but the District Court granted petitioners’ motion to dismiss on the ground that Regulation Z specifically excludes such fees. The Sixth Circuit reversed, holding that the exclusion conflicts with §1605(a)’s plain language. Noting, first, that, as a remedial statute, TILA must be liberally interpreted in favor of consumers, the court then concluded that the over-limit fees in this case were imposed “incident to an extension of credit” and therefore fell squarely within §1605′s language. That conclusion turned on the distinction the court drew between unilateral acts of default, which would not generate a “finance charge,” and acts of default resulting from an agreement between the creditor and the consumer, which would.|
|||Held: Regulation Z is not an unreasonable interpretation of §1605. Pp. 4-11.|
|||(a) Because respondent does not challenge the Board’s authority under §1604(a) to issue binding regulations, this Court faces only two questions. It asks, first, whether “Congress has directly spoken to the precise question at issue,” Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837, 842, in which case courts, as well as the Board, “must give effect to the unambiguously expressed intent of Congress,” id., at 842-843. However, whenever Congress has “explicitly left a gap for the [implementing] agency to fill,” the agency’s regulation is “given controlling weight unless [it is] arbitrary, capricious, or manifestly contrary to the statute.” Id., at 843-844. Pp. 4-5.|
|||(b) TILA itself does not explicitly address whether over-limit fees are included within the “finance charge” definition. The Sixth Circuit did not attempt to clarify the scope of §1605(a)’s critical term “incident to the extension of credit.” Because the phrase “incident to” does not make clear whether a substantial (as opposed to a remote) connection is required between an antecedent and its object, cf. Holly Farms Corp. v. NLRB, 517 U. S. 392, 402, n. 9, it cannot be concluded that the term “finance charge,” standing alone, unambiguously includes over-limit fees. Moreover, an examination of TILA‘s related provisions, as well as the full text of §1605 itself, casts doubt on the Sixth Circuit’s interpretation. A consumer holding an open-end credit plan may incur two types of charges — finance charges and “other charges which may be imposed as part of the plan.” §§1637(a)(1)-(5). TILA does not make clear which charges fall into each category, but its recognition of at least two categories establishes that Congress did not contemplate that all charges made in connection with an open-end credit plan would be considered “finance charges.” And where TILA explicitly addresses over-limit fees, it defines them as fees imposed “in connection with an extension of credit,” §1637(c)(1)(B)(iii), rather than “incident to an extension of credit,” §1605(a). Furthermore, none of §1605′s specific examples of charges that fall within the “finance charge” definition includes over-limit or comparable fees. Thus, 1605(a) is, at best, ambiguous. Pp. 5-8.|
|||(c) Regulation Z’s exclusion of over-limit fees from “finance charge[s]” is in no way manifestly contrary to §1605. Regulation Z defines “finance charge” as “the cost of consumer credit,” excluding as less relevant to determining such cost a number of specific payments, including over-limit fees, that do not automatically recur or are imposed only when a consumer defaults on a credit agreement. Because over-limit fees are imposed only in the latter circumstance, they can reasonably be characterized as a penalty for defaulting on the credit agreement, and the Board’s decision to exclude them from “finance charge[s]” is reasonable. Despite the Board’s rational decision to adopt a uniform rule excluding from the term “finance charge” all penalties imposed for exceeding the credit limit, the lower court adopted a case-by-case approach contingent on whether an act of default was “unilateral.” That approach would prove unworkable to creditors and, more importantly, lead to significant confusion for the consumer, who would be able to decipher if a charge is more properly a “finance charge” or an “other charge” only by recalling the details of the particular transaction that caused him to exceed his credit limit. In most cases, the consumer would not even know the relevant facts, which are contingent on the nature of the authorization given by the creditor to the merchant. Here, the Board accomplished all of the objectives set forth in §1604(a)’s broad delegation of rulemaking authority when it set forth a clear, easy to apply (and easy to enforce) rule that highlights the charges the Board determined to be most relevant to a consumer’s credit decisions. Pp. 8-11.|
|||295 F. 3d 522, reversed.|
|||Thomas, J., delivered the opinion for a unanimous Court.|
|||On Writ Of Certiorari To The United States Court Of Appeals For The Sixth Circuit Court Below: 295 F. 3d 522|
|||Seth P. Waxman argued the cause for petitioners. With him on the briefs were Louis R. Cohen, Christopher R. Lipsett, Richard C. Pepperman II, and William G. Porter.|
|||Barbara B. McDowell argued the cause for the United States as amicus curiae urging reversal. With her on the brief were Solicitor General Olson, Assistant Attorney General Keisler, Deputy Solicitor General Clement, Matthew D. Roberts, James V. Mattingly, Jr., and Katherine H. Wheatley.|
|||Sylvia Antalis Goldsmith argued the cause for respondent. With her on the brief were John T. Murray, Joseph F. Murray, and Brian K. Murphy.|
|||Briefs of amici curiae urging reversal were filed for the American Bankers Association et al. by Drew S. Days III, Beth S. Brinkmann, and Seth M. Galanter; and for William P. Schlenk by Richard A. Cordray, Mark D. Fischer, and Mark McClure Sandmann.|
|||The opinion of the court was delivered by: Justice Thomas|
|||541 U. S. ____ (2004)|
|||Congress enacted the Truth in Lending Act (TILA), 82 Stat. 146, in order to promote the “informed use of credit” by consumers. 15 U. S. C. §1601(a). To that end, TILA‘s disclosure provisions seek to ensure “meaningful disclosure of credit terms.” Ibid. Further, Congress delegated expansive authority to the Federal Reserve Board (Board) to enact appropriate regulations to advance this purpose. §1604(a). We granted certiorari, 539 U. S. 957 (2003), to decide whether the Board’s Regulation Z, which specifically excludes fees imposed for exceeding a credit limit (over-limit fees) from the definition of “finance charge,” is an unreasonable interpretation of §1605. We conclude that it is not, and, accordingly, we reverse the judgment of the Court of Appeals for the Sixth Circuit.|
|||Respondent, Sharon Pfennig, holds a credit card initially issued by petitioner Household Credit Services, Inc. (Household), but in which petitioner MBNA America Bank, N. A. (MBNA), now holds an interest through the acquisition of Household’s credit card portfolio. Although the terms of respondent’s credit card agreement set respondent’s credit limit at $2,000, respondent was able to make charges exceeding that limit, subject to a $29 “over-limit fee” for each month in which her balance exceeded $2,000.|
|||TILA regulates, inter alia, the substance and form of disclosures that creditors offering “open end consumer credit plans” (a term that includes credit card accounts) must make to consumers, §1637(a), and provides a civil remedy for consumers who suffer damages as a result of a creditor’s failure to comply with TILA‘s provisions, §1640.*fn1 When a creditor and a consumer enter into an open-end consumer credit plan, the creditor is required to provide to the consumer a statement for each billing cycle for which there is an outstanding balance due. §1637(b). The statement must include the account’s outstanding balance at the end of the billing period, §1637(b)(8), and “[t]he amount of any finance charge added to the account during the period, itemized to show the amounts, if any, due to the application of percentage rates and the amount, if any, imposed as a minimum or fixed charge,” §1637(b)(4). A “finance charge” is an amount “payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit.” §1605(a). The Board has interpreted this definition to exclude “[c]harges … for exceeding a credit limit.” See 12 CFR §226.4(c)(2) (2004) (Regulation Z). Thus, although respondent’s billing statement disclosed the imposition of an over-limit fee when she exceeded her $2,000 credit limit, consistent with Regulation Z, the amount was not included as part of the “finance charge.”|
|||On August 24, 1999, respondent filed a complaint in the United States District Court for the Southern District of Ohio on behalf of a purported nationwide class of all consumers who were charged or assessed over-limit fees by petitioners. Respondent alleged in her complaint that petitioners allowed her and each of the other putative class members to exceed their credit limits, thereby subjecting them to over-limit fees. Petitioners violated TILA, respondent alleged, by failing to classify the over-limit fees as “finance charges” and thereby “misrepresented the true cost of credit” to respondent and the other class members. Class Action Complaint in No. C2-99 815 ¶ ;¶ ;34-39, App. to Pet. for Cert. A39-A40. Petitioners moved to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) on the ground that Regulation Z specifically excludes over-limit fees from the definition of “finance charge.” 12 CFR §226.4(c)(2) (2004). The District Court agreed and granted petitioners’ motion to dismiss.|
|||On appeal, respondent argued, and the Court of Appeals agreed, that Regulation Z’s explicit exclusion of over-limit fees from the definition of “finance charge” conflicts with the plain language of 15 U. S. C. §1605(a). The Court of Appeals first noted that, as a remedial statute, TILA must be liberally interpreted in favor of consumers. 295 F. 3d 522, 528 (CA6 2002). The Court of Appeals then concluded that the over-limit fees in this case were imposed “incident to the extension of credit” and therefore fell squarely within §1605′s definition of “finance charge.” Id., at 528-529. The Court of Appeals’ conclusion turned on the distinction between unilateral acts of default and acts of default resulting from consumers’ requests for additional credit, exceeding a predetermined credit limit, that creditors grant. Under the Court of Appeals’ reasoning, a penalty imposed due to a unilateral act of default would not constitute a “finance charge.” Id., at 530-531. Respondent alleged in her complaint, however, that petitioners “allowed [her] to make charges and/or assessed [her] charges that allowed her balance to exceed her credit limit of two thousand dollars,” App. to Pet. for Cert. A39, ¶ ;34, putting her actions under the category of acts of default resulting from consumers requests for additional credit, exceeding a predetermined credit limit, that creditors grant. The Court of Appeals held that because petitioners “made an additional extension of credit to [respondent] over and above the alleged `credit limit,’ ” id., ¶ ;35, and charged the over-limit fee as a condition of this additional extension of credit, the over-limit fee clearly and unmistakably fell under the definition of a “finance charge.” 295 F. 3d, at 530. Based on its reading of respondent’s allegations, the Court of Appeals limited its holding to “those instances in which the creditor knowingly permits the credit card holder to exceed his or her credit limit and then imposes a fee incident to the extension of that credit.” Id., at 532, n. 5.*fn2|
|||Congress has expressly delegated to the Board the authority to prescribe regulations containing “such classifications, differentiations, or other provisions” as, in the judgment of the Board, “are necessary or proper to effectuate the purposes of [TILA], to prevent circumvention or evasion thereof, or to facilitate compliance therewith.” §1604(a). Thus, the Court has previously recognized that “the [Board] has played a pivotal role in `setting [TILA] in motion… .’ ” Ford Motor Credit Co. v. Milhollin, 444 U. S. 555, 566 (1980) (quoting Norwegian Nitrogen Products Co. v. United States, 288 U. S 294, 315 (1933)). Indeed, “Congress has specifically designated the [Board] and staff as the primary source for interpretation and application of truth-in-lending law.” 444 U. S., at 566. As the Court recognized in Ford Motor Credit Co., twice since the passage of TILA, Congress has made this intention clear: first by providing a good-faith defense to creditors who comply with the Board’s rules and regulations, 88 Stat. 1518, codified at 15 U. S. C. §1640(f), and, second, by expanding this good-faith defense to creditors who conform to “any interpretation or approval by an official or employee of the Federal Reserve System duly authorized by the Board to issue such interpretations or approvals,” 90 Stat. 197, codified as amended, at §1640(f). 444 U. S., at 566-567.|
|||Respondent does not challenge the Board’s authority to issue binding regulations. Thus, in determining whether Regulation Z’s interpretation of TILA‘s text is binding on the courts, we are faced with only two questions. We first ask whether “Congress has directly spoken to the precise question at issue.” Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837, 842 (1984). If so, courts, as well as the agency, “must give effect to the unambiguously expressed intent of Congress.” Id., at 842-843. However, whenever Congress has “explicitly left a gap for the agency to fill,” the agency’s regulation is “given controlling weight unless [it is] arbitrary, capricious, or manifestly contrary to the statute.” Id., at 843-844.|
|||TILA itself does not explicitly address whether over-limit fees are included within the definition of “finance charge.” Congress defined “finance charge” as “all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit.” §1605(a). The Court of Appeals, however, made no attempt to clarify the scope of the critical term “incident to the extension of credit.” The Court of Appeals recognized that, ” `[i]n ascertaining the plain meaning of the statute, the court must look to the particular statutory language at issue, as well as the language and design of the statute as a whole.’ ” Id., at 529-530 (quoting K mart Corp. v. Cartier, Inc., 486 U. S. 281, 291 (1988)). However, the Court of Appeals failed to examine TILA‘s other provisions, or even the surrounding language in §1605, before reaching its conclusion. Because petitioners would not have imposed the over-limit fee had they not “granted [respondent's] request for additional credit, which resulted in her exceeding her credit limit,” the Court of Appeals held that the over-limit fee in this case fell squarely within §1605(a)’s definition of “finance charge.” 295 F. 3d, at 528-529. Thus, the Court of Appeals rested its holding primarily on its particular characterization of the transaction that led to the over-limit charge in this case.*fn3|
|||The Court of Appeals’ characterization of the transaction in this case, however, is not supported even by the facts as set forth in respondent’s complaint. Respondent alleged in her complaint that the over-limit fee is imposed for each month in which her balance exceeds the original credit limit. App. to Pet. for Cert. A39, ¶ ;35. If this were true, however, the over-limit fee would be imposed not as a direct result of an extension of credit for a purchase that caused respondent to exceed her $2,000 limit, but rather as a result of the fact that her charges exceeded her $2,000 limit at the time respondent’s monthly charges were officially calculated. Because over-limit fees, regardless of a creditor’s particular billing practices, are imposed only when a consumer exceeds his credit limit, it is perfectly reasonable to characterize an over-limit fee not as a charge imposed for obtaining an extension of credit over a consumer’s credit limit, but rather as a penalty for violating the credit agreement.|
|||The Court of Appeals thus erred in resting its conclusion solely on this particular characterization of the details of credit card transactions, a characterization that is not clearly compelled by the terms and definitions of TILA, and one with which others could reasonably disagree. Certainly, regardless of how the fee is characterized, there is at least some connection between the over-limit fee and an extension of credit. But, this Court has recognized that the phrase “incident to or in conjunction with” implies some necessary connection between the antecedent and its object, although it “does not place beyond rational debate the nature or extent of the required connection.” Holly Farms Corp. v. NLRB, 517 U. S. 392, 403, n. 9 (1996) (internal quotation marks omitted). In other words, the phrase “incident to” does not make clear whether a substantial (as opposed to a remote) connection is required. Thus, unlike the Court of Appeals, we cannot conclude that the term “finance charge” unambiguously includes over-limit fees. That term, standing alone, is ambiguous.|
|||Moreover, an examination of TILA‘s related provisions, as well as the full text of §1605 itself, casts doubt on the Court of Appeals’ interpretation of the statute. A consumer holding an open-end credit plan may incur two types of charges — finance charges and “other charges which may be imposed as part of the plan.” §§1637(a)(1)-(5). TILA does not make clear which charges fall into each category. But TILA‘s recognition of at least two categories of charges does make clear that Congress did not contemplate that all charges made in connection with an open-end credit plan would be considered “finance charges.” And where TILA does explicitly address over-limit fees, it defines them as fees imposed “in connection with an extension of credit,” §1637(c)(1)(B)(iii), rather than “incident to the extension of credit,” §1605(a). Furthermore, none of §1605′s specific examples of charges that fall within the definition of “finance charge” includes over-limit or comparable fees. See, e.g., §1605(a)(2) (“[s]ervice or carrying charge”); §1605(a)(3) (loan fee or similar charge); §1605(a)(6) (mortgage broker fees).*fn4|
|||As our prior discussion indicates, the best interpretation of the term “finance charge” may exclude over-limit fees. But §1605(a) is, at best, ambiguous, because neither §1605(a) nor its surrounding provisions provides a clear answer. While we acknowledge that there may be some fees not explicitly addressed by §1605(a)’s definition of “finance charge” but which are unambiguously included in or excluded by that definition, over-limit fees are not such fees.|
|||Because §1605 is ambiguous, the Board’s regulation implementing §1605 “is binding in the courts unless procedurally defective, arbitrary or capricious in substance, or manifestly contrary to the statute.” United States v. Mead Corp., 533 U. S. 218, 227 (2001).|
|||Regulation Z’s exclusion of over-limit fees from the term “finance charge” is in no way manifestly contrary to §1605. Regulation Z defines the term “finance charge” as “the cost of consumer credit.” 12 CFR §226.4 (2004). It specifically excludes from the definition of “finance charge” the following:|
|||“(1) Application fees charged to all applicants for credit, whether or not credit is actually extended.|
|||“(2) Charges for actual unanticipated late payment, for exceeding a credit limit, or for delinquency, default, or a similar occurrence.|
|||“(3) Charges imposed by a financial institution for paying items that overdraw an account, unless the payment of such items and the imposition of the charge were previously agreed upon in writing.|
|||“(4) Fees charged for participation in a credit plan, whether assessed on an annual or other periodic basis.|
|||“(5) Seller’s points.|
|||“(6) Interest forfeited as a result of an interest reduction required by law on a time deposit used as security for an extension of credit.|
|||“(7) [Certain fees related to real estate.]|
|||“(8) Discounts offered to induce payment for a purchase by cash, check, or other means, as provided in section 167(b) of the Act.” §226.4(c) (emphasis added).|
|||The Board adopted the regulation to emphasize “disclosures that are relevant to credit decisions, as opposed to disclosures related to events occurring after the initial credit choice,” because “the primary goals of the [TILA] are not particularly enhanced by regulatory provisions relating to changes in terms on outstanding obligations and on the effects of the failure to comply with the terms of the obligation.” 45 Fed. Reg. 80 649 (1980). The Board’s decision to emphasize disclosures that are most relevant to a consumer’s initial credit decisions reflects an understanding that “[m]eaningful disclosure does not mean more disclosure,” but instead “describes a balance between `competing considerations of complete disclosure … and the need to avoid … [informational overload].’ ” Ford Motor Credit Co., 444 U. S., at 568 (quoting S. Rep. No. 96-73, p. 3 (1979)). Although the fees excluded from the term “finance charge” in Regulation Z (e.g., application charges, late payment charges, and over-limit fees) might be relevant to a consumer’s credit decision, the Board rationally concluded that these fees — which are not automatically recurring or are imposed only when a consumer defaults on a credit agreement — are less relevant to determining the true cost of credit. Because over-limit fees, which are imposed only when a consumer breaches the terms of his credit agreement, can reasonably be characterized as a penalty for defaulting on the credit agreement, the Board’s decision to exclude them from the term “finance charge” is surely reasonable.|
|||In holding that Regulation Z conflicts with §1605′s definition of the term “finance charge,” the Court of Appeals ignored our warning that “judges ought to refrain from substituting their own interstitial lawmaking for that of the [Board].” Ford Motor Credit Co., supra, at 568. Despite the Board’s rational decision to adopt a uniform rule excluding from the term “finance charge” all penalties imposed for exceeding the credit limit, the Court of Appeals adopted a case-by-case approach contingent on whether an act of default was “unilateral.” Putting aside the lack of textual support for this approach, the Court of Appeals’ approach would prove unworkable to creditors and, more importantly, lead to significant confusion for consumers. Under the Court of Appeals’ rule, a consumer would be able to decipher if a charge is considered a “finance charge” or an “other charge” each month only by recalling the details of the particular transaction that caused the consumer to exceed his credit limit. In most cases, the consumer would not even know the relevant facts, which are contingent on the nature of the authorization given by the creditor to the merchant. Moreover, the distinction between “unilateral” acts of default and acts of default where a consumer exceeds his credit limit (but has not thereby renegotiated his credit limit and is still subject to the over-limit fee) is based on a fundamental misunderstanding of the workings of the credit card industry. As the Board explained below, a creditor’s “authorization” of a particular point-of-sale transaction does not represent a final determination that a particular transaction is within a consumer’s credit limit because the authorization system is not suited to identify instantaneously and accurately over-limit transactions. Brief for Board of Governors of Federal Reserve System as Amicus Curiae in No. 00-4213 (CA6), pp. 7-9.|
|||Congress has authorized the Board to make “such classifications, differentiations, or other provisions, and [to] provide for such adjustments and exceptions for any class of transactions, as in the judgment of the Board are necessary or proper to effectuate the purposes of [TILA], to prevent circumvention or evasion thereof, or to facilitate compliance therewith.” §1604(a). Here, the Board has accomplished all of these objectives by setting forth a clear, easy to apply (and easy to enforce) rule that highlights the charges the Board determined to be most relevant to a consumer’s credit decisions. The judgment of the Court of Appeals is therefore reversed.|
|||It is so ordered.|
|||*fn1 An “open end credit plan” is a plan under which a creditor “reasonably contemplates repeated transactions, which prescribes the terms of such transactions, and which provides for a finance charge which may be computed from time to time on the outstanding unpaid balance.” 15 U. S. C. §1602(i).|
|||*fn2 To the extent that respondent sought monetary relief, the Court of Appeals affirmed the District Court’s dismissal of respondent’s TILA claim because §1640(f) provides a good-faith defense to creditors who act in conformity with rules promulgated by the Board. 295 F. 3d, at 532-533.|
|||*fn3 Respondent does not attempt to defend the Court of Appeals’ reasoning in this Court and has abandoned her principal argument on appeal — that Regulation Z conflicts with the plain language of §1605. Instead, respondent maintains that the Board’s exclusion of over-limit fees in Regulation Z is not challenged in this case because Regulation Z does not cover over-limit fees imposed for authorized extensions of credit. Because respondent did not advance this theory in the Court of Appeals, and did not raise it in her Brief in Opposition accompanied by an appropriate cross-petition, see Northwest Airlines, Inc. v. County of Kent, 510 U. S. 355, 364 (1994), we decline to consider it here.|
|||*fn4 Additionally, by specifically excepting charges from the term “finance charge” that would otherwise be included under a broad reading of “incident to the extension of credit,” see §1605(a) (charges of a type payable in a comparable cash transaction); ibid. (fees imposed by third-party closing agents); §1605(d)(1) (fees and charges relating to perfecting security interests); §1605(e) (fees relating to the extension of credit secured by real property), Congress appears to have excluded such an expansive interpretation of the term.|
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