Lenders Increasingly Facing Forensic Loan Audits

Posted on February 4, 2010. Filed under: Foreclosure Defense, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending, Refinance, RESPA, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , |

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are trying to forestall a foreclosure, push for a loan modification or, at the end of continuum, try to get the loan rescinded.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the program as a best practice and the first step before bringing a lawsuit against the lender to get a “bad” mortgage rescinded or force a loan modification.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.”

Paper chase

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.

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Deutsche Bank v. Debra Abbate Etal.

Posted on October 23, 2009. Filed under: Case Law, Foreclosure Defense, Mortgage Audit, Mortgage Law | Tags: , , , , , , , , , , , , |



Debra Abbate, CARMELA ABBATE, KIM FIORENTINO, BOCCE COURT HOMEOWNERS ASSOCIATION, INC., NEW YORK CITY ENVIRONMENTAL CONTROL BOARD, NEW YORK CITY TRANSIT ADJUDICATION BUREAU, NEW YORK CITY PARKING VIOLATIONS BUREAU, and “JOHN DOE No. 1″ through “JOHN DOE #10,” the last ten names being fictitious and unknown to the plaintiff, the person or parties intended being the person or parties, if any, having or claiming an interest in or lien upon the Mortgaged premises described in the Complaint, Defendants.


Plaintiff was represented by the law firm of Frenkel Lambert Weiss & Weisman.

Defendant was represented by Robert E. Brown, Esq.

Joseph J. Maltese, J.

The defendants Kim Fiorentino, Debra Abbate, and Carmella Abbate’s motion to dismiss the plaintiff’s complaint is granted in its entirety.

This is an action to foreclose a mortgage dated February 24, 2005, upon the property located at 25 Bocce Court, Staten Island, New York. The mortgage was originated by Suntrust Mortgage Inc. (”Suntrust”) and was recorded in the Office of the Clerk of Richmond County on April 26, 2005. The plaintiff filed the Summons, Complaint, and Notice of Pendency on March [*2]1, 2007.[FN1] However, Suntrust assigned the first mortgage on this property to Option One Mortgage Corporation, which was executed on July 6, 2007. Another assignment to plaintiff Deutsche Bank National Trust Company (”Deutsche Bank”) was executed on March 7, 2007. Both assignments, which were recorded on July 23, 2007, contained a clause expressing their intention to be retroactively effective: the first one to date back to February 24, 2005, and the second one to February 28, 2007.[FN2] On November 19, 2007, this court issued an order of foreclosure and sale on the subject property. This court also granted two orders to show cause to stay the foreclosure on January 9, 2008 and April 8, 2008.[FN3]


The Appellate Division, Second Department ruled and reiterated in Kluge v. Kugazy the well established law that “foreclosure of a mortgage may not be brought by one who has no title to it . . . .”[FN4] The Appellate Division, Third Department has similarly ruled that an assignee of a mortgage does not have a right or standing to foreclose a mortgage unless the assignment is complete at the time of commencing the action.[FN5] An assignment takes the form of a writing or occurs through the physical delivery of the mortgage.[FN6] Absent such transfer, the assignment of the mortgage is a nullity.[FN7]

Retroactive Assignments of a Mortgage are Invalid
The first issue this court must resolve is whether the clauses in the July 6, 2007 and March 7, 2007 assignments setting the effective date of the assignment to February 24, 2005 and February 28, 2007 respectively are permissible. This court rules that, absent a physical or written transfer before the filing of a complaint, retroactive assignments are invalid.

Recently, trial courts have been faced with the situation where the plaintiff commenced a [*3]foreclosure action before the assignment of the mortgage.[FN8] In those cases the trial courts have held,

. . . where there is no evidence that plaintiff, prior to commencing the foreclosure action, was the holder of the mortgage and note, took physical delivery of the mortgage and note, or was conveyed the mortgage and note by written assignment, an assignment’s language purporting to give it retroactive effect prior to the date of the commencement of the action is insufficient to establish the plaintiff’s requisite standing. . .[FN9]

In this case, the plaintiff failed to offer any admissible evidence demonstrating that they became assignees to the mortgage on or before March 1, 2007; as such, this court agrees with its sister courts and finds that the retroactive language contained in the July 26, 2007 and March 7, 2007 assignments are ineffective. This court therefore rules that it lacks jurisdiction over the subject matter when the plaintiff has no title to the mortgage at the time that it commenced the action.

The next issue this court must resolve is whether the defendants waived subject matter jurisdiction because they did not raise that issue in their prior applications to this court.

Affirmative Defense of Standing

At the outset of any litigation, the court must ascertain that the proper party requests an adjudication of a dispute.[FN10] As the first step of justiciability, “standing to sue is critical to the proper functioning of the judicial system.”[FN11] Standing is a threshold issue; if it is denied, “the pathway to the courthouse is blocked.” [FN12]

The doctrine of standing is designed to “ensure that a party seeking relief has a sufficiently cognizable stake in the outcome so as to present a court with a dispute that is capable [*4]of judicial resolution.”[FN13] “Standing to sue requires an interest in the claim at issue in the lawsuit that the law will recognize as a sufficient predicate for determining the issue at the litigant’s request.”[FN14] Where the plaintiff has no legal or equitable interest in a mortgage, the plaintiff has no foundation in law or in fact.[FN15]

A plaintiff who has no standing in an action is subject to a jurisdictional dismissal since (1) courts have jurisdiction only over controversies that involve the plaintiff, (2) a plaintiff found to lack “standing is not involved in a controversy, and (3) the courts therefore have no jurisdiction of the case when such plaintiff purports to bring it.”[FN16]

On November 7, 2005, in the case of Wells Fargo Bank Minn. N.A. v. Mastropaolo [“Mastropaolo”], this court found that “Insofar as the plaintiff was not the legal titleholder to the mortgage at the time the action was commenced, [the Bank] had no standing to bring the action and it must be dismissed.”[FN17] Erroneously, this court “[o]rdered, that the plaintiff’s summary judgment motion is denied in its entirety and that this action is dismissed with prejudice.”[FN18]

This Court should have ordered that this matter was dismissed without prejudice, which would have given the plaintiff the right to start the action again after it had acquired title to the note and mortgage. Unfortunately, the plaintiff, did not seek a motion to reargue that error, which would have been corrected promptly. Instead, the plaintiff appealed the decision to the Appellate Division, Second Department, which rightfully reversed the decision 18 months later on May 29, 2007 based upon the dismissal with prejudice as opposed to a dismissal without prejudice to refile the action. However, in what appears to be dicta, the court went on to discuss whether lack of standing is tantamount to lack of subject matter jurisdiction. The court further stated that the failure of the initial pro se defendant to make a pre-answer motion or a motion to dismiss, the defense of lack of standing would be waived. But the Appellate Division did not address the issue of subject matter jurisdiction, which may not be waived. [*5]

In the instant case, this court is again faced with similar facts, which raise the issue that the Bank must have title to the mortgage before it can sue the defendant. Clearly, having title to the subject matter (the mortgage) is a condition precedent to the right to sue on that mortgage. This has always been the case, but since the Appellate Division, Second Department’s comments in Mastropaolo, that issue has been clouded.

At the time that the plaintiff improperly commenced the action, the pathway to the Courthouse should have been blocked. Deutsche Bank had no legal foundation to foreclose a mortgage in which it had no interest at the time of filing the summons and complaint. Lack of a plaintiff’s interest at the beginning of the action strips the court’s power to adjudicate over the action.[FN19] Lack of interest and controversy is protected by the umbrella of subject matter jurisdiction. Whenever a court lacks jurisdiction, a defense can be raised at any time and is not waivable.[FN20] In other words, for there to be a cause of action, there needs to be an injury. At the time that the action was commenced, the instant plaintiff suffered no injury and had no interest in the controversy. Since the plaintiff filed this action to foreclose the mortgage before it had title to it, there was no controversy between the existing parties when the action commenced. Therefore, the court lacked subject matter jurisdiction to adjudicate the present case. The defendants are consequently entitled to a dismissal without prejudice because the court lacked jurisdiction over a non-existent controversy.

Accordingly, it is hereby:

ORDERED, that the defendants Kim Fiorentino, Debra Abbate, and Carmella Abbate’s motion to dismiss the plaintiff’s complaint is granted, without prejudice to the plaintiff having the right to refile within the time provided by the Statute of Limitations; and it is further

ORDERED, that the parties and counsel shall appear before this court to further conference this matter on November 20, 2009 at 11:00AM.


DATED: October 6, 2009

Joseph J. Maltese

Justice of the Supreme Court

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Ruling by judges rattles mortgage industry

Posted on October 4, 2009. Filed under: Banking, bankruptcy, Case Law, Foreclosure Defense, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law | Tags: , , , , , , , , , , , , |

A bankruptcy judge here, joining judges across the country, is throwing a bit of sand in the gears of the mortgage machine and its ruthless foreclosure blade.

She has raised this issue: In many home foreclosures springing out of bankruptcy proceedings, the foreclosure is being triggered by a representative of the lender — a surrogate that may not have a legal, equity stake in the proceedings.

As a result, it is conceivable — though still something of a legal long shot — that the homeowner who is filing for bankruptcy protection could end up saving his house.

The argument that a lender’s surrogate can’t trigger foreclosure has drawn notice of Nevada homeowners, who are preparing a class action lawsuit. They are seeking a preliminary injunction this month to stop their foreclosures.

First, some background:

Law and custom have long required that property transactions be recorded with a county clerk or “recorder of deeds,” along with information about the person who holds the mortgage, and, if there are multiple mortgages, the place in line of each creditor.

For big lenders, tracking that information in hundreds of jurisdictions across the country was an onerous process, so the biggest, including Fannie Mae and Freddie Mac, set up a company that would do it all electronically. It is called Mortgage Electronic Registration Systems and is recognized by its acronym.

The MERS name wound up on millions of mortgages, including more than 987,000 in Nevada alone, according to the company.

via Ruling by judges rattles mortgage industry – Saturday, Oct. 3, 2009 | 2 a.m. – Las Vegas Sun.

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States gain more power over banks

Posted on June 30, 2009. Filed under: Case Law, Legislation, Mortgage Fraud, Predatory Lending, Truth in Lending Act | Tags: , , , , , , , , , , , , , , , , |

Reporting from Washington — The Supreme Court ruled Monday that states could enforce some of their consumer protection laws against national banks, a move that could lead to tougher oversight than federal regulators have provided in recent years.

The 5-4 decision in a case involving attempts by New York’s attorney general to enforce fair-lending laws was praised by consumer and civil rights groups, who have accused federal regulators of being lax in policing banks chartered by the federal government.

“This puts more consumer cops on the consumer crime beat,” said Edmund Mierzwinski, consumer program director at the U.S. Public Interest Research Group. “The federal regulators have demonstrated they’re just having doughnuts in the coffee shop.”

Banking trade groups, however, warned that the ruling could lead to a confusing patchwork of enforcement levels in states that could cause national banks to offer fewer products, such as credit cards.

“This will make it difficult to serve consumers in today’s high-tech, mobile society where people and bank services move constantly across state lines,” said Edward L. Yingling, president of the American Bankers Assn.

The ruling has limited effect because it applies only to a small number of state laws, such as those dealing with discrimination in lending practices, including predatory lending. Most other state laws affecting national banks are enforced by federal officials.

And it only affects the approximately 1,600 national banks, not the larger number of state banks that are subject to the laws of the states in which they’re chartered.

But it is significant because it reverses a trend of states losing legal battles with federal officials over banking regulatory oversight.

The case’s importance also could be amplified by President Obama’s recent proposal to create a Consumer Financial Protection Agency that would allow states to enact and enforce tougher consumer protection laws than the federal government.

via States gain more power over banks – Los Angeles Times.

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Melfi v. WMC Mortg. Corp

Posted on June 28, 2009. Filed under: Case Law, Mortgage Audit, Refinance, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , , , , , , , |

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.



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.

. . . .


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.


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AIG unit sues Countrywide over loan losses

Posted on March 23, 2009. Filed under: Banking, Finance, Fraud, Mortgage Fraud, Mortgage Law | Tags: , , , , |

LOS ANGELES (AP) — A unit of embattled insurer American International Group Inc. filed suit against mortgage lender Countrywide Financial Corp. in California federal court Thursday, alleging Countrywide misrepresented the health of loans that the company insured, resulting in massive losses.

United Guaranty Mortgage Indemnity Co. filed suit in U.S. District Court, accusing Countrywide of breach of contract, fraud, negligence, and unfair competition and business practices.

United Guaranty alleges Countrywide “abandoned its own underwriting guidelines to boost its market share and then misrepresented the quality of its loans so that United Guaranty would provide insurance coverage for them.”

The AIG unit is seeking unspecified punitive damages, and wants the insurance policies on the loans and its payments on the policies to be canceled.

Charlotte, N.C.-based Bank of America bought Countrywide in July 2008 for about $2.5 billion in an all-stock deal. Countrywide was the nation’s largest mortgage lender at the time of the acquisition. But like most lenders, the company was hit hard by sharply rising defaults over the past 18 months. Bank of America received billions in federal aid so it could absorb mortgage-related losses from Countrywide and its later acquisition, Merrill Lynch.

AIG, once the world’s largest insurer, recently reported a 2008 fourth-quarter loss of $61.7 billion — the biggest quarterly loss in U.S. corporate history — linked to subprime loan defaults and continued market turmoil. The company, which has received over $170 million in government aid, outraged lawmakers by recently paying out $165 million in bonuses, including to traders in the Financial Products unit that nearly brought about AIG’s collapse.

For its part, Countrywide is the target of multiple lawsuits linked to the subprime mortgage meltdown.

Calls and emails to AIG’s attorney and Countrywide representatives seeking comment weren’t immediately returned late Thursday.

via AIG unit sues Countrywide over loan losses | Lawinfo Weblog.

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Boulware v. Crossland Mortgage Corp. (RESPA §8)

Posted on January 25, 2009. Filed under: Case Law, Mortgage Law, RESPA | Tags: , , , , |

TYNA L. BOULWARE, on behalf of

herself and all others similarly



v.No. 01-2318




Amicus Curiae.


Appeal from the United States District Court
for the District of Maryland, at Greenbelt.
Frederic N. Smalkin, Chief District Judge.

Argued: April 4, 2002

Decided: May 22, 2002

Before WILKINSON, Chief Judge, and WILLIAMS and
TRAXLER, Circuit Judges.


Affirmed by published opinion. Chief Judge Wilkinson wrote the

opinion, in which Judge Williams and Judge Traxler joined.



ARGUED: James Evan Felman, KYNES, MARKMAN & FEL-

MAN, P.A., Tampa, Florida, for Appellant. Christine N. Kohl, Appel-

late Staff, Civil Division, UNITED STATES DEPARTMENT OF

JUSTICE, Washington, D.C., for Amicus Curiae. Michael Schatzow,

VENABLE, BAETJER & HOWARD, L.L.P., Baltimore, Maryland,

for Appellee. ON BRIEF: Katherine Earle Yanes, KYNES, MARK-

MAN & FELMAN, P.A., Tampa, Florida; Andrew N. Friedman,

Gary E. Mason, Victoria S. Nugent, COHEN, MILSTEIN, HAUS-

FELD & TOLL, Washington, D.C.; Lee S. Shalov, SHALOV,

STONE & BONNER, New York, New York; Peter D. Fastow, Steven

B. Preller, TROESE, FASTOW & PRELLER, L.L.C., Annapolis,

Maryland, for Appellant. Robert D. McCallum, Jr., Assistant Attorney

General, Thomas M. DiBiagio, United States Attorney, Michel Jay

Singer, Appellate Staff, Civil Division, UNITED STATES DEPART-

MENT OF JUSTICE, Washington, D.C.; Richard A. Hauser, General

Counsel, Peter S. Race, Assistant General Counsel, Joan L. Kayagil,


DEVELOPMENT, Washington, D.C., for Amicus Curiae. Mark D.

Maneche, VENABLE, BAETJER & HOWARD, L.L.P., Baltimore,

Maryland, for Appellee.



WILKINSON, Chief Judge:

Plaintiff Tyna Boulware claims that § 8(b) of the Real Estate Set-

tlement Procedures Act (“RESPA“) is a broad price control statute

prohibiting any overcharge for real estate settlement services. Boul-

ware seeks to certify a class to challenge Crossland Mortgage Corpo-

ration’s alleged overcharge for credit reports. The district court found

that Boulware did not allege any split or kickback of the overcharge

from Crossland to a third party. It thus dismissed Boulware’s com-

plaint and denied class certification. We agree with the Seventh Cir-

cuit that § 8(b) is a prohibition on kickbacks rather than a broad price

control provision. See Echevarria v. Chi. Title & Trust Co., 256 F.3d

623 (7th Cir. 2001); Durr v. Intercounty Title Co., 14 F.3d 1183 (7th

Cir. 1994). We therefore affirm the judgment.



In November 2000, Tyna Boulware, a Maryland consumer,

obtained a federally related home mortgage loan from Crossland

Mortgage Corporation.1 In connection with this loan, Crossland pur-

chased Boulware’s credit report from a third-party credit reporting

agency. On July 18, 2001, Boulware initiated this action, alleging that

Crossland violated RESPA § 8(b), 12 U.S.C. § 2607(b) (2000), by

charging her $65 for the credit report when it cost Crossland $15 or

less to obtain it. Boulware claimed that Crossland kept the $50 over-

charge for itself without performing additional services. She did not

allege that the credit reporting agency or any other third party

received payment from Crossland beyond that owed to it for services

actually performed.2

Boulware sought civil remedies under RESPA, including treble

damages, attorneys’ fees, and costs. See 12 U.S.C. § 2607(d). In addi-

tion, she sought to certify a class of all parties who had received simi-

lar mortgages from Crossland in the past twelve months, and who had

paid Crossland for a credit report in connection with their loans.

On October 2, 2001, the district court dismissed Boulware’s com-

plaint and denied class certification. Following two Seventh Circuit

decisions, the district court held that the “plain words” of RESPA

§ 8(b) “support the proposition that the statute is only violated where

there is a charge for a real estate settlement service that is split or

kicked back, not simply where there has been an overcharge.” See

Echevarria, 256 F.3d 623; Durr, 14 F.3d 1183. The district court rec-

ognized that the Department of Housing and Urban Development was

authorized to promulgate regulations and interpretations of RESPA,

see 12 U.S.C. § 2617, and intimated that HUD’s view of the statute

was consistent with Boulware’s. However, the court refused to adopt

a construction of the statute that went beyond § 8(b)’s plain meaning,


1 On January 2, 2001, Crossland merged into Wells Fargo Home Mort-

gage, Inc. However, we follow the practice of the district court and par-

ties by referring to the defendant as Crossland.

2 Because the district court dismissed Boulware’s complaint under Fed.

R. Civ. P. 12(b)(6), we accept her allegations as true. See, e.g., Mayes

v. Rapoport, 198 F.3d 457, 460 (4th Cir. 1999).


“whether condoned by administrative agency utterances or not.” Boul-

ware appeals.



RESPA § 8(b) provides:

No person shall give and no person shall accept any por-

tion, split, or percentage of any charge made or received for

the rendering of a real estate settlement service in connec-

tion with a transaction involving a federally related mort-

gage loan other than for services actually performed.

12 U.S.C. § 2607(b). The plain language of § 8(b) makes clear that it

does not apply to every overcharge for a real estate settlement service

and that § 8(b) is not a broad price-control provision. Therefore,

§ 8(b) only prohibits overcharges when a “portion” or “percentage” of

the overcharge is kicked back to or “split” with a third party. Compen-

sating a third party for services actually performed, without giving the

third party a “portion, split, or percentage” of the overcharge, does not

violate § 8(b). By using the language “portion, split, or percentage,”

Congress was clearly aiming at a sharing arrangement rather than a

unilateral overcharge.3

Here, Crossland collected an overcharge and kept it as a “windfall”

for itself. See Durr, 14 F.3d at 1187. We therefore reject Boulware’s

argument that § 8(b) applies, and conclude that the district court cor-

rectly dismissed her complaint under Rule 12(b)(6).

This very case demonstrates the problems with concluding other-

wise. As previously noted, Boulware does not allege that Crossland’s

purported overcharge was kicked back to or split with the credit


3 An overcharge or unearned fee must be present in order for § 8(b) to

apply because the charge must be one “other than for services actually

performed.” However, the presence of an overcharge alone, without any

portion of the overcharge being kicked back to or split with a third party,

is not sufficient to fall within the purview of § 8(b).


reporting agency or any other third party. Outside of a kickback or

fee-splitting situation, there is no way to make sense of the statutory

directive that “[n]o person shall give and no person shall accept” any

portion of an unearned fee. In fact, under Boulware’s view, Boulware

herself would have to be the giver contemplated by the statute in

order for § 8(b) to apply.

It would be irrational to conclude that Congress intended consum-

ers to be potentially liable under RESPA for paying unearned fees. In

addition to civil penalties, RESPA § 8(d) establishes criminal sanc-

tions for violations, including up to one year in prison. And it makes

both the giver and the acceptor jointly and severally liable. See 12

U.S.C. § 2607(d)(1)-(2). It would be perverse to find that Congress

intended to impose such liability on consumers – the very group it

was trying to protect in enacting RESPA. See 12 U.S.C. § 2601.

Accordingly, the giver in § 8(b) must be some party in the settlement

process besides the borrower herself.

Boulware, joined by HUD as amicus curiae, contended at oral

argument that the government would not prosecute consumers. How-

ever, it is unclear whether the government would be bound by HUD’s

statement that it is “unlikely to direct any enforcement actions against

consumers for the payment of unearned fees.” RESPA Statement of

Policy 2001-1, 66 Fed. Reg. 53,052, 53,059 n.6 (October 18, 2001).

Moreover, it is insufficient for HUD to proclaim that the statute will

not be enforced against consumers. We cannot interpret § 8(b) so as

to compel the absurd conclusion that Congress drafted it to apply to

consumers in the first place. See, e.g., United States v. Wilson, 503

U.S. 329, 334 (1992) (citing United States v. Turkette, 452 U.S. 576,

580 (1981)).

Boulware cannot give a satisfactory explanation of what the phrase

“[n]o person shall give and no person shall accept” means under her

interpretation of the statute. She attempts to avoid the problem posed

by the prospect of applying § 8(b) to consumers by asserting that a

giver and acceptor do not both have to be present for the statute to

apply. Alternatively she claims that § 8(b) only applies if the giver

knows that services were not rendered. But Boulware’s arguments are

unpersuasive because these qualifications find no expression in the

plain language of the statute. The use of the conjunctive “and” indi-


cates that Congress was clearly aiming at an exchange or transaction,

not a unilateral act.

Our interpretation of § 8(b) makes sense of all of the statute’s terms

and leaves a wide variety of conduct prohibited. For example, the pro-

vision would clearly apply to situations where a mortgage lender

overcharges a consumer and splits the overcharge with a mortgage

service provider, such as a credit reporting agency. In such a case,

both the lender/giver and the credit-reporting agency/acceptor would

violate § 8(b). In addition, the statute would apply if a mortgage ser-

vice provider overcharged for its services and gave a mortgage lender

a portion of the unearned fee.

In holding that § 8(b) requires fee-splitting or a kickback, our result

is consistent with the only other federal appellate court that has

addressed the question of whether § 8(b) requires unearned fees to

pass from one settlement service provider to another. See Echevarria,

256 F.3d 623; Durr, 14 F.3d 1183; Mercado v. Calumet Fed. Sav. &

Loan Ass’n, 763 F.2d 269 (7th Cir. 1985). The Seventh Circuit has

held on three occasions that § 8(b) does not apply to all overcharges

for real estate settlement services. Instead, the court explained that

§ 8(b) “is an anti-kickback statute” which “requires at least two par-

ties to share fees.” Mercado, 763 F.2d at 270. And the court stressed

that “under RESPA’s express terms,” the broad protection of the stat-

ute “extends only over transactions where the defendant gave or

received any portion, split, or percentage of any charge to a third

party.” Durr, 14 F.3d at 1187 (internal quotation omitted). Further-

more, in both Echevarria and Durr, the Seventh Circuit confronted

facts almost identical to those in the case at bar and found no viola-

tion of § 8(b) in the absence of any allegation of a kickback to a third

party. Echevarria, 256 F.3d at 626-27; Durr, 14 F.3d at 1186-87.

Boulware contends that our interpretation of § 8(b) is incorrect

because it makes § 8(a) and § 8(b) both proscribe the same conduct.

However, a comparison of these two subsections does not affect our

conclusion. Section 8(a) states:

No person shall give and no person shall accept any fee,

kickback, or thing of value pursuant to any agreement or

understanding, oral or otherwise, that business incident to or


a part of a real estate settlement service involving a federally

related mortgage loan shall be referred to any person.

12 U.S.C. § 2607(a). It is apparent that § 8(a) is not rendered mean-

ingless by our interpretation of § 8(b). The provisions both seek to

eliminate kickbacks or referral fees paid to a third party, but they do

so by prohibiting different actions. Section 8(a) prohibits the payment

of formal kickbacks or fees for the referral of business and does not

require an overcharge to a consumer. On the other hand, § 8(b) pro-

hibits “splitting fees with anyone for anything other than services

actually performed.” Willis v. Quality Mortgage USA, Inc., 5 F. Supp.

2d 1306, 1308 (M.D. Ala. 1998) (noting the differences between

§ 8(a) and (b)). Section 8(b) therefore requires an overcharge and pro-

hibits conduct where money is moving in the same way as a kickback

or referral fee even though there is no explicit referral agreement.


In a further attempt to salvage her claim, Boulware urges us to pro-

ceed past the language of § 8(b) to HUD’s broader interpretation of

the provision. See 24 C.F.R. § 3500.14(c) (2001) (“Regulation X”); 66

Fed. Reg. at 53,057-59. Deference might well be due Regulation X

or HUD’s statement of policy if § 8(b) were ambiguous. See Chevron

U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43

(1984). But the text of the statute controls in this case. Id.; see also,

e.g., Hillman v. IRS, 263 F.3d 338, 342 (4th Cir. 2001) (citing Cami-

netti v. United States, 242 U.S. 470, 485 (1917)). Although it is true

that “RESPA is a broad statute, directed against many things that

increase the cost of real estate transactions,” it is equally true that “the

objective of a statute is not a warrant to disregard the terms of the

statute.” Mercado, 763 F.2d at 271.


Despite the textual directive of § 8(b), Boulware argues that Con-

gress’ intent in enacting § 8(b) was far broader than our reading of it,

and that her claim should accordingly not be dismissed. She maintains

that Congress intended to forbid all overcharges and markups by

mortgage lenders for every real estate settlement service they might

provide. Boulware is in effect asking us to subject all settlement ser-


vices, including, inter alia, title searches, title examinations, title

insurance, attorneys’ services, property surveys, credit reports, pest

inspections, real estate agents’ and brokers’ services, and loan pro-

cessing, to broad price regulation. In fact, under her interpretation of

the statute, HUD or the federal courts could determine what settle-

ment service fees are reasonable in the first instance, without an alle-

gation that the fees were even marked up. See 66 Fed. Reg. at 53,059

(stating that under HUD’s interpretation of § 8(b), which mirrors

Boulware’s, “[a] single service provider also may be liable under

§ 8(b) when it charges a fee that exceeds the reasonable value of

goods, facilities, or services provided”). Further, Boulware would

provide both a private right of action and potential criminal penalties

to enforce the price controls she envisions § 8(b) creating. See 12

U.S.C. § 2607(d).

If Congress had intended § 8(b) to sweep as broadly as Boulware

proposes, it could easily have written § 8(b) to state that “there shall

be no markups or overcharges for real estate settlement services.” Or

Congress could have explained that “a mortgage lender shall only

charge the consumer what is paid to a third party for a real estate set-

tlement service.” But Congress chose not to draft the statute that way.

And we have no authority to recast it. If we were to read § 8(b) in the

way Boulware suggests, every settlement fee would be the subject of

potential litigation and discovery, leading perhaps to increased costs

for real estate settlement services in the long run. Though the regula-

tion of charging practices would not be beyond the purview of Con-

gress, this was not Congress’ intent in enacting RESPA.

Instead, the view that § 8(b) only applies when there is a kickback

or split with a third party is actually the view that is consistent with

RESPA’s stated purposes. In enacting RESPA, Congress proclaimed

that “significant reforms in the real estate settlement process” were

needed to protect consumers “from unnecessarily high settlement

charges caused by certain abusive practices that ha [d] developed in

some areas of the country.” 12 U.S.C. § 2601(a). Congress went on

to explain that one of the purposes of RESPA was “to effect certain

changes in the settlement process,” which would result “in the elimi-

nation of kickbacks or referral fees that tend to increase unnecessarily

the costs of certain settlement services.” 12 U.S.C. § 2601(b)(2).


Nothing in § 2601 indicates that RESPA § 8 was intended to elimi-

nate all settlement service overcharges. Instead, its purpose was “to

prohibit all kickback and referral fee arrangements whereby any pay-

ment is made or thing of value furnished for the referral of real estate

settlement business.” Mercado, 763 F.2d at 270-71 (quoting Senate

report). And the provision was designed to prohibit “a person that ren-

ders a settlement service from giving or rebating any portion of the

charge to any other person except in return for services actually per-

formed.” Id. at 271 (quoting Senate report); see also Echevarria, 256

F.3d at 627; Durr, 14 F.3d at 1186; Duggan v. Indep. Mortgage

Corp., 670 F. Supp. 652, 654 (E.D. Va. 1987). Therefore, if we sub-

jected a settlement service provider to RESPA liability for keeping an

overcharge without requiring an allegation that the unearned fee was

shared with a third party, “we would radically, and wrongly, expand

the class of cases to which RESPA § 8(b) applies.” Echevarria, 256

F.3d at 627.4


RESPA was meant to address certain practices, not enact broad

price controls. Congress chose to leave markups and the price of real

estate settlement services to the free market by “consider[ing] and

explicitly reject[ing] a system of price control for fees.” Mercado, 763

F.2d at 271 (citing Senate report). Instead, Congress “directed § 8

against a particular kind of abuse that it believed interfered with the

operation of free markets – the splitting and kicking back of fees to

parties who did nothing in return for the portions they received.” Id.

Accordingly, we decline to extend § 8(b) beyond its text, and we

affirm the judgment.



4 In deciding whether to certify a class, a district court has “broad dis-

cretion” within the framework of Fed. R. Civ. P. 23. Lienhart v. Dryvit

Sys., Inc., 255 F.3d 138, 146 (4th Cir. 2001). Because Boulware failed

to state a claim as the purported named plaintiff, and because all other

similarly situated plaintiffs would likewise fail to state a claim, the dis-

trict court necessarily acted within its discretion in denying class certifi-


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Darling v. Indymac Bank (TILA Audit)

Posted on January 19, 2009. Filed under: Case Law, Mortgage Audit, Mortgage Law, Predatory Lending, RESPA, right to rescind, Truth in Lending Act, Yield Spread Premium | Tags: , , , , , , , , , , , , , , , , , , , , , |

Darling v. Indymac Bank, F.S.B., No. 06-123-B-W (D.Me. 12/03/2007)

[2] Civ. No. 06-123-B-W
[3] 2007.DME.0000264
[4] December 3, 2007
[6] The opinion of the court was delivered by: Margaret J. Kravchuk U.S. Magistrate Judge
[8] 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.
[9] Background
[10] 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.)
[11] 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.)
[12] 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:
[13] 1. That the Darlings “are unsophisticated borrowers” (id. ¶ 2);
[14] 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.);
[15] 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.);
[16] 4. That a second group of disclosure forms were issued without including a new notice of the Darlings’ right to cancel (id.);
[17] 5. That these and other irregularities or misstatements give rise to “a continuing right to rescind the loan transaction” (id.);
[18] 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:
[19] 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;
[20] b. an overstatement of the loan’s annual percentage rate, referencing 12 C.F.R. § 226.22;
[21] c. an understatement of the loan’s finance charge, referencing 12 C.F.R. § 226.18(d)(1)(i);
[22] 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
[23] e. failure to provide the required HUD booklet on loans, referencing 12 U.S.C. § 2406 et seq.
[24] (id. ¶ 3);
[25] 7. That, in his opinion, “this loan is fraudulent and consists of unjust enrichment and is predatory in nature (id. ¶ 3(i)); and, finally;
[26] 8. That these violations expose the lender to severe penalties, which he then characterizes (id. ¶ 5).
[27] Discussion
[28] 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.
[29] A. Rule 26 of the Federal Rules of Evidence
[30] 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.
[31] 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.
[32] 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.
[33] B. Rule 702 of the Federal Rules of Evidence
[34] 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.
[35] 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).
[36] 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.
[37] 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.
[38] 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.”).
[39] 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.
[40] 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.
[41] 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.
[42] 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).
[43] 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.
[44] 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.
[45] 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.
[46] Conclusion
[47] 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.
[49] Any objections to this Order shall be filed in accordance with Fed.R.Civ. P. 72. So Ordered.

Opinion Footnotes

[50] *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.
[51] *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.)
[52] *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.
[53] *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.


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Smith v. Encore Credit Corp. (TILA/HOEPA/RESPA)

Posted on January 19, 2009. Filed under: Case Law, Foreclosure Defense, Legislation, Mortgage Law, Predatory Lending, RESPA, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , , , , |

Smith v. Encore Credit Corp., No. 4:08 CV 1462 (N.D.Ohio 12/09/2008)

[2] Case No. 4:08 CV 1462
[3] 2008.NOH.0001120
[4] December 9, 2008
[6] The opinion of the court was delivered by: Judge Dan Aaron Polster
[8] After LaSalle Bank National Association (“LaSalle”) obtained a judgment entry of foreclosure on the residence of Plaintiffs Ronald J. and Nancy L. Smith in state court, the Smiths filed this action alleging four federal law claims and seven state law claims against persons and entities related to the underlying refinancing mortgage loan transaction (“the Loan”) other than LaSalle. The Smiths seek a declaration that the Loan was illegal, rescission of the Loan, an injunction against the foreclosure sale of their residence, and damages. Defendants have filed the following motions, which have been fully briefed and are ripe for review:
[9] *Motion of Defendant Bear Stearns Residential Mortgage Corporation to Dismiss Plaintiffs’ Complaint (ECF No. 11);
[10] *Motion of Defendants Motion Financial and Ellyn Klein Grober to Dismiss Plaintiffs’ Complaint (ECF No. 14);
[11] *Motion of Defendant Sand Canyon Corporation F/K/A Option One Mortgage Corporation to Dismiss Plaintiffs’ Complaint (ECF No. 16); and
[12] *Defendant Encore Credit Corporation’s Motion to Dismiss the Complaint of Donald J. Smith and Nancy L. Smith (ECF No. 19).
[13] For the reasons articulated below, the Motions are GRANTED IN PART, the federal law claims (Counts I through IV) are dismissed with prejudice, and the state law claims (Counts V through XI) are dismissed without prejudice.
[14] I.
[15] In January 2004, the Smiths had several discussions over the telephone with agents of Defendant Motion Financial (“Motion”) concerning a possible refinancing of the mortgage on their home. (ECF No. 1 (“Compl.”) ¶ 13.) The Smiths “directed Defendant Motion to extract equity from their home for the purpose of paying credit cards and other personal loans due to a deteriorating income stream versus prior year and also to be able to fund the March, 2004 mortgage payments.” (Id.) The Smiths “believed that the best way to accomplish this would be through a fix-rate loan at the lowest interest rate for which [they] qualified and with a monthly payment plan which [they] could afford given their financial situation as to income and expenses.” (Id.) On January 7, 2004, Defendant Ellyn Klein Grober allegedly represented to the Smiths that they qualified for a fixed rate mortgage loan in the principal amount of $528,500. (Id. ¶ 14.) Grober prepared a Uniform Residential Loan Application indicating that the Smiths were applying for a fixed rate loan, which the Smiths executed on January 9, 2004. (Id.) Grober also provided the Smiths with an early Truth In Lending Statement setting forth the fixed rate mortgage loan. In February 2004, Grober informed the Smiths that the fixed rate loan they initially qualified for would not provide a sufficient loan-to-value ratio to enable them to obtain a cash-out refinance program. (Compl. ¶ 17.) Grober told them that the only loan program available to them to obtain a cash-out refinance would be a program with a two-year fixed rate and an adjustable rate every six months thereafter that required an appraised value of the property of $630,000. (Id.) Grober arranged for an appraisal that valued the residence at $570,000 — insufficient to provide cash to the Smiths. (Id. ¶ 20.) She arranged a second appraisal which valued the residence at $630,000 — sufficient to provide a cash payout. (Id. ¶ 22.) With less than two weeks remaining before the Smiths would default on numerous obligations (including, presumably, their March 2004 mortgage payment), the Smiths “agreed to proceed with the closing on the adjustable rate mortgage.” (Compl. ¶ 23.) On March 5, 2004, Defendants Motion and Encore Credit Corporation (“Encore”) executed the refinancing Loan with the Smiths. (Id. ¶ 24.) The Smiths allege that the Loan, which was the result of predatory lending practices, “was sold to a securities firm” immediately after the closing and, within the Loan year, “ended up as collateral for Bear Stearns Asset-Backed Securities LLC Asset-Backed Certificates Series 2004-HES.” (Id. ¶ 28(g).)
[16] The Smiths subsequently defaulted on the loan and, on October 18, 2005, LaSalle, as Trustee for Certificate Holders of Bear Stearns Asset-Backed Securities LLC Asset-Backed Certificates Series 2004-HES (“LaSalle”), filed a foreclosure action against the Smiths and others in the Court of Common Pleas for Mahoning County, Ohio, in Case No. 2005-CV-3869 (“the Foreclosure Case”). (Compl. ¶ 49.) Nancy Smith filed an answer on December 29, 2005, and Ronald Smith filed an answer on January 10, 2006.
[17] After an evidentiary hearing, the state court granted LaSalle’s motion for summary and default judgment, and entered judgment against the Smiths on January 12, 2007. (ECF No. 12-2 at 1.) The state court decreed that if the amount then due on the loan was not fully paid within three days of the judgment, the right of the Smiths in the property “shall be foreclosed and [ ] an order of sale may be issued to the Mahoning County Sheriff, directing him to appraise, advertise in a paper of general circulation within the County and sell said premises as upon execution and according to law free and clear of the interest of all parties to this action.” (Id. at 4.)
[18] In August 2007, LaSalle filed a motion to withdraw the order of sale scheduled for August 7, 2007 upon the representation that Ronald Smith had filed a Chapter 13 bankruptcy proceeding on August 3, 2007. The court granted LaSalle’s request to have the order of sale returned by the sheriff unexecuted and granted leave to LaSalle to file an alias order of sale. On October 15, 2007, the state court granted LaSalle’s request to vacate the bankruptcy stay, reinstate the case to the active docket and for leave to continue with the prosecution of the case.
[19] On June 17, 2008, the Smiths filed this case in federal court asserting a laundry list of state and federal claims against Defendants Grober, Motion, Encore, Bear Stearns Residential Mortgage Corporation (“BSRMC”) and Option One Mortgage Corporation (which is alleged to be in an agency relationship with Encore, Compl. ¶ 4) for their predatory lending practices.*fn1 Specifically, the Smiths allege claims for violation of the Homeowners Equity Protection Act, 15 U.S.C. § 1639, the Real Estate Settlement Procedures Act , 12 U.S.C. § 2601, the Truth in Lending Act, 15 U.S.C. § 1605, the Fair Credit Reporting Act, 15 U.S.C. § 1681, the Ohio Consumer Protection Act, O.R.C. Chapter 1345, the Ohio Mortgage Brokers Act , O.R.C. Chapter 1322, and the Ohio Racketeer Influenced and Corrupt Organizations (“RICO”) Act, O.R.C. § 2929.32. They also allege claims of fraudulent misrepresentation, breach of fiduciary duty, unjust enrichment, and civil conspiracy. The Smiths ask this Court to treat the Complaint as a “Notice of Rescission” and declare the refinancing transaction illegal and void in the first instance, rescind the Loan, and enjoin the foreclosure sale of their home. They seek damages as well.
[20] On July 21, 2008, Defendant BSRMC filed the first motion to dismiss, followed by the other pending motions to dismiss. Defendants all argue that the Court lacks the jurisdiction to granted the requested declaratory and injunctive relief based on the Rooker-Feldman doctrine and the Anti-Injunction Act, that the Court should abstain from adjudicating the case based on Younger v. Harris, 401 U.S. 37 (1971), and that issue preclusion bars adjudication of the alleged claims. They argue, in the alternative, that most of the claims are time-barred and all of them fail to state a claim for which relief can be granted. Having reviewed the motions, the briefs and the record, the Court is prepared to issue its ruling.
[21] II.
[22] Defendants move for dismissal for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted. Defendants make a facial attack on the subject matter jurisdiction of this Court. In reviewing a facial attack, a trial court takes the allegations in the complaint as true, which is a similar safeguard employed under 12(b)(6) motions to dismiss. Ohio Nat’l Life Ins. Co. v. United States, 922 F.2d 320, 325 (6th Cir. 1990); see also Nat’l Ass’n of Minority Contractors v. Martinez, 248 F.Supp.2d 679, 681 (S.D. Ohio 2002) (applying standard).
[23] When ruling on a Rule 12(b)(6) motion to dismiss, the Court must construe the complaint liberally in a light most favorable to the non-moving party. Bloch v. Ribar, 156 F.3d 673, 677 (6th Cir. 1998). The Court “must accept as true all of the factual allegations contained in the complaint.” Erickson v. Pardus, — U.S. —, 127 S.Ct. 2197, 2200 (2007) (citing Bell Atl. Corp. v. Twombly, — U.S. —, 127 S.Ct. 1955, 1965 (2007) (citations omitted)). See also, NicSand, Inc. v. 3M Co., 507 F.3d 442, 449 (6th Cir. 2007) (en banc) (viewing a complaint “through the prism of Rule 12(b)(6) [requires] us to accept all of its allegations and all reasonable inferences from them as true”) (citing Mich. Paytel Joint Venture v. City of Detroit, 287 F.3d 527, 533 (6th Cir. 2002)). When reviewing a Rule 12(b)(6) motion to dismiss, the Court must “determine whether the plaintiff can prove a set of facts in support of its claims that would entitle it to relief.” Daubenmire v. City of Columbus, 507 F.3d 383, (6th Cir. Nov. 6, 2007) (quoting Bovee v. Coopers & Lybrand C.P.A., 272 F.3d 356, 360 (6th Cir. 2001)). In order to preclude dismissal under Rule 12(b)(6), a complaint must contain either direct or inferential allegations which comprise all of the essential, material elements necessary to sustain a claim for relief under some viable legal theory. Lewis v. ACB Bus. Serv., Inc., 135 F.3d 389, 406 (6th Cir. 1998).
[24] III.
[25] Defendants argue that the district court lacks subject matter jurisdiction to adjudicate the claims and grant the requested relief based on the Rooker-Feldman doctrine, issue preclusion, the Anti-Injunction Act, and the Younger abstention doctrine. The Court will address each argument in turn.
[26] A. Rooker-Feldman
[27] First, Defendants argue that the Rooker-Feldman doctrine prohibits this federal district court from granting the Smith’s request for declaratory and injunctive relief (i.e., declaring the refinancing Loan illegal and void, and enjoining the foreclosure sale of their residence). The Smiths disagree.
[28] The Rooker-Feldman doctrine stands for the proposition that federal district courts generally lack subject matter jurisdiction to review state court judgments. It derives from two Supreme Court decisions: Dist. of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983) and Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923).
[29] For years, a standard employed by the Sixth Circuit in determining whether Rooker-Feldman barred federal court adjudication of claims was whether the claims in the federal case were “inextricably intertwined” with claims previously asserted in a state court proceeding. See, e.g., Tropf v. Fidelity Nat’l Title Ins. Co., 289 F.3d 929, 937-38 (6th Cir. 2002); Kafele v. Lerner, Sampson & Rothfuss, LPA, 161 Fed. Appx. 487, 489-90 (citing Catz v. Chalker, 142 F.3d 279, 293 (6th Cir. 1998)). “Where federal relief [could] only be predicated upon a conviction that the state court [was] wrong,” the federal claims were determined to be inextricably intertwined with the state court claims and thus barred by Rooker-Feldman from adjudication in federal court. Id.
[30] After various circuits adopted differing interpretations regarding the breadth of Rooker-Feldman, the Supreme Court recently took the opportunity to clarify the doctrine’s limited scope. In re Hamilton, 540 F.3d 367-371 (6th Cir. 2008) (citing Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280 (2005)).
[31] The Rooker-Feldman doctrine, we hold today, is confined to cases of the kind from which the doctrine acquired its name: cases brought by state court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.
[32] Id. (quoting Exxon, 544 U.S. at 284).
[33] Following Exxon, the Sixth Circuit further refined the doctrine, distinguishing between plaintiffs who bring an impermissible attack on a state court judgment, in which case Rooker-Feldman does apply — and plaintiffs who assert independent claims before the district court, in which case Rooker-Feldman does not apply. Pittman v. Cuyahoga County Dep’t of Children & Family Serv., 241 Fed. Appx. 285, 287 (6th Cir. 2007) (citing McCormick v. Braverman, 451 F.3d 382, 393 (6th Cir. 2006)). The Sixth Circuit stated that the pertinent inquiry is whether the “source of the injury” upon which a plaintiff bases his federal claim is the state court judgment:
[34] If the source of the injury is the state court decision, then the Rooker-Feldman doctrine would prevent the district court from asserting jurisdiction. If there is some other source of injury, such as a third party’s actions, then the plaintiff asserts an independent claim.
[35] McCormick, 451 F.3d at 394-95. Thus, the Sixth Circuit concluded that jurisdiction is proper if a plaintiff presents an independent claim in federal court, “albeit one that denies a legal conclusion that a state court has reached in a case to which he was a party.” Id. (quoting GASH Assocs. v. Rosemont, 995 F.2d 726, 728 (7th Cir. 1993)). In fact, the Sixth Circuit recently reversed a ruling that Rooker-Feldman barred claims (including a request for rescission of a mortgage loan) brought by a mortgagor against individuals involved in state mortgage foreclosure proceedings where the source of injury was the defendants’ conduct preceding the foreclosure decree. Brown v. First Nationwide Mortg. Corp., 206 Fed. Appx. 436 (6th Cir. 2006). See also Lawrence v. Welch, 531 F.3d 364, 369 (6th Cir. 2008) (holding that claims that certain defendants committed fraud and misrepresentation in a state probate proceeding did not allege an injury caused by state court judgment and were not barred by Rooker-Feldman; however, claims that the probate court’s order of receivership violated the plaintiff’s constitutional rights were barred because “the count alleges that the state court order itself was illegal and harmed plaintiff”); Pittman, 241 Fed. Appx. at 288 (holding that claims of improper conduct by employees of a family services agency were not barred by Rooker-Feldman because their actions were independent from a juvenile court’s custody decision; plaintiff did not seek reversal of the custody order); Loriz v. Connaughton, 233 Fed. Appx. 469, 474-75 (6th Cir. 2007) (holding that a landowners’ claims challenging a zoning decision as unconstitutional were barred by Rooker-Feldman).
[36] Here, the Smiths allege that Defendants violated the Homeowner Equity Protection Act (“HOEPA“), 15 U.S.C. § 1639, by charging excessive fees, expenses and costs exceeding 10% of the financed amount (Count 1); Defendants violated the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2601, by accepting charges for services not performed (Count 2); Defendants violated the Truth in Lending Act (“TILA”), 15 U.S.C. § 1605, by failing to disclose certain charges associated with the Loan (Count 3); Defendants violated the Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681s-2(b), by failing to undertake an investigation of disputed credit information (Count 4); Defendants violated the Ohio Consumer Protection Act, O.R.C. § 1345.01 by failing to disclose, altering and misrepresenting material terms of the Loan (Count 5); Defendants Motion and Grober violated the Ohio Mortgage Brokers Act by misrepresenting and concealing the knowledge that the Smiths would not qualify for the loan after the first two years; Defendants fraudulently misrepresented the Loan terms (Count 7); Defendants breached their fiduciary duty to the Smiths (Count 8); Defendants enjoyed unjust enrichment by their unlawful conduct (Count 9); Defendants engaged in a civil conspiracy (Count 10); and Defendants violated the Ohio RICO statute, O.R.C. § 2929.32, by their fraudulent conduct (Count 11). These are all independent claims against third parties where the source of injury is not the state court foreclosure judgment itself but the alleged conduct of these particular parties leading up to and encompassing the refinancing transaction. Because the source of injury is not the state court judgment, Rooker-Feldman does not bar adjudication of these claims in federal court.*fn2
[37] B. Issue Preclusion
[38] Next, Defendants argue that issue preclusion prevents the Smiths from seeking a declaration that the Loan was illegal and void, rescission of the Loan, and termination of the Loan documents. The Full Faith and Credit Act, 28 U.S.C. § 1738, requires federal courts to give state court judgments the same preclusive effect that the state would afford such judgment. McCormick, 451 F.3d at 397 (citing Exxon, 125 S.Ct. at 1527). Ohio’s doctrine of issue preclusion, also known as collateral estoppel, holds that a party asserting issue preclusion has the burden of establishing the following elements:
[39] (1) the party against whom estoppel is sought was a party or in privity with a party to the prior action;
[40] (2) there was a final judgment on the merits in the previous case after a full and fair opportunity to litigate the issue;
[41] (3) the issue must have been admitted or actually tried and decided and must be necessary to the final judgment; and
[42] (4) the issue must have been identical to the issue involved in the prior suit.
[43] Dye v. City of Warren, 367 F. Supp. 2d 1175, 1184-85 (N.D. Ohio 2005); see also, Knott v. Sullivan, 418 F.3d 561, 568 (6th Cir. 2005); State ex rel. Stacy v. Batavia Local Sch. Dist. Bd. of Educ., 779 N.E.2d 216, 219 (Ohio 2002) (“[T]hat a fact or a point that was actually and directly at issue in a previous action, and was passed upon and determined by a court of competent jurisdiction, may not be drawn into question in a subsequent action between the same parties or their privies, whether the cause of action in the two actions be identical or different.”). Issue preclusion cannot be invoked because similar issues were previously litigated and decided; rather, the same issue must have been actually litigated and decided. See Thompson v. Wing, 637 N.E.2d 917 (Ohio 1994); Goodson v. McDonough Power Equip., Inc., 443 N.E.2d 978, 987 (Ohio 1983) (“Collateral estoppel precludes relitigation only when the identical issue was actually decided in the former case.”).
[44] Defendants argue that issue preclusion is proper because the issue of the Loan’s validity was actually litigated and decided in the Foreclosure case when the state court determined that LaSalle was owed money on the note in connection with the Loan. Defendants reason that the Smiths’ claims are precluded since the previous and present issues both encompass the broad topic of the Loan’s validity. The Smiths counter that the issues in the Complaint were not “passed upon or determined” by the Mahoning County Court. Instead, the issues raised here deal with fraud, violations of federal lending laws, violations of the Ohio Consumer Practices Act, violations of the Ohio RICO Act and conspiracy, all of which are distinct from the question of the Loan’s validity.
[45] Based on case law, the Court cannot apply the broad application of the term “issue” that is espoused by Defendants to the claims in this case. The Court finds that Defendants have failed to show that the claims in the Complaint are identical to issues actually litigated and decided by the Mahoning County Court in the Foreclosure case.
[46] C. Younger Abstention
[47] Defendants argue that the Court must abstain from adjudicating this case based on Younger v. Harris, 401 U.S. 37 (1971). Under the abstention doctrine articulated in Younger, “when state proceedings are pending, principles of federalism dictate that the constitutional claims should be raised and decided in state court without interference by the federal courts.” Doscher v. Menifee Circuit Court, 75 Fed. Appx. 996, 997 (6th Cir. 2003) (citing Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 17 (1987)). “[O]nly exceptional circumstances justify a federal court’s refusal to decide a case in deference to the States.” Leatherworks P’ship v. Boccia, 245 Fed. Appx. 311, 317 (6th Cir. 2007) (citing New Orleans Pub. Servs., Inc. v. Council of the City of New Orleans, 491 U.S. 350, 368 (1989)). In order for a federal district court to abstain from hearing a claim pursuant to Younger, it must find that (1) there is an ongoing state judicial proceeding, (2) the proceeding implicates important state interests, and (3) there is an adequate opportunity in the state proceeding to raise constitutional challenges. Id. (citing Middlesex County Ethics Comm’n v. Garden State Bar Ass’n, 457 U.S. 423 (1982)). The court should proceed deliberately “to ensure that abstention remains ‘the exception, not the rule.'” Id. (quoting New Orleans, 491 U.S. at 359, in turn quoting Hawaii Hous. Auth. v. Midkiff, 467 U.S. 229, 236 (1984)). Because the Smiths have not raised any constitutional challenges to the foreclosure judgment, Younger does not require this Court to abstain from adjudicating the claims before it.
[48] D. Anti-Injunction Act
[49] Defendants argue that the Anti-Injunction Act, 28 U.S.C. § 2283, prohibits the Court from issuing the requested injunctive relief. The Court agrees.
[50] The Anti-Injunction Act states, in full, that “[a] court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.”
[51] 28 U.S.C. § 2283. The Supreme Court has acknowledged that the Act creates “an absolute prohibition against enjoining state court proceedings, unless the injunction falls within one of the three specifically defined exceptions.” Atlantic Coast Line R.R. Co. v. Bhd. of Locomotive Eng’rs, 398 U.S. 281, 286-87 (1970). The three exceptions are: (1) where Congress expressly authorizes, (2) where necessary in aid of the court’s jurisdiction, or (3) where necessary to protect or effectuate the court’s judgments. Martingale LLC v. City of Louisville, 361 F.3d 297, 302 (6th Cir. 2004); see 28 U.S.C. § 2283. Once the Anti-Injunction Act defense is raised, the party pursuing the injunction bears the burden of establishing that the injunction falls within one of the exceptions. See id.
[52] The Smiths contend that the Court can enjoin the foreclosure sale because the Ohio RICO statute expressly authorizes injunctive relief. (ECF No. 20, at 5-6.) To qualify as an “expressly authorized” exception to the Anti-Injunction Act, the test is “whether an Act of Congress, clearly creating a federal right or remedy enforceable in a federal court of equity, could be given its intended scope only by the stay of a state court proceeding.” Mitchum v. Foster, 407 U.S. 225, 238 (1972); see also, Atlantic Coast Line R.R., 398 U.S. at 297 (“Any doubts as to the propriety of a federal injunction. . . should be resolved in favor of permitting the state courts to proceed . . .”). The Ohio RICO statute permits an injunction, but the statute was not “expressly authorized” by an Act of Congress. Therefore, it does not fall within any exception to the Anti-Injunction Act.
[53] Thus, to the extent that the Smiths are asking the federal district court to stay the Foreclosure case, the request is moot because the state court has stayed the Foreclosure case pending the adjudication of claims presented in this federal case. To the extent that the Smiths are asking the federal district court to enjoin the foreclosure sale ordered by the state court, the federal district court is barred from providing that relief by the Anti-Injunction Act.
[54] IV.
[55] Defendants argue that all the federal claims and most of the state law claims are time-barred. The Court finds that all the federal claims are barred by the relevant statutes of limitations for the following reasons.
[56] A. HOEPA (Count I) and TILA (Count III)
[57] Count I alleges that “Defendants”*fn3 engaged in predatory lending practices, charged “excessive fees, expenses and costs which exceeded more than 10% of the amount financed” and failed to make required disclosures to the Smiths no later than 3 days prior to closing in violation of HOEPA, 15 U.S.C. § 1639. Count III alleges that Defendants failed to disclose certain charges incident to the extension of credit to the Smiths that were associated with the loan transaction on the Truth in Lending Statement and calculated the annual percentage rate based upon improperly calculated, undisclosed or inconsistent amounts — all in violation of TILA statutes and regulations.
[58] The TILA is a federal consumer protection statute intended to promote the informed use of credit by requiring certain uniform disclosures from creditors. In re Community Bank of Northern Virginia, 418 F.3d 277, 303-04 (3d Cir. 2005) (citing15 U.S.C. § 1607, as implemented by Regulation Z, 12 C.F.R. §§ 226.1 et seq.) Creditors who make loans secured by a borrower’s principal dwelling are required to provide borrowers with disclosures such as the annual percentage rate, the finance charge, the amount financed, the total payments, and the payment schedule. Id. at 304 (citing 12 C.F.R. § 226.23) (quotations omitted). The HOEPA, enacted as an amendment to the TILA, creates a special class of regulated loans that are made at higher interest rates or with excessive costs and fees. Id. These loans are not only subject to the restriction on terms commonly used by predatory lenders to manipulate the cost of the loans, but are also subject to special disclosure requirements. Id. (citing 15 U.S.C. § 1639). Under 15 U.S.C. § 1640(e), TILA and HOEPA must be brought “within one year from the date of the occurrence of the violation.”
[59] Defendants argue that the HOEPA and TILA claims are barred by the relevant one-year statute of limitations. These claims, which are based on the failure of Defendants to disclose certain material information leading up to or at the time the Loan transaction was entered, accrued no later than the closing date of March 5, 2004. As such, the claims expired one year later on March 5, 2005.
[60] Rather than address the many and varied claims independently, the Smiths generally assert that Defendants’ pattern “during the life of the mortgage loan, of defrauding the Smiths including failing to credit payments made, incorrectly calculating interest on the accounts and failing to accurately debit fees” entitles all of their claims to equitable tolling. Putting aside for the moment the dubious question of whether accounting errors fall within the ambit of TILA or HOEPA (or RESPA or FCRA for that matter), it is true that the HOEPA and TILA limitations statute may be subject to equitable tolling. Borg v. Chase Manhattan Bank USA, NA, 247 Fed. Appx. 627, 633 (6th Cir. 2007). When equitable tolling is applied, the one-year period begins to run when the borrower discovers or had reasonable opportunity to discover the fraudulent concealment of charges. Id. (citing Jones v. TransOhio Sav. Ass’n, 747 F.2d 1037, 1041 (6th Cir. 1984)). The Smiths argue that there was no practical way for them to know about the alleged fraudulent concealment of charges prior to being sued for foreclosure. Giving the Smiths every benefit of the doubt (i.e., assuming that the statute was tolled until the foreclosure action was commenced on October 18, 2005 or until Nancy Smith filed her answer on December 29, 2005 and Ronald Smith filed his answer on January 10, 2006), the Smiths still had until October 18, 2006 (or December 29, 2006 or January 10, 2007) to file their TILA and HOEPA claims against the appropriate entities and failed to do so.
[61] Moreover, “[a]n obligor’s right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first.”
[62] 15 U.S.C. § 1635(f). The Supreme Court has interpreted this section to be an absolute three-year bar to claims for rescission under TILA or HOEPA. Beach v. Ocwen Fed. Bank, 523 U.S. 410, 411-12 (1998) (holding that “§ 1635(f) completely extinguishes the right of rescission at the end of the 3-year period.”). Accordingly, the Smiths’ right to rescission of the refinancing loan under TILA and HOEPA was absolutely statutorily extinguished on March 5, 2007.
[63] The Court notes in passing that nothing prevented the Smiths from adding these Defendants to their foreclosure case and bringing these claims (or any of the other claims) against them in the course of those proceedings. See, e.g., 15 U.S.C. § 1536(f). For all these reasons, Counts I and III are barred by the statute of limitations.
[64] B. RESPA (Count II)
[65] Count II alleges that Defendants’ conduct in accepting charges for settlement services not rendered violates 12 U.S.C. § 2607 of the RESPA, and seek an amount equal to three times the amount of charges paid for “settlement services” under § 2607(d)(2). Among the abusive practices Congress sought to eliminate through the enactment of RESPA was the unlawful payment of referral fees, kickbacks and other unearned fees. Sosa v. Chase Manhattan Mortg. Corp., 348 F.3d 979, 981 (11th Cir. 2003) (citation omitted); see also 12 U.S.C. §§ 2601(b), 2607. Claims for violations of § 2607 of the RESPA must be brought within 1 year of the violation. 12 U.S.C. § 2614. There is no dispute that this claim accrued on March 5, 2004 and that it expired on March 5, 2005. The Smiths acknowledge that the Sixth Circuit has yet to decide whether equitable tolling applies to claims brought under § 2607 of the RESPA. See, e.g., Egerer v. Woodland Realty, Inc., No. 1:06 CV 789, 2007 WL 3467263 at *4 (W.D. Mich. Nov. 13, 2007). Even assuming that equitable tolling applies, it would fail here for the same reasons set forth respecting the TILA and HOEPA claims. Accordingly, Count II is time-barred.
[66] C. FCRA (Count IV)
[67] In Count IV, the Smiths assert that “Defendants wrongfully, improperly, and illegally reported negative information as to the Smiths to one or more credit reporting agencies” and that the Smiths are thereby entitled to maintain a private cause of action against Defendants pursuant to § 1681s-2(b). Compl. ¶¶ 73, 74. The Smiths claim that they are entitled to recover damages for Defendants’ alleged negligent non-compliance with the FCRA under § 1681o, and punitive damages for Defendants’ alleged willful noncompliance with the FCRA under § 1681(n)(a)(2). Id. ¶¶ 75, 76.
[68] Congress enacted the FCRA as part of the Consumer Credit Protection Act “to ensure fair and accurate credit reporting, promote efficiency in the banking system, and protect consumer privacy.” Safeco Ins. Co. of Am. v. Burr, 127 S.Ct. 2201 (2007) (citing 84 Stat. 1128, 15 U.S.C. § 1681 and TRW Inc. v. Andrews, 534 U.S. 19 (2001)). The Sixth Circuit has explained that the FCRA is aimed at protecting consumers from inaccurate information in consumer reports and establishing credit reporting procedures that utilize correct, relevant, up-to-date information in a confidential and responsible manner. Jones v. Federated Fin. Reserve Corp., 144 F.3d 961, 965 (6th Cir. 1998) (citation omitted).
[69] Under § 1681s-2(b), those who furnish information to credit reporting agencies have the obligation to undertake an investigation upon receipt of notice of dispute regarding credit information that they had previously furnished. Defendants contend that a claim for violation of § 1681s-2(b) is time-barred by the relevant statute of limitations. Furthermore, Defendants argue that the Smiths have failed to state a claim under § 1681s-2(b).
[70] Violations of the FCRA may be brought no later than the earlier of (1) two years after the date of discovery by the plaintiff that is the basis for such liability or (2) five years after the date on which the violation that is the basis for such liability occurs. 15 U.S.C. § 1681p. The Smiths have not alleged the date on which any alleged § 1681s-2(b) violation occurred. Indeed, any claims based violations of the FCRA prior to June 17, 2006 are time-barred.
[71] Furthermore, this claim fails to state a claim for which relief can be granted for two reasons. First, it’s not entirely clear in the Sixth Circuit whether a consumer has a private cause of action against a furnisher of information under § 1681s-2(b). Compare Downs v. Clayton Homes, Inc., 88 Fed. Appx. 851, 853 (6th Cir. 2004) (“If it is assumed that a private right of action exists under § 1681s-2(b), . . . “) and Zamos v. Asset Acceptance, LLC, 423 F.Supp.2d 777 (N.D. Ohio 2006) (“[D]isputes currently exist among the courts as to whether the FCRA creates a private cause of action for a consumer against a furnisher of credit information.”) with Bach v. First Union Nat’l Bank, 149 Fed. Appx. 354, 359-60 (6th Cir. 2005) (“While a consumer cannot bring a private cause of action for a violation of a furnisher’s duty to report truthful information, a consumer may recover damages for . . . violation of . . . § 1681s-2(b)(A)-(D).”) and Sweitzer v. Am. Express Centurion Bank, 554 F.Supp.2d 788, 794 (noting that “[t]he majority consensus among the courts that have addressed the issue is that . . . § 1681s-2(b) created a private right of action by a consumer against a data furnisher,” and declining to follow the minority view espoused in Zamos).
[72] Second, assuming for the moment that there is such cause of action, the Smiths have not alleged that they notified a credit reporting agency that (1) they had a dispute over inaccurate information on their credit report that was furnished to the agency by any of the Defendants, (2) the agency notified Defendants of the dispute, and (3) Defendants failed to undertake an investigation of the dispute. The Smiths assert only that “Defendants” negligently or willfully furnished inaccurate information to the credit reporting agencies. These allegations are insufficient to state a claim for relief, if there is such a thing, under § 1681s-2(b).
[73] For all these reasons, Count IV is dismissed.
[74] V.
[75] The Smiths filed this case in federal court based on the Court’s federal question jurisdiction over the four federal claims, 28 U.S.C. § 1331, and supplemental jurisdiction over the seven state-law claims, 28 U.S.C. § 1367(a). Compl. ¶¶ 8, 10. Because the Court has dismissed the federal claims, the Court declines to exercise its supplemental jurisdiction over the state-law claims. See 28 U.S.C. § 1367(c)(3); see also United Mine Workers v. Gibbs, 383 U.S. 715, 726 (1966) (“[I]f the federal claims are dismissed before trial, . . . the state claims should be dismissed as well.”); Experimental Holdings, Inc. v. Farris, 503 F.3d 514, 521 (6th Cir. 2007) (“Generally, once a federal court has dismissed a plaintiff’s federal law claim, it should not reach state law claims.”) Thus, the state-law claims (Counts V through XI) are hereby dismissed without prejudice.
[76] VI.
[77] In summary, the Court GRANTS IN PART the pending Motions as follows. The Court grants the pending Motions with respect to Counts I through IV and dismisses those claims with prejudice for reasons set forth in Section III. The Court dismisses without prejudice Counts V through XI for the reason articulated in Section IV. The Court also notes that, if the federal claims were not dismissed, the Court would be unable to grant the Smiths’ request to enjoin the foreclosure sale of their home as ordered by the state court by the federal Anti-Injunction Act.
[79] Dan Aaron Polster United States District Judge

Opinion Footnotes

[80] *fn1 The Court notes in passing that the Smiths defaulted on the Loan well before entering the adjustable rate portion of their refinancing program.
[81] *fn2 Given the limited scope of Rooker-Feldman, the Court is concerned that future plaintiffs may use the federal courts to collaterally attack state court judgments, as in this case. The Sixth Circuit acknowledged this problem, but noted that “this is an inevitable byproduct of the Supreme Court’s confining the scope of Rooker-Feldman in Exxon Mobil, 544 U.S. at 284. . ..” Pittman, 241 Fed. Appx. at 289.
[82] *fn3 The Court takes this opportunity to mention that the Smiths’ referral to “Defendants” as targets of all their allegations and claims is unduly vague. It is difficult to determine, for instance, how BSMRC can be liable for failure to provide the proper truth-in-lending disclosures on March 5, 2004 or what role Option One Mortgage plays in this case at all.


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Sterten v. Option One Mortgage Corp.

Posted on January 9, 2009. Filed under: bankruptcy, Case Law, Mortgage Law, Truth in Lending Act | Tags: , , , , , , , |

A provision in the Truth in Lending Act that excuses minor inaccuracies on the part of lenders is not an “affirmative defense” that must be specifically raised by the defendant, but instead is a “general defense” that cannot be waived, the 3rd U.S. Circuit Court of Appeals has ruled.

The ruling in Sterten v. Option One Mortgage Corp. could prove to be a significant boon to banks by relaxing the rules for reaping the benefits of a TILA amendment that was designed to prevent creditors from being subject to “extraordinary liability” for small disclosure discrepancies.

The unanimous three-judge panel upheld a decision by U.S. District Judge Timothy J. Savage who had concluded that a bankruptcy judge had erred by first dismissing the debtor’s claims under TILA sua sponte due to the statute’s “tolerances for accuracy” provision, but later reversing himself on the grounds that Option One had waived that defense by failing to raise it.

Savage, in a March 2007 decision, held that “because the ‘tolerances for accuracy’ provision is not an affirmative defense,” the original verdict by Bankruptcy Judge Kevin J. Carey in favor of Option One “was correct and should not have been disturbed.”

Now the 3rd Circuit has agreed, finding that, under Rule 8(c) of the Federal Rules of Civil Procedure, the “tolerances for accuracy” provision should not be treated as an affirmative defense. Writing for the court, U.S. Circuit Judge Thomas L. Ambro found that Rule 8(c)’s key provision — that an affirmative defense will be deemed to be waived unless asserted — was designed to avoid “surprise and undue prejudice.”

In the case of the tolerances for accuracy defense, Ambro found, there is no risk that surprise would harm the plaintiff.

“The analysis a plaintiff must undertake to show any undisclosed finance charges under the Truth in Lending Act — that there were discrepancies between what was charged and what was disclosed in the Truth in Lending Disclosure Statement, and that those undisclosed fees fall within the Act’s definition of a ‘finance charge’ — is the same analysis required to show that the undisclosed charges exceeded [the tolerance for accuracy’s] range of error,” Ambro wrote.

As a result, Ambro said, “[W]e see no reason to think that Sterten suffered any ‘unfair surprise’ as a consequence of Option One’s failure to plead specifically the tolerances for accuracy defense.”

According to court papers, debtor Gaye L. Sterten took out a $132,000 loan from Option One in February 2001 to refinance a second mortgage on her home and to consolidate her medical and credit card bills. Nearly two years later, Sterten sent a letter to Option One contending that the closing of the loan failed to comply with the Truth in Lending Act and requesting a recision of the loan.

When Option One disputed her right to rescind, Sterten filed a Chapter 13 bankruptcy petition and Option One filed a proof of claim. Sterten responded by filing an adversary proceeding seeking recision of the loan.

The suit alleged that Sterten was never provided with either her Truth in Lending disclosure statement or her notice of right to cancel form; and that the finance charges were not accurately disclosed.

In its formal answer to the suit, Option One denied both allegations and said that it had “acted at all times relevant hereto in full compliance with all applicable laws and/or acts.”

After a bench trial, Carey found Sterten was less credible than the mortgage broker and therefore concluded that she had received the required forms.

On the issue of the finance charges, Carey found that only two — a $25 “mark up” in the appraisal fee and $32 charged for notary services — qualified as finance charges.

Carey then sua sponte applied TILA‘s tolerances for accuracy provision and concluded that, because the $57 in non-disclosed finance charges were within the tolerance range, Option One’s disclosure was “accurate as a matter of law.”

TILA’s tolerances for accuracy provision states that finance charges “shall be treated as being accurate” if they do not vary from the actual finance charge by more than $100, or, in a claim seeking recision of a loan, if the amount disclosed does not vary from the actual finance charge by more than half a percent of the loan total.

Sterten’s lawyer, David A. Scholl, urged Carey to reconsider, arguing that the court should not have applied the tolerances for accuracy provision because Option One had failed to raise it as an affirmative defense and had therefore waived it.

Carey agreed and vacated his judgment, declared a recision and awarded nearly $20,000 in attorney fees.

While Option One’s appeal to U.S. District Court was pending, Carey held a remedy hearing and concluded that Sterten had a repayment obligation of about $119,000, payable in 302 monthly installments. But Option One later prevailed in its appeal when Savage ruled that Carey’s original verdict should be reinstated because the tolerances for accuracy provision is not a waivable defense.

Now the 3rd Circuit has ruled that Savage correctly ordered that the original verdict in favor of Option One be reinstated.

Ambro, who was joined by Judges Maryanne Trump Barry and Leonard I. Garth, rejected the argument that Option One had waived the defense by failing to raise it at any stage of the litigation.

Instead, Ambro found that Sterten “cannot establish that she suffered any prejudice” as a result of Option One’s failure to raise the issue.

“We do not dispute that the most prudent course for Option One was to argue — in its answer or otherwise — that, if it made any disclosure errors, those errors fell within the tolerance range rather than relying on the Bankruptcy Court’s sua sponte application,” Ambro wrote.

“Still, Option One’s general denial that it committed any disclosure violations was sufficient to preserve the tolerance issue. Given that denial, and given the absence of any real prejudice suffered by Sterten, the Bankruptcy Court’s sua sponte application … was not improper.” Option One was represented in the appeal by attorney Donna M. Doblick of Reed Smith’s Pittsburgh office. Debtor’s attorney Scholl could not be reached for comment.

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