No bar to attorneys’ fees under TILA

Posted on September 15, 2009. Filed under: Case Law, Foreclosure Defense, Legislation, Mortgage Audit, right to rescind, Truth in Lending Act | Tags: , , , , , , , |

A car buyer whose damages under the Truth in Lending Act were slashed by the Supreme Court is nevertheless entitled to attorneys’ fees for that portion of his otherwise “successful action,” the 4th U.S. Circuit Court of Appeals has held.

The decision affirms a fee award of more than $80,000 to Bradley Nigh, who claimed Koons Buick Pontiac GM Inc. pressured him into signing multiple loan documents and purchasing an “alarm silencer” he hadn’t ordered.A federal jury in Alexandria, Va., awarded Nigh about $25,000, or twice the financing charges he had paid, in May 2001.

Koons appealed to the 4th Circuit, which affirmed, and then to the Supreme Court, which likewise affirmed on liability but capped the TILA damages at $1,000.Koons appealed again after the U.S. District Court awarded Nigh fees on remand. Last week, the 4th Circuit affirmed. Despite the cap, the 4th Circuit said, Nigh brought a “successful action” under TILA, receiving the maximum amount allowed by the federal law.

Congress, which set the $1,000 cap, likewise included the fee-shifting provisions because it believes it is in the best interest of society for big companies to act honestly, Judge Roger Gregory wrote for the appeals court; but unless the injured consumer has hope of having his costs covered by the guilty defendant, he will never bring the case.

Read Full Post | Make a Comment ( 1 so far )

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: , , , , , , , , , , , , , , , , , , |

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND. Hon. Mary M. Lisi, U.S. District Judge.
Melfi v. WMC Mortg. Corp., 2009 U.S. Dist. LEXIS 1454 (D.R.I., Jan. 9, 2009)

DISPOSITION:

Affirmed.

COUNSEL: Christopher M. Lefebvre with whom Claude F. Lefebvre and Christopher M. Lefebvre, P.C. were on brief for appellant.

Jeffrey S. Patterson with whom David E. Fialkow and Nelson Mullins Riley & Scarborough, LLP were on brief for appellees, Deutsche Bank National Trust Company, N.A. and Wells Fargo Bank, N.A.

JUDGES: Before Boudin, Hansen, * and Lipez, Circuit Judges.
*

Of the Eighth Circuit, sitting by designation.

OPINION BY: BOUDIN

OPINION

BOUDIN, Circuit Judge. In April 2006, Joseph Melfi refinanced his home mortgage with WMC Mortgage Corporation (“WMC”). At the closing, Melfi received from WMC a notice of his right to rescind the transaction. The notice is required for such a transaction by the Truth in Lending Act (“TILA”), 15 U.S.C. § 1635(a) (2006). Assuming that the notice complies with TILA, a borrower is given three “business days” to rescind the transaction; otherwise, the period is much longer. Id. The question in this case is whether the notice given Melfi adequately complied.

The three-day period aims “to give the consumer the opportunity to reconsider any transaction which would  [*2]  have the serious consequence of encumbering the title to his [or her] home.” S. Rep. No. 96-368, at 28 (1979), reprinted in 1980 U.S.C.C.A.N. 236, 264. Under TILA, the requirements for the notice are established by the Federal Reserve Board (“the Board”) in its Regulation Z. 12 C.F.R. § 226.23 (2007). Failure to provide proper notice extends to three years the borrower’s deadline to rescind. Id. § 226.23 (a)(3).

About 20 months after the closing, Melfi attempted to rescind the transaction. The incentives for a borrower to do so may be substantial where a new loan is available, especially if rates have fallen or substantial interest has been paid during the period of the original loan. “When a consumer rescinds a transaction . . . the consumer shall not be liable for any amount, including any finance charge” and “the creditor shall return any money or property that has been given to anyone in connection with the transaction . . . .” 12 C.F.R. 226.23(d)(1), (2).

Melfi argued that the notice of his right to cancel was deficient because it left blank the spaces for the date of the transaction (although the date was stamped on the top right corner of the notice) and the actual deadline to  [*3]  rescind. WMC and co-defendants Deutsche Bank and Wells Fargo (the loan’s trustee and servicer, respectively) refused to allow the rescission, and Melfi then brought this action in the federal district court in Rhode Island.

The district court, following our decision in Palmer v. Champion Mortgage, 465 F.3d 24 (1st Cir. 2006), asked whether a borrower of average intelligence would be confused by the Notice. Melfi v. WMC Mortgage Corp., No. 08-024ML, 2009 U.S. Dist. LEXIS 1454, 2009 WL 64338, at *1 (D.R.I. Jan. 9, 2009). The court ruled that even if the omissions in the notice were violations, they were at most technical violations that did not give rise to an extended rescission period because the notice was clear and conspicuous despite the omissions, and it dismissed Melfi’s complaint. 2009 U.S. Dist. LEXIS 1454, [WL] at *3.

Melfi now appeals. Our review is de novo, accepting all of the well-pleaded facts in the complaint as true and drawing reasonable inferences in favor of Melfi. Andrew Robinson Int’l, Inc. v. Hartford Fire Ins. Co., 547 F.3d 48, 51 (1st Cir. 2008). We may consider materials incorporated in the complaint (here, the notice Melfi received) and also facts subject to judicial notice. In re Colonial Mortgage Bankers Corp., 324 F.3d 12, 14 (1st Cir. 2003).

TILA  [*4]  provides that “[t]he creditor shall clearly and conspicuously disclose, in accordance with regulations of the Board, to any obligor [here, Melfi] in a transaction subject to this section the rights of the obligor under this section.” 15 U.S.C. § 1635(a). Regulation Z says what the notice of the right to cancel must clearly and conspicuously disclose; pertinently, the regulation requires that the notice include “[t]he date the rescission period expires.” 12 C.F.R. § 226.23(b)(1)(v). The Board has created a model form; a creditor must provide either the model form or a “substantially similar notice.” 12 C.F.R. § 226.23(b)(2). The use of the model form insulates the creditor from most insufficient disclosure claims. 15 U.S.C. § 1604(b). WMC gave Melfi the model form, but the spaces left for the date of the transaction and the date of the rescission deadline were not filled in. The form Melfi received had the date of the transaction stamped at its top (but it was not so designated) and then read in part:

You are entering into a transaction that will result in a mortgage/lien/security interest on your home. You have a legal right under federal law to cancel this transaction, without cost,  [*5]  within THREE BUSINESS DAYS from whichever of the following events occurs LAST:

(1) The date of the transaction, which is ; or

(2) The date you receive your Truth in Lending disclosures; or

(3) The date you received this notice of your right to cancel.

. . . .

HOW TO CANCEL

If you decide to cancel this transaction, you may do so by notifying us in writing. . . .

You may use any written statement that is signed and dated by you and states your intention to cancel and/or you may use this notice by dating and signing below. Keep one copy of this notice because it contains important information about your rights.

If you cancel by mail or telegram, you must send the notice no later than MIDNIGHT of (or MIDNIGHT of the THIRD BUSINESS DAY following the latest of the three events listed above). If you send or deliver your written notice to cancel some other way, it must be delivered to the above address no later than that time.

. . . .

Melfi’s argument is straightforward. Regulation Z requires in substance the deadline for rescission be provided; one of the three measuring dates–the date of the transaction–was left blank (the other two are described but have no blanks); and therefore the notice  [*6]  was deficient and Melfi has three years to rescind. A number of district court cases, along with two circuit court opinions, support Melfi’s position, n1 although one of the circuit cases also involved more serious substantive flaws.

– – – – – – – – – – – – – – Footnotes – – – – – – – – – – – – – – -1

E.g., Semar v. Platte Valley Fed. Sav. & Loan Ass’n, 791 F.2d 699, 702-03 (9th Cir. 1986); Williamson v. Lafferty, 698 F.2d 767, 768-69 (5th Cir. 1983); Johnson v. Chase Manhattan Bank, USA N.A., No. 07-526, 2007 U.S. Dist. LEXIS 50569, 2007 WL 2033833, at *3 (E.D. Pa. July 11, 2007); Reynolds v. D & N Bank, 792 F. Supp. 1035, 1038 (E.D. Mich. 1992).
– – – – – – – – – – – – End Footnotes- – – – – – – – – – – – – –

The circuit cases are now elderly and may be in tension with later TILA amendments, but the statements that “technical” violations of TILA are fatal has been echoed in other cases. This circuit took a notably different approach in Palmer to determining whether arguable flaws compromised effective disclosure process. See also Santos-Rodriguez v. Doral Mortgage Corp., 485 F.3d 12, 17 (1st Cir. 2007). Following Palmer, district court decisions in this circuit concluded that failing to fill in a blank did not automatically trigger a right to rescind. n2

– – – – – – – – – – – – – – Footnotes – – – – – – – – – – – – – – -2

Bonney v. Wash. Mut. Bank, 596 F. Supp. 2d 173 (D. Mass. 2009); Megitt v. Indymac Bank, F.S.B., 547 F. Supp. 2d 56 (D. Mass. 2008);  [*7]  Carye v. Long Beach Mortgage Co., 470 F. Supp. 2d 3 (D. Mass. 2007).
– – – – – – – – – – – – End Footnotes- – – – – – – – – – – – – –

In Palmer, the plaintiff received a notice of her right to cancel that followed the Federal Reserve’s model form but the form was not received until after the rescission deadline listed on the notice. 465 F.3d at 27. Nonetheless, Palmer held that the notice “was crystal clear” because it included (as in the Federal Reserve’s model form) the alternative deadline (not given as a date but solely in descriptive form) of three business days following the date the notice was received, so the plaintiff still knew that she had three days to act. Id. at 29.

Palmer did not involve the blank date problem. Palmer, 465 F.3d at 29. But the principle on which Palmer rests is broader than the precise facts: technical deficiencies do not matter if the borrower receives a notice that effectively gives him notice as to the final date for rescission and has the three full days to act. Our test is whether any reasonable person, in reading the form provided in this case, would so understand it. Here, the omitted dates made no difference.

The date that Melfi closed on the loan can hardly have been unknown to him and was in fact hand stamped  [*8]  or typed on the form given to him. From that date, it is easy enough to count three days; completing the blank avoids only the risk created by the fact that Saturday counts as a business day under Board regulations, 12 C.F.R. § 226.2(a)(6), and the borrower might think otherwise. Lafferty, 698 F.2d at 769 n.3 (“[T]he precise purpose of requiring the creditor to fill in the date [of the rescission deadline] is to prevent the customer from having to calculate three business days”).

Nor does completing the blank necessarily tell the borrower how long he has to rescind. Where after the closing the borrower is mailed either the notice or certain other required information, the three days runs not from the transaction date but from the last date when the borrower receives the notice and other required documents. Melfi himself says he was given the form on the date of the closing and does not claim that there was any pertinent delay in giving him the other required disclosures. So the blanks in no way misled Melfi in this case.

So the argument for allowing Melfi to extend his deadline from three days to three years depends on this premise: that any flaw or deviation should be penalized automatically  [*9]  in order to deter such errors in the future. If Congress had made such a determination as a matter of policy, a court would respect that determination; possibly, this would also be so if the Board had made the same determination. See Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 844, 104 S. Ct. 2778, 81 L. Ed. 2d 694 (1984). Melfi argues at length that we owe such deference to the Board.

The answer is that there is no evidence in TILA or any Board regulation that either Congress or the Board intended to render the form a nullity because of an uncompleted blank in the form or similar flaw where, as here, it could not possibly have caused Melfi to think that he had months in order to rescind. The central purpose of the disclosure–the short notice period for rescission at will–was plain despite the blanks. Melfi’s argument assumes, rather than establishes, that a penalty was intended.

Some cases finding a blank notice form to be grounds for rescission even though harmless were decided under an earlier version of TILA. In 1995, Congress added a new subsection to TILA, titled “Limitation on Rescission Liability.” It provided that a borrower could not rescind “solely from the form of written notice  [*10]  used by the creditor . . . if the creditor provided the [borrower] the appropriate form of written notice published and adopted by the Board . . . .” Truth in Lending Act Amendments of 1995, Pub L. No. 104-29, § 5, 109 Stat. 271, 274 (1995) (codified at 15 U.S.C. § 1635(h)).

Read literally, this safe harbor may not be available to WMC because, while it used the Board’s form of notice, it did not properly fill in the blanks. But the TILA amendments were aimed in general to guard against widespread rescissions for minor violations. McKenna v. First Horizon Loan Corp., 475 F.3d 418, 424 (1st Cir. 2007). To this extent, Congress has now leaned against a penalty approach and, perhaps, weakened the present force of the older case law favoring extension of the rescission deadline.

In any event, in the absence of some direction from Congress or the Board to impose a penalty, we see no policy basis for such a result. Where, as here, the Board’s form was used and a reasonable borrower cannot have been misled, allowing a windfall and imposing a penalty serves no purpose and, further, is at odds with the general approach already taken by this court in Palmer.

Affirmed.

Read Full Post | Make a Comment ( None so far )

Homeowners should be suing lenders!

Posted on June 26, 2009. Filed under: Foreclosure Defense, Fraud, Loan Modification, Mortgage Audit, Mortgage Law, Predatory Lending, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , , , , , , |

Homeowners, welcome to Paradise Lost, the fate of millions of financially strapped boomers. A simultaneous loss of life savings, job income and foreclosure has many of them wondering, “Whose America is this, anyway? The bankers got bonuses to defraud us, and our industries and economy are in the pits. We worked for decades to live the American dream, and now we are out of work, saddled with debt and thrown out on the streets! What retirement? When I’m too old to enjoy it? More like I’m living a nightmare.”

You might be quite inclined to agree. However, there is light at the end of the tunnel, even for those that have already been foreclosed and evicted from their precious homes.

Although lately, while it feels like we are in the same boat as a third world country, we still have a little document on our side called The United States Constitution, which states, among other things that, “Citizens of the United States shall not be deprived of life, liberty or prosperity without due process of law.”

Now, there’s a mouthful. So don’t despair! And don’t get left out in the cold! Baby, it’s warm inside!

Homeowners, listen up! It is time to begin a reversal of your misfortune by gearing up and waging your mortgage war. Even if you have wearily given up your keys and angrily moved out, there are legal remedies that can make you whole. Your lender has broken so many laws that you may end up with more money than you had in cash and equity in your home!

And, no, this is not a pipe dream. But it is the repossession of your American dream. And the statute of limitation is greater than three years if your lender committed fraud.

How to tell if you are a victim of illegal foreclosure and unlawful eviction? Read on. Hint: you are in good company. Your platoon is millions strong.

If you have an adjustable rate mortgage and your loan has been securitized, there is a high probability that the securitization was done illegally. Further, if you have been defrauded by a predatory lender or broker, it’s time to fight back and go to court.

I recently asked Ohio attorney Dan McCookey, an expert in foreclosure defense and offense, what traumatized and victimized homeowners can do even after they have lost their homes, and find themselves figuratively and literally, out on the street. He provided some strategic counsel and laid out two hopeful options for now homeless homeowners:

Option #1: the “void judgment defense.” Your attorney files a motion to set aside the judgment, as the court never had proper jurisdiction to begin with.

What does this mean to you? If your loan was securitized, your lender sold your note and quite profitably, retained the mortgage servicing rights. When your note was sold, your lender gave up its legal ownership of your note and was paid in full for your loan, and then some. Therefore, your lender had no legal standing to foreclose! And no matter how many times your servicer was acquired, it has no right to foreclose!

In fact, your lender is not considered by the Court, a “true party of interest” or a “holder in due course.” Since the Court’s jurisdiction was never evoked, any and all proceedings found by the Court are void. That right is given to the current holder of the note. If only your lender could remotely identify whom that is.

Your lender has no idea where your original note currently is, as it traveled the globe, during its metamorphosis from a secured interest in your property to a mere shadow of its former self. The poor thing was sliced and diced multiple times by the depositor and a series of trustees, each earning profits and fees along the way.

More….

Read Full Post | Make a Comment ( 4 so far )

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)

[1] UNITED STATES DISTRICT COURT DISTRICT OF MAINE
[2] Civ. No. 06-123-B-W
[3] 2007.DME.0000264
[4] December 3, 2007
[5] JOSEPH AND ROXANNE DARLING, PLAINTIFFS,
v.
INDYMAC BANK, F.S.B., AND WESTERN THRIFT & LOAN, DEFENDANTS.
[6] The opinion of the court was delivered by: Margaret J. Kravchuk U.S. Magistrate Judge
[7] MEMORANDUM OF DECISION ON MOTION TO EXCLUDE OR LIMIT EXPERT TESTIMONY
[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.
[48] CERTIFICATE
[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.

20071203


Read Full Post | Make a Comment ( None so far )

Household Credit Services, Inc. v. Pfennig (TILA)

Posted on January 19, 2009. Filed under: Case Law, Finance, Truth in Lending Act | Tags: , , , , |

Household Credit Services, Inc. v. Pfennig, 124 S.Ct. 1741, 541 U.S. 232, 158 L.Ed.2d 450 (U.S. 04/21/2004)

[1] SUPREME COURT OF THE UNITED STATES
[2] No. 02-857
[3] 124 S.Ct. 1741, 541 U.S. 232, 158 L.Ed.2d 450, 2004 Daily Journal D.A.R. 4821, 4 Cal. Daily Op. Serv. 3433, 04 Cal. Daily Op. Serv. 3433, 2004.SCT.0000066< http://www.versuslaw.com&gt;
[4] April 21, 2004
[5] HOUSEHOLD CREDIT SERVICES, INC. AND MBNA AMERICA BANK, N. A., PETITIONERS
v.
SHARON R. PFENNIG
[6] SYLLABUS BY THE COURT
[7] OCTOBER TERM, 2003
[8] Argued February 23, 2004
[9] The Truth in Lending Act (TILA) regulates, inter alia, the disclosures that credit card issuers must make to consumers, 15 U. S. C. §1637(a), and provides consumers with a civil remedy for creditors’ failure to comply, §1640. Among other things, the creditor’s periodic balance statement to the consumer must include “[t]he amount of any finance charge,” §1637(b)(4), which is defined as an amount “payable directly or indirectly by the [consumer], and imposed directly or indirectly by the creditor as an incident to the extension of credit.” §1605(a). Section §1604(a) expressly gives to the Federal Reserve Board (Board) expansive authority to prescribe regulations containing “such classifications, differentiations, or other provisions,” as, in the Board’s judgment, “are necessary or proper to effectuate [TILA‘s] purposes … , to prevent circumvention or evasion thereof, or to facilitate compliance therewith.” The Board’s Regulation Z interprets §1605(a)’s “finance charge” definition to exclude “charges … for exceeding a credit limit” (over-limit fees).
[10] Respondent holds a credit card issued by one of the petitioner financial institutions and in which the other holds an interest. Although the parties’ agreement set respondent’s credit limit at $2,000, she was able to make charges exceeding that limit, subject to a $29 over-limit fee for each month in which her balance exceeded $2,000. While her monthly billing statement disclosed the over-limit fees, the amount was not included as part of the “finance charge,” consistent with Regulation Z. Respondent filed suit alleging that petitioners violated TILA by failing to classify over-limit fees as “finance charges,” but the District Court granted petitioners’ motion to dismiss on the ground that Regulation Z specifically excludes such fees. The Sixth Circuit reversed, holding that the exclusion conflicts with §1605(a)’s plain language. Noting, first, that, as a remedial statute, TILA must be liberally interpreted in favor of consumers, the court then concluded that the over-limit fees in this case were imposed “incident to an extension of credit” and therefore fell squarely within §1605’s language. That conclusion turned on the distinction the court drew between unilateral acts of default, which would not generate a “finance charge,” and acts of default resulting from an agreement between the creditor and the consumer, which would.
[11] Held: Regulation Z is not an unreasonable interpretation of §1605. Pp. 4-11.
[12] (a) Because respondent does not challenge the Board’s authority under §1604(a) to issue binding regulations, this Court faces only two questions. It asks, first, whether “Congress has directly spoken to the precise question at issue,” Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837, 842, in which case courts, as well as the Board, “must give effect to the unambiguously expressed intent of Congress,” id., at 842-843. However, whenever Congress has “explicitly left a gap for the [implementing] agency to fill,” the agency’s regulation is “given controlling weight unless [it is] arbitrary, capricious, or manifestly contrary to the statute.” Id., at 843-844. Pp. 4-5.
[13] (b) TILA itself does not explicitly address whether over-limit fees are included within the “finance charge” definition. The Sixth Circuit did not attempt to clarify the scope of §1605(a)’s critical term “incident to the extension of credit.” Because the phrase “incident to” does not make clear whether a substantial (as opposed to a remote) connection is required between an antecedent and its object, cf. Holly Farms Corp. v. NLRB, 517 U. S. 392, 402, n. 9, it cannot be concluded that the term “finance charge,” standing alone, unambiguously includes over-limit fees. Moreover, an examination of TILA‘s related provisions, as well as the full text of §1605 itself, casts doubt on the Sixth Circuit’s interpretation. A consumer holding an open-end credit plan may incur two types of charges — finance charges and “other charges which may be imposed as part of the plan.” §§1637(a)(1)-(5). TILA does not make clear which charges fall into each category, but its recognition of at least two categories establishes that Congress did not contemplate that all charges made in connection with an open-end credit plan would be considered “finance charges.” And where TILA explicitly addresses over-limit fees, it defines them as fees imposed “in connection with an extension of credit,” §1637(c)(1)(B)(iii), rather than “incident to an extension of credit,” §1605(a). Furthermore, none of §1605’s specific examples of charges that fall within the “finance charge” definition includes over-limit or comparable fees. Thus, 1605(a) is, at best, ambiguous. Pp. 5-8.
[14] (c) Regulation Z’s exclusion of over-limit fees from “finance charge[s]” is in no way manifestly contrary to §1605. Regulation Z defines “finance charge” as “the cost of consumer credit,” excluding as less relevant to determining such cost a number of specific payments, including over-limit fees, that do not automatically recur or are imposed only when a consumer defaults on a credit agreement. Because over-limit fees are imposed only in the latter circumstance, they can reasonably be characterized as a penalty for defaulting on the credit agreement, and the Board’s decision to exclude them from “finance charge[s]” is reasonable. Despite the Board’s rational decision to adopt a uniform rule excluding from the term “finance charge” all penalties imposed for exceeding the credit limit, the lower court adopted a case-by-case approach contingent on whether an act of default was “unilateral.” That approach would prove unworkable to creditors and, more importantly, lead to significant confusion for the consumer, who would be able to decipher if a charge is more properly a “finance charge” or an “other charge” only by recalling the details of the particular transaction that caused him to exceed his credit limit. In most cases, the consumer would not even know the relevant facts, which are contingent on the nature of the authorization given by the creditor to the merchant. Here, the Board accomplished all of the objectives set forth in §1604(a)’s broad delegation of rulemaking authority when it set forth a clear, easy to apply (and easy to enforce) rule that highlights the charges the Board determined to be most relevant to a consumer’s credit decisions. Pp. 8-11.
[15] 295 F. 3d 522, reversed.
[16] Thomas, J., delivered the opinion for a unanimous Court.
[17] On Writ Of Certiorari To The United States Court Of Appeals For The Sixth Circuit Court Below: 295 F. 3d 522
[18] Seth P. Waxman argued the cause for petitioners. With him on the briefs were Louis R. Cohen, Christopher R. Lipsett, Richard C. Pepperman II, and William G. Porter.
[19] Barbara B. McDowell argued the cause for the United States as amicus curiae urging reversal. With her on the brief were Solicitor General Olson, Assistant Attorney General Keisler, Deputy Solicitor General Clement, Matthew D. Roberts, James V. Mattingly, Jr., and Katherine H. Wheatley.
[20] Sylvia Antalis Goldsmith argued the cause for respondent. With her on the brief were John T. Murray, Joseph F. Murray, and Brian K. Murphy.
[21] Briefs of amici curiae urging reversal were filed for the American Bankers Association et al. by Drew S. Days III, Beth S. Brinkmann, and Seth M. Galanter; and for William P. Schlenk by Richard A. Cordray, Mark D. Fischer, and Mark McClure Sandmann.
[22] The opinion of the court was delivered by: Justice Thomas
[23] 541 U. S. ____ (2004)
[24] Congress enacted the Truth in Lending Act (TILA), 82 Stat. 146, in order to promote the “informed use of credit” by consumers. 15 U. S. C. §1601(a). To that end, TILA‘s disclosure provisions seek to ensure “meaningful disclosure of credit terms.” Ibid. Further, Congress delegated expansive authority to the Federal Reserve Board (Board) to enact appropriate regulations to advance this purpose. §1604(a). We granted certiorari, 539 U. S. 957 (2003), to decide whether the Board’s Regulation Z, which specifically excludes fees imposed for exceeding a credit limit (over-limit fees) from the definition of “finance charge,” is an unreasonable interpretation of §1605. We conclude that it is not, and, accordingly, we reverse the judgment of the Court of Appeals for the Sixth Circuit.
[25] I.
[26] Respondent, Sharon Pfennig, holds a credit card initially issued by petitioner Household Credit Services, Inc. (Household), but in which petitioner MBNA America Bank, N. A. (MBNA), now holds an interest through the acquisition of Household’s credit card portfolio. Although the terms of respondent’s credit card agreement set respondent’s credit limit at $2,000, respondent was able to make charges exceeding that limit, subject to a $29 “over-limit fee” for each month in which her balance exceeded $2,000.
[27] TILA regulates, inter alia, the substance and form of disclosures that creditors offering “open end consumer credit plans” (a term that includes credit card accounts) must make to consumers, §1637(a), and provides a civil remedy for consumers who suffer damages as a result of a creditor’s failure to comply with TILA‘s provisions, §1640.*fn1 When a creditor and a consumer enter into an open-end consumer credit plan, the creditor is required to provide to the consumer a statement for each billing cycle for which there is an outstanding balance due. §1637(b). The statement must include the account’s outstanding balance at the end of the billing period, §1637(b)(8), and “[t]he amount of any finance charge added to the account during the period, itemized to show the amounts, if any, due to the application of percentage rates and the amount, if any, imposed as a minimum or fixed charge,” §1637(b)(4). A “finance charge” is an amount “payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit.” §1605(a). The Board has interpreted this definition to exclude “[c]harges … for exceeding a credit limit.” See 12 CFR §226.4(c)(2) (2004) (Regulation Z). Thus, although respondent’s billing statement disclosed the imposition of an over-limit fee when she exceeded her $2,000 credit limit, consistent with Regulation Z, the amount was not included as part of the “finance charge.”
[28] On August 24, 1999, respondent filed a complaint in the United States District Court for the Southern District of Ohio on behalf of a purported nationwide class of all consumers who were charged or assessed over-limit fees by petitioners. Respondent alleged in her complaint that petitioners allowed her and each of the other putative class members to exceed their credit limits, thereby subjecting them to over-limit fees. Petitioners violated TILA, respondent alleged, by failing to classify the over-limit fees as “finance charges” and thereby “misrepresented the true cost of credit” to respondent and the other class members. Class Action Complaint in No. C2-99 815 ¶ ;¶ ;34-39, App. to Pet. for Cert. A39-A40. Petitioners moved to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) on the ground that Regulation Z specifically excludes over-limit fees from the definition of “finance charge.” 12 CFR §226.4(c)(2) (2004). The District Court agreed and granted petitioners’ motion to dismiss.
[29] On appeal, respondent argued, and the Court of Appeals agreed, that Regulation Z’s explicit exclusion of over-limit fees from the definition of “finance charge” conflicts with the plain language of 15 U. S. C. §1605(a). The Court of Appeals first noted that, as a remedial statute, TILA must be liberally interpreted in favor of consumers. 295 F. 3d 522, 528 (CA6 2002). The Court of Appeals then concluded that the over-limit fees in this case were imposed “incident to the extension of credit” and therefore fell squarely within §1605’s definition of “finance charge.” Id., at 528-529. The Court of Appeals’ conclusion turned on the distinction between unilateral acts of default and acts of default resulting from consumers’ requests for additional credit, exceeding a predetermined credit limit, that creditors grant. Under the Court of Appeals’ reasoning, a penalty imposed due to a unilateral act of default would not constitute a “finance charge.” Id., at 530-531. Respondent alleged in her complaint, however, that petitioners “allowed [her] to make charges and/or assessed [her] charges that allowed her balance to exceed her credit limit of two thousand dollars,” App. to Pet. for Cert. A39, ¶ ;34, putting her actions under the category of acts of default resulting from consumers requests for additional credit, exceeding a predetermined credit limit, that creditors grant. The Court of Appeals held that because petitioners “made an additional extension of credit to [respondent] over and above the alleged `credit limit,’ ” id., ¶ ;35, and charged the over-limit fee as a condition of this additional extension of credit, the over-limit fee clearly and unmistakably fell under the definition of a “finance charge.” 295 F. 3d, at 530. Based on its reading of respondent’s allegations, the Court of Appeals limited its holding to “those instances in which the creditor knowingly permits the credit card holder to exceed his or her credit limit and then imposes a fee incident to the extension of that credit.” Id., at 532, n. 5.*fn2
[30] II.
[31] Congress has expressly delegated to the Board the authority to prescribe regulations containing “such classifications, differentiations, or other provisions” as, in the judgment of the Board, “are necessary or proper to effectuate the purposes of [TILA], to prevent circumvention or evasion thereof, or to facilitate compliance therewith.” §1604(a). Thus, the Court has previously recognized that “the [Board] has played a pivotal role in `setting [TILA] in motion… .’ ” Ford Motor Credit Co. v. Milhollin, 444 U. S. 555, 566 (1980) (quoting Norwegian Nitrogen Products Co. v. United States, 288 U. S 294, 315 (1933)). Indeed, “Congress has specifically designated the [Board] and staff as the primary source for interpretation and application of truth-in-lending law.” 444 U. S., at 566. As the Court recognized in Ford Motor Credit Co., twice since the passage of TILA, Congress has made this intention clear: first by providing a good-faith defense to creditors who comply with the Board’s rules and regulations, 88 Stat. 1518, codified at 15 U. S. C. §1640(f), and, second, by expanding this good-faith defense to creditors who conform to “any interpretation or approval by an official or employee of the Federal Reserve System duly authorized by the Board to issue such interpretations or approvals,” 90 Stat. 197, codified as amended, at §1640(f). 444 U. S., at 566-567.
[32] Respondent does not challenge the Board’s authority to issue binding regulations. Thus, in determining whether Regulation Z’s interpretation of TILA‘s text is binding on the courts, we are faced with only two questions. We first ask whether “Congress has directly spoken to the precise question at issue.” Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837, 842 (1984). If so, courts, as well as the agency, “must give effect to the unambiguously expressed intent of Congress.” Id., at 842-843. However, whenever Congress has “explicitly left a gap for the agency to fill,” the agency’s regulation is “given controlling weight unless [it is] arbitrary, capricious, or manifestly contrary to the statute.” Id., at 843-844.
[33] A.
[34] TILA itself does not explicitly address whether over-limit fees are included within the definition of “finance charge.” Congress defined “finance charge” as “all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit.” §1605(a). The Court of Appeals, however, made no attempt to clarify the scope of the critical term “incident to the extension of credit.” The Court of Appeals recognized that, ” `[i]n ascertaining the plain meaning of the statute, the court must look to the particular statutory language at issue, as well as the language and design of the statute as a whole.’ ” Id., at 529-530 (quoting K mart Corp. v. Cartier, Inc., 486 U. S. 281, 291 (1988)). However, the Court of Appeals failed to examine TILA‘s other provisions, or even the surrounding language in §1605, before reaching its conclusion. Because petitioners would not have imposed the over-limit fee had they not “granted [respondent’s] request for additional credit, which resulted in her exceeding her credit limit,” the Court of Appeals held that the over-limit fee in this case fell squarely within §1605(a)’s definition of “finance charge.” 295 F. 3d, at 528-529. Thus, the Court of Appeals rested its holding primarily on its particular characterization of the transaction that led to the over-limit charge in this case.*fn3
[35] The Court of Appeals’ characterization of the transaction in this case, however, is not supported even by the facts as set forth in respondent’s complaint. Respondent alleged in her complaint that the over-limit fee is imposed for each month in which her balance exceeds the original credit limit. App. to Pet. for Cert. A39, ¶ ;35. If this were true, however, the over-limit fee would be imposed not as a direct result of an extension of credit for a purchase that caused respondent to exceed her $2,000 limit, but rather as a result of the fact that her charges exceeded her $2,000 limit at the time respondent’s monthly charges were officially calculated. Because over-limit fees, regardless of a creditor’s particular billing practices, are imposed only when a consumer exceeds his credit limit, it is perfectly reasonable to characterize an over-limit fee not as a charge imposed for obtaining an extension of credit over a consumer’s credit limit, but rather as a penalty for violating the credit agreement.
[36] The Court of Appeals thus erred in resting its conclusion solely on this particular characterization of the details of credit card transactions, a characterization that is not clearly compelled by the terms and definitions of TILA, and one with which others could reasonably disagree. Certainly, regardless of how the fee is characterized, there is at least some connection between the over-limit fee and an extension of credit. But, this Court has recognized that the phrase “incident to or in conjunction with” implies some necessary connection between the antecedent and its object, although it “does not place beyond rational debate the nature or extent of the required connection.” Holly Farms Corp. v. NLRB, 517 U. S. 392, 403, n. 9 (1996) (internal quotation marks omitted). In other words, the phrase “incident to” does not make clear whether a substantial (as opposed to a remote) connection is required. Thus, unlike the Court of Appeals, we cannot conclude that the term “finance charge” unambiguously includes over-limit fees. That term, standing alone, is ambiguous.
[37] Moreover, an examination of TILA‘s related provisions, as well as the full text of §1605 itself, casts doubt on the Court of Appeals’ interpretation of the statute. A consumer holding an open-end credit plan may incur two types of charges — finance charges and “other charges which may be imposed as part of the plan.” §§1637(a)(1)-(5). TILA does not make clear which charges fall into each category. But TILA‘s recognition of at least two categories of charges does make clear that Congress did not contemplate that all charges made in connection with an open-end credit plan would be considered “finance charges.” And where TILA does explicitly address over-limit fees, it defines them as fees imposed “in connection with an extension of credit,” §1637(c)(1)(B)(iii), rather than “incident to the extension of credit,” §1605(a). Furthermore, none of §1605’s specific examples of charges that fall within the definition of “finance charge” includes over-limit or comparable fees. See, e.g., §1605(a)(2) (“[s]ervice or carrying charge”); §1605(a)(3) (loan fee or similar charge); §1605(a)(6) (mortgage broker fees).*fn4
[38] As our prior discussion indicates, the best interpretation of the term “finance charge” may exclude over-limit fees. But §1605(a) is, at best, ambiguous, because neither §1605(a) nor its surrounding provisions provides a clear answer. While we acknowledge that there may be some fees not explicitly addressed by §1605(a)’s definition of “finance charge” but which are unambiguously included in or excluded by that definition, over-limit fees are not such fees.
[39] B.
[40] Because §1605 is ambiguous, the Board’s regulation implementing §1605 “is binding in the courts unless procedurally defective, arbitrary or capricious in substance, or manifestly contrary to the statute.” United States v. Mead Corp., 533 U. S. 218, 227 (2001).
[41] Regulation Z’s exclusion of over-limit fees from the term “finance charge” is in no way manifestly contrary to §1605. Regulation Z defines the term “finance charge” as “the cost of consumer credit.” 12 CFR §226.4 (2004). It specifically excludes from the definition of “finance charge” the following:
[42] “(1) Application fees charged to all applicants for credit, whether or not credit is actually extended.
[43] “(2) Charges for actual unanticipated late payment, for exceeding a credit limit, or for delinquency, default, or a similar occurrence.
[44] “(3) Charges imposed by a financial institution for paying items that overdraw an account, unless the payment of such items and the imposition of the charge were previously agreed upon in writing.
[45] “(4) Fees charged for participation in a credit plan, whether assessed on an annual or other periodic basis.
[46] “(5) Seller’s points.
[47] “(6) Interest forfeited as a result of an interest reduction required by law on a time deposit used as security for an extension of credit.
[48] “(7) [Certain fees related to real estate.]
[49] “(8) Discounts offered to induce payment for a purchase by cash, check, or other means, as provided in section 167(b) of the Act.” §226.4(c) (emphasis added).
[50] The Board adopted the regulation to emphasize “disclosures that are relevant to credit decisions, as opposed to disclosures related to events occurring after the initial credit choice,” because “the primary goals of the [TILA] are not particularly enhanced by regulatory provisions relating to changes in terms on outstanding obligations and on the effects of the failure to comply with the terms of the obligation.” 45 Fed. Reg. 80 649 (1980). The Board’s decision to emphasize disclosures that are most relevant to a consumer’s initial credit decisions reflects an understanding that “[m]eaningful disclosure does not mean more disclosure,” but instead “describes a balance between `competing considerations of complete disclosure … and the need to avoid … [informational overload].’ ” Ford Motor Credit Co., 444 U. S., at 568 (quoting S. Rep. No. 96-73, p. 3 (1979)). Although the fees excluded from the term “finance charge” in Regulation Z (e.g., application charges, late payment charges, and over-limit fees) might be relevant to a consumer’s credit decision, the Board rationally concluded that these fees — which are not automatically recurring or are imposed only when a consumer defaults on a credit agreement — are less relevant to determining the true cost of credit. Because over-limit fees, which are imposed only when a consumer breaches the terms of his credit agreement, can reasonably be characterized as a penalty for defaulting on the credit agreement, the Board’s decision to exclude them from the term “finance charge” is surely reasonable.
[51] In holding that Regulation Z conflicts with §1605’s definition of the term “finance charge,” the Court of Appeals ignored our warning that “judges ought to refrain from substituting their own interstitial lawmaking for that of the [Board].” Ford Motor Credit Co., supra, at 568. Despite the Board’s rational decision to adopt a uniform rule excluding from the term “finance charge” all penalties imposed for exceeding the credit limit, the Court of Appeals adopted a case-by-case approach contingent on whether an act of default was “unilateral.” Putting aside the lack of textual support for this approach, the Court of Appeals’ approach would prove unworkable to creditors and, more importantly, lead to significant confusion for consumers. Under the Court of Appeals’ rule, a consumer would be able to decipher if a charge is considered a “finance charge” or an “other charge” each month only by recalling the details of the particular transaction that caused the consumer to exceed his credit limit. In most cases, the consumer would not even know the relevant facts, which are contingent on the nature of the authorization given by the creditor to the merchant. Moreover, the distinction between “unilateral” acts of default and acts of default where a consumer exceeds his credit limit (but has not thereby renegotiated his credit limit and is still subject to the over-limit fee) is based on a fundamental misunderstanding of the workings of the credit card industry. As the Board explained below, a creditor’s “authorization” of a particular point-of-sale transaction does not represent a final determination that a particular transaction is within a consumer’s credit limit because the authorization system is not suited to identify instantaneously and accurately over-limit transactions. Brief for Board of Governors of Federal Reserve System as Amicus Curiae in No. 00-4213 (CA6), pp. 7-9.
[52] Congress has authorized the Board to make “such classifications, differentiations, or other provisions, and [to] provide for such adjustments and exceptions for any class of transactions, as in the judgment of the Board are necessary or proper to effectuate the purposes of [TILA], to prevent circumvention or evasion thereof, or to facilitate compliance therewith.” §1604(a). Here, the Board has accomplished all of these objectives by setting forth a clear, easy to apply (and easy to enforce) rule that highlights the charges the Board determined to be most relevant to a consumer’s credit decisions. The judgment of the Court of Appeals is therefore reversed.
[53] It is so ordered.

Opinion Footnotes

[54] *fn1 An “open end credit plan” is a plan under which a creditor “reasonably contemplates repeated transactions, which prescribes the terms of such transactions, and which provides for a finance charge which may be computed from time to time on the outstanding unpaid balance.” 15 U. S. C. §1602(i).
[55] *fn2 To the extent that respondent sought monetary relief, the Court of Appeals affirmed the District Court’s dismissal of respondent’s TILA claim because §1640(f) provides a good-faith defense to creditors who act in conformity with rules promulgated by the Board. 295 F. 3d, at 532-533.
[56] *fn3 Respondent does not attempt to defend the Court of Appeals’ reasoning in this Court and has abandoned her principal argument on appeal — that Regulation Z conflicts with the plain language of §1605. Instead, respondent maintains that the Board’s exclusion of over-limit fees in Regulation Z is not challenged in this case because Regulation Z does not cover over-limit fees imposed for authorized extensions of credit. Because respondent did not advance this theory in the Court of Appeals, and did not raise it in her Brief in Opposition accompanied by an appropriate cross-petition, see Northwest Airlines, Inc. v. County of Kent, 510 U. S. 355, 364 (1994), we decline to consider it here.
[57] *fn4 Additionally, by specifically excepting charges from the term “finance charge” that would otherwise be included under a broad reading of “incident to the extension of credit,” see §1605(a) (charges of a type payable in a comparable cash transaction); ibid. (fees imposed by third-party closing agents); §1605(d)(1) (fees and charges relating to perfecting security interests); §1605(e) (fees relating to the extension of credit secured by real property), Congress appears to have excluded such an expansive interpretation of the term.

20040421


Read Full Post | Make a Comment ( None so far )

Rescission turns mortgage in to unsecured debt!

Posted on January 17, 2009. Filed under: Case Law, Foreclosure Defense, Mortgage Audit, Mortgage Law, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , |

The borrowers were married but received only 2 copies of the Right to Cancel notice five days after signing the closing documents for a refinance of their primary residence. Upon completion of a Forensic Loan Audit and the discovery of  “material disclosure violations” they rescinded the loan and filed for protection under chapter 13 of the bankruptcy code.

The lender refused to rescind the loan and the borrowers consequently filed an Adversary Proceeding in the Bankruptcy Court. The judge found in favor of the borrowers and determined that they had the right to rescind.

Since they had rescinded the loan, it was held by the court that the loan became an unsecured debt and the mortgage was automatically voided as per the TILA. Because the debt became “unsecured” it was able to be discharged through bankruptcy like any other type of unsecured debt such as a credit card debt.

JAASKELAINEN v. Wells Fargo

Read Full Post | Make a Comment ( 2 so far )

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.

Read Full Post | Make a Comment ( None so far )

Truth in Lending Act (TILA) Case Law

Posted on December 19, 2008. Filed under: Case Law, Foreclosure Defense, Loan Modification, Mortgage Audit, Mortgage Law, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , , |

A. Availability of Rescission in a Class Action

Andrews v. Chevy Chase Bank, FSB

(2007 WL 112568, E.D. Wisconsin, January 16, 2007).

Borrowers alleged that the lender:

(1) failed to properly disclose the payment schedule because the schedule did not reflect that the required payments were due monthly;

(2) did not clearly disclose the APR and variable rate feature, based in part on disclosures reflecting a note rate of 1.950% and a five year fixed period that applied to the payment and not the rate;

(3) added information to the TILA disclosure that was not directly related to the information required to be disclosed (i.e., the initial discounted interest rate of 1.950% set forth as the note rate); and

(4) failed to properly disclose the possibility of negative amortization.

The federal district court agreed with the first three allegations and determined that the loan was rescindable because of the violations. The court further determined that this matter was appropriate for class certification, finding nothing in the language of the TILA that precludes the use of the class action mechanism to obtain a judicial declaration of whether a TILA error entitles each member of the class individually to seek rescission. The MBA and other industry trade groups have filed an amici curiae brief requesting that the United States Court of Appeals for the Seventh Circuit overturn the class certification.

LaLiberte v. Pacific Mercantile Bank
(147 Cal. App. 4th 1, 4th Dist. Cal., January 25, 2007)

The borrowers filed suit alleging that the exclusion of $450 in closing fees from the Truth in Lending disclosures with each of their loans violated the TILA, and later amended the complaint to include class allegations, including the right to rescind on a class basis. The California appellate court held that rescission is a personal remedy under the TILA and should not be given class treatment. The court found it difficult to believe that Congress would carefully balance the deterrent effects of class actions under the TILA against the potential harm to businesses in the context of statutory damages, and yet allow class action rescission to proceed without any safeguard. The court also noted that with 100 class members, the lender could face the loss of over $37 million in security if rescission were allowed on a class basis.

McKenna v. First Horizon Home Loan Corp.
(475 F.3d 418, 1st Cir., January 29, 2007).

The borrowers filed suit alleging that the lender inaccurately disclosed information pertaining to their rescission rights and had failed to appropriately respond to their requests for rescission in violation of the TILA and its Massachusetts counterpart, the Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA). The borrowers asserted that the violations entitled them to statutory damages and rescission, and sought a declaration that any class member who so elected could rescind. The United States Court of Appeals for the First Circuit reversed the district court’s 2006 decision certifying class treatment of the rescission claim, finding class certification is not available for rescission claims, whether direct or declaratory, under the TILA or the MCCCDA. The First Circuit stated that the rescission process is intended to be private, with the creditor and debtor working out the logistics of a given rescission. In addressing the express cap on statutory damages for class actions and the absence of any express class action provision in connection with rescission, the First Circuit stated that “Congress either may have intended rescission to be totally unavailable as a class remedy in the TILA milieu or it may have intended rescission class actions to be available unrestrainedly in TILA cases, not subject to any special limiting conditions. We find the first alternative to be much more likely.”

Murry v. America’s Mortgage Banc, Inc.
(2006 WL 1647531, N.D. Ill. June 5, 2006).

The court denied a plaintiff’s motion to certify a class with regard to a rescission claim based on grounds specific to the case. The issue of whether or not a rescission claim may proceed on a class action basis was not addressed.

B. Right to Rescind After Loan Pay-Off

Barrett v. JP Morgan Chase Bank, N.A.
(445 F.3d 874, 6th Cir., April 18, 2006).

The borrowers refinanced their mortgage with Bank One in May 2000 and again in January 2001. In May 2001, the borrowers refinanced the loan with another lender, and Bank One released its security interest in their home. The borrowers requested that the Bank One loans be rescinded based on alleged TILA violations. Bank One responded that because both loans were refinanced, and the security interest released, there was nothing left to rescind. The district court agreed, but the United States Court of Appeals for the Sixth Circuit reversed. The Sixth Circuit stated that nothing in the TILA or its implementing regulations provides that the act of refinancing extinguishes an unexpired right to rescind, and that the right to rescind gives consumers the right to recover fees in addition to the right to the release of the security interest.

Handy v. Anchor Mortgage Corp.
(464 F.3d 760, 7th Cir., September 29, 2006).

The borrower obtained a refinance mortgage loan from Anchor Mortgage and was provided with five copies of a notice of right to cancel. Four of the notices followed the Federal Reserve Board’s H-9 model form (refinancing with original creditor) and one followed model form H-8 (general). The H-8 form was the correct form for the transaction. The borrower sought to rescind the transaction two years later on the basis that the rescission notices were not clear and conspicuous. While the case was pending, the borrower died and the administrator of her estate was allowed to substitute as plaintiff. The district court denied the rescission claim on the grounds that if the borrower wanted to rescind following the closing, she could have used either of the forms to do so. The United States Court of Appeals for the Seventh Circuit disagreed, finding that the provision of two versions of the rescission notice violated the clear and conspicuous notice requirement, especially with regard to the effects of rescission. The lender argued that rescission was inappropriate, and maybe even impossible, because the estate of the borrower had recently repaid the loan. The Seventh Circuit agreed with the “well-reasoned opinion” of the Sixth Circuit in Barrett
and held that even though the loan had been paid in full, a transaction containing a TILA violation is rescindable even after the loan is paid off.

Pacific Shore Funding v. Lozo

(138 Cal. App. 4th 1342, 2d Dist. Cal., July 19, 2006).

The borrowers obtained a refinance loan subject to the Home Ownership and Equity Protection Act (HOEPA). Almost two years later the borrowers refinanced the loan. The borrowers then attempted to rescind the first loan on the grounds that the rescission notice did not include the date of the transaction or the deadline for rescission, and that lender failed to comply with the HOEPA pre-closing disclosure requirements. The borrowers filed suit after the lender rejected the rescission demand, and the trial court, following the decision of the United States Court of Appeals for the Ninth Circuit in the 1986 case King v. State of Cal., denied the claim on the grounds that once a loan is refinanced there is nothing left to rescind. The appellate court declined to follow King, and instead followed Barrett and other cases in holding that the right to rescind survived the refinance of the loan. The court noted that the borrowers still had something to rescind, namely the interest, fees, penalties and charges paid under the first loan.
C. Other Rescission Issues
1.

Bills v. BNC Mortgage, Inc.

(2006 WL 3227887, N.D. Illinois, November 3, 2006).

The borrower, who was married, obtained a refinance loan. The borrower’s wife did not attend the closing, or receive or sign any documents, as the borrower was the sole owner of the property and sole borrower. The couple later sought to rescind the loan on the grounds that the wife had not received a notice of the right to cancel. The couple argued that the wife was a consumer entitled to receive the notice of the right to cancel because she held homestead rights in the property. Based on other cases, the district court determined that under Illinois law homestead rights are merely rights of possession and do not rise to the level of an ownership interest and, therefore, the wife was not a consumer entitled to receive a notice of the right to rescind. The court granted the defendant’s motion to dismiss.
2.

Bank of New York v. Conway
(916 A.2d 130, Superior Court of Connecticut, December 13, 2006).

A married couple obtained a refinance loan that was closed on March 22, 2000. The named defendant-borrower signed the note, but did not sign the mortgage as he did not have any ownership interest in the property at the time of closing. On March 27, 2000, the borrowers signed and returned a document certifying that they had not exercised the right to rescind. On March 28, 2000, the borrower who owned the property executed a quitclaim deed that conveyed the property to herself and her husband. The husband then added his signature to the mortgage. After the borrowers defaulted, they were sent a demand letter. In response, the husband returned a notice of the right to cancel seeking to rescind the loan. A foreclosure action was commenced and the note holder moved for summary judgment. The borrowers asserted that the signing of the mortgage by the husband after closing constituted a separate transaction that entitled him to receive a separate notice of the right to cancel. As special defenses the borrowers asserted that the loan was rescinded, that the lender had failed to follow the rescission procedures, and that the lender had failed to disclose an $80 recording fee and had padded a $475 appraisal fee. The note holder claimed that the assertions regarding the fees were false. The court determined that the husband’s signing of the mortgage did not constitute a separate transaction that triggered the right to receive a notice of the right to cancel. With regard to the borrower’s special defenses based on the recording and appraisal fees, although the facts were in dispute, the court, following prior state court decisions, determined that even if the allegations were true the right to foreclose would not be defeated. The court stated that violations of the TILA’s disclosure provisions are not valid special defenses in a mortgage foreclosure action because such violations do not relate to the validity of the note or mortgage, but rather relate to the conduct of the lienholder.

Palmer v. Champion Mortgage
(465 F.3d 24, 1st Cir., September 29, 2006)

The borrower obtained a debt consolidation loan that was closed on March 28, 2003. On that date the borrower signed the loan documents, TILA disclosure statement and settlement statement, but did not receive copies of the documents. In early April the borrower received by mail copies of the closing documents, and the notice of the right to cancel. The notice provided that the borrower had the right to cancel within three business days of the last to occur of (1) the date of the transaction, which was stated to be March 28, 2003, (2) the date of receipt of the TILA disclosures or (3) date of receipt of the cancellation notice. The notice also provided that to cancel, the cancellation notice must be sent no later than April 1, 2003 or midnight of the third business day following the latest of the three listed events. In August of 2004 the borrower attempted to rescind the transaction, and the lender did not respond. The borrower then filed suit claiming that the inclusion in the cancellation notice of the April 1 deadline was confusing and entitled her to a continuing right to rescind. The district court granted the lender’s motion to dismiss. Citing other cases, the United States Court of Appeals for the First Circuit stated that the court must refrain from crediting the plaintiff’s bald assertions, unsupportable conclusions and opprobrious epithets, and that courts must evaluate the adequacy of TILA disclosures from the vantage point of a hypothetical average consumer, which the court described as a consumer who is neither particularly sophisticated nor particularly dense. The First Circuit stated that it failed to see how any reasonable consumer would be drawn to the April 1 deadline without grasping the twice-repeated alternate deadlines, and affirmed the dismissal of the case.

Moore v. Cycon Enterprises, Inc.
(2007 WL 475202, W.D. Michigan, February 9, 2007).
The borrowers rescinded a mortgage transaction under the TILA. At issue was whether borrowers were required to tender the full original principal loan amount or the principal loan amount less the loan origination fee, underwriting fee and settlement fee that the borrowers financed. The court noted that the TILA and Regulation Z provide that upon rescission, a consumer is not liable for any amount, including any finance charge. The court held that the borrowers were not required to pay any charges related to the transaction, even if such fees were financed by the lender. Thus, the borrowers were required to return the principal, less the amount of the fees that were financed.

Tucker v. Beneficial Mortgage Company
(437 F.Supp.2d 584, E.D. Virginia, July 7, 2006).

In October 2003, the borrowers joined a class action settlement with the lender that was negotiated by the Virginia Attorney General. The settlement released the lender from liability for “all civil claims and causes of action…whether known or unknown.” In September 2004, the borrowers attempted to rescind their loan with lender based on alleged TILA and HOEPA violations. The court found that because borrowers joined in the class action settlement, they were barred from rescinding the loan.

D. Payoff Fees
McAnaney v. Astoria Financial Corp.

(2006 WL 2689621, E.D.N.Y., September 19, 2006).

Three married couples obtained loans made or acquired by the defendant. In connection with the payoff of their loans, the couples assert that they received a letter from the defendant demanding fees such as an attorney document preparation fee, a facsimile fee and a recording fee. The couples brought a class action against the defendant challenging the fees. The district court noted that the defendant used Fannie Mae/Freddie Mac uniform instruments that provided there would be no prepayment penalties or fees, and that the TILA disclosures did not disclose the disputed fees as prepayment penalties or finance charges. The court granted the motion of the couples to certify a class.
E. Business Purpose

1.

Cashmere Valley Bank v. Brender

(146 P.3d 928, Supreme Court of Washington, November 16, 2006).

In 1993 the borrower consolidated approximately $203,000 of business loans with the lender, and obtained an additional $150,000 to settle a divorce and obtain his wife’s interest in an orchard and shake mill. The borrower signed an agreement representing and warranting that the new loan primarily was for business purposes. The loan was renewed in 1996, and the lender obtained additional security in the borrower’s mobile home. In 1999 the borrower obtained additional funds, and in 2001 the 1996 and 1999 loans were consolidated into one loan. The borrower defaulted on the 2001 loan and the lender commenced foreclosure. The borrower asserted defenses and counterclaims including a violation of the TILA. The central issue was whether the 2001 loan was exempt from the TILA on the grounds that it was primarily for a business purposes. The Supreme Court of Washington noted the analysis of the Court of Appeals, in which the lower court identified the following three approaches by which courts assess the purpose of a loan: (1) the original purpose approach, pursuant to which a court will assess the original character and predominating purpose of the loan, (2) the all circumstances approach, pursuant to which the court undertakes a factual analysis, and (3) the quantitative approach, pursuant to which the court looks to whether the borrower used the majority of the loan proceeds for a commercial or consumer purpose. The Court of Appeals selected the quantitative method for the case, and the Supreme Court agreed that such method was appropriate (noting that it was not opining on whether the quantitative method is appropriate for use outside the circumstances of the particular case). The $150,000 obtained by the borrower to settle his divorce and obtain his wife’s interest in an orchard and shake mill was considered at trial to be for a consumer purpose. The Supreme Court noted that bank did not object to this characterization, even though it appeared as if the proceeds were used to obtain business assets. The court concluded that, even if the $150,000 was considered to be used for consumer purposes, the majority of the funds still were used for an exempt purpose and, therefore, the loan was not subject to the TILA.

F. Assignee Liability

Parker v. Potter
(2007 WL 465560, 11th Cir., February 14, 2007).

The United States Court of Appeals for the Eleventh Circuit held that the right to rescission applies against assignees, as well as creditors, even if a violation of the TILA is not apparent on the face of the documents.

Miranda v. Universal Financial Group, Inc.
(459 F.Supp.2d 760, N.D. Illinois, November 7, 2006).

The borrower brought an action for rescission against the lender, two former assignees and the current note holder. The former assignees argued that they no longer had the power to rescind the loan, and that they should be dismissed from the litigation. The court held that a borrower may exercise the right to rescind against any assignees, including former assignees, and declined to dismiss the former assignees.
G. Security Interest Disclosure

Carye v. Long Beach Mortgage Company
, 470 F.Supp.2d 3, D. Massachusetts, January 22, 2007).

The lender required the borrower to sign a 1-4 Family Rider, adding to the property description, among other items, “goods of every nature whatsoever now or hereafter located in, on, or used, or intended to be used in connection with the Property….” The borrower argued that the Rider created a security interest that should have been disclosed as part of the TILA disclosures. The lender countered that the Rider created only incidental interests that are excluded from the definition of a security interest. The court denied the lender’s motion to dismiss, stating that it “cannot conclude that the only reasonable interpretation of the Rider is that is creates only incidental interests that cannot be disclosed.”

II. REGULATORY

A. CHARM Booklet
1. A revised Booklet was issued by the Federal Reserve Board (Board) in December 2006. The prior version was issued in May 2005.

2. The revised Booklet may be used now, and must be used no later than October 1, 2007.

3. Revisions to the Booklet include:

a. An upfront summary of key points, referred to by the Board as “core message,” with references to where the points are addressed in the Booklet.

b. A mortgage shopping worksheet that is an expanded version of the mortgage checklist and appears in the front of the Booklet.

c A greater focus on the potential for payment shock.

d. A highlighted statement that loans are available through lenders and brokers, and that brokers are not required to find the best deal for the consumer unless they are acting as the consumer’s agent.

e. A highlighted statement that with no-doc or low-doc loans, the lender does not require proof of income, but the consumer usually will have to pay a higher interest rate or extra fees.

f. A highlighted statement that the payment amounts used in the examples do not include taxes, insurance, condominium or HOA fees, or similar items that can be a significant part of the monthly payment.

g. Specific discussions regarding:

i. Hybrid ARMs.

ii. Interest-only ARMs.

iii. Payment-option ARMs.

h. A Consumer Cautions section that addresses:

i. Loans with initial discounted interest rates.

ii. Payment shock that can result when initial discounted rates are adjusted.

iii. Negative amortization in greater detail, including the potential for significantly higher payments.

iv. The potential for home prices not to increase sufficiently, or to decrease, and that this may make it difficult for the consumer to refinance.

v. Prepayment penalties and conversion fees.

vi. Graduated-payment or stepped-rate loans.
B. Interest-Only Mortgage Payments and Payment-Option ARMS—Are They for You?
1. A new Booklet issued by Federal Financial Institution Exam Council members in November 2006 for consumers. Not a required disclosure.

2. Addresses interest-only ARMs and payment-option ARMs, and refers consumers to the CHARM Booklet for additional information.
C. HOEPA Point and Fee Trigger.
1. Under the Home Ownership and Equity Protection Act, in addition to the applicable annual percentage rate trigger, the requirements of the Act are triggered if the points and fees exceed the greater of a specific dollar amount that is adjusted annually or 8% of the “total loan amount”.
2. The Board adjusted the dollar amount for points and fees test from $528 for 2006 to $547 for 2007. (August 14, 2006

Federal Register

notice.)
D. Regulation Z—Bankruptcy Act Changes/Other Open-End Changes
1. Background
a. In December 2004 the Board published an advanced notice of proposed rulemaking to commence a comprehensive review of the open-end credit rules under Regulation Z. (December 8, 2004

Federal Register

.)

b. On April 20, 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was signed into law.

i. The Act includes amendments to the TILA, both open-end and closed-end provisions.

ii. The Board is required to adopt regulations to implement the amendments.
c. In October 2005 the Board published a second advanced notice of proposed rulemaking regarding the open-end credit rules, and advised that it will include the changes regarding open-end credit that are required by the Act in the Board’s overall review of the Regulation Z open-end credit provisions. (October 17, 2005

Federal Register

.)

2. Bankruptcy Act Changes.

a. Minimum payment warning (open-end).

b. Introductory rate offers (open-end, credit card).

c. Credit card Internet solicitations (open-end, credit card).

d. Late fee disclosure (open-end).

e. Tax deductibility warning with high loan-to-value mortgage credit (open- and closed-end).

f. Account termination restriction (open-end).

3. Minimum Payment Warning.

a. Pursuant to the minimum payment warning requirement, periodic billing statements for open-end accounts will need to include in a prominent location on the front of the statements:

i. A warning that making only the minimum payment will increase the interest the consumer pays and the time it takes to repay the balance.

ii. A hypothetical example of how long it would take to pay off a specified balance if only minimum payments are made.

iii. A toll-free telephone number that the consumer may call to obtain an estimate of the time it would take to repay their actual account balance.

b. To standardize the information provided to consumers through the toll-free telephone number, the Board is required by the Act to prepare tables that illustrate the approximate number of months it would take to repay an outstanding balance if the consumer pays only the minimum monthly payment and if no other advances are made.

i. The Board plans to develop formulas that can be used to generate the required tables.

c. With regard to the toll-free telephone number:

i. The Board must establish and maintain for up to a 24-month period a toll-free number for use by customers of depository institutions having assets of $250 million or less.

ii. Other depository institutions must establish their own toll-free number or use a third party.

iii. The FTC must establish a toll-free number for use by customers of non-depository institutions.

d. Exception: If through a toll-free number a creditor provides the actual number of months that it will take the consumer to repay the outstanding balance (rather than an estimate):

i. The hypothetical example is not required to be included in the periodic statement.

ii. The warning and toll-free number must be disclosed in the periodic statement, but do not have to be on the front of the statement.

e. The Board can exempt one or more types of open-end accounts from some or all of the minimum payment warning requirements.

i. The Board requested comment on whether it should exempt open-end accounts and credit extensions with a fixed repayment period, such as certain home equity lines of credit, from all of the requirements, or only the requirement to disclose the hypothetical example and toll-free number.

ii. The Board noted that the requirements may not be suitable for reverse mortgage transactions.

4. Late Fee Disclosure.

a. The Act requires that with open-end plans creditors must provide additional disclosures on periodic statements if a late payment fee will be imposed for failure to make a payment on or before the due date.

b. The periodic statement must disclose clearly and conspicuously:

i. The date on which the payment is due or, if different, the earliest date on which a late payment fee may be charged.

ii. The amount of the late payment fee that may be imposed if payment is made after the applicable date.

5. Tax Deductibility Warning With High Loan-to-Value Mortgage Credit.

a. For credit, both open-end and closed-end, secured by a consumer’s principal dwelling, creditors must provide additional disclosures if the credit amount will or may exceed the fair market value of the dwelling.

b. With advertisements that are disseminated in paper form to the public or through the Internet (but not radio or television), the advertisements must include a clear and conspicuous statement that:

i. The interest on the portion of the credit extension that is greater than the fair market value of the dwelling is not tax deductible for Federal income tax purposes.

ii. The consumer should consult a tax advisor for further information regarding the deductibility of the interest and charges.

c. Credit applications for open-end credit must include a statement that interest on the portion of the credit extension that is greater than the fair market value of the dwelling is not tax deductible for Federal income tax purposes (and continue to include a statement that the consumer consult a tax advisor, which was required before the Act).

d. Credit applications for closed-end credit must include a clear and conspicuous statement that:

i. The interest on the portion of the credit extension that is greater than the fair market value of the dwelling is not tax deductible for Federal income tax purposes.

ii. The consumer should consult a tax advisor for further information regarding the deductibility of the interest and charges.

6. Account Termination Restriction.

a. A creditor may not terminate an open-end credit plan before its expiration date solely because the consumer has not incurred finance charges on the account.

b. A creditor would not be prohibited from terminating an account that was inactive for three or more consecutive months.

E. Federal Reserve Board Hearings
1. The Home Ownership Equity Protection Act (HOEPA) requires the Board to periodically hold public hearings on the home equity lending market and the adequacy of existing regulatory and legislative provisions for protecting the interests of consumers, particularly low income consumers.

2. The Board held hearings in 2000, which focused on predatory lending and the ability of the Board to use its regulatory authority to address abusive lending practices.

a. The hearings led to amendments of the Regulation Z provisions governing HOEPA loans that were adopted in December 2001, with compliance becoming mandatory in October 2002 (the “2002 revisions”).

b. Among other changes, the 2002 revisions:

i. Lowered the APR trigger for first lien loans from 10 to 8 percentage points above the yield on Treasury securities with comparable maturities.

ii. Required (1) the inclusion in the points and fees test of premiums or other charges for credit life, accident, health or loss-of-income insurance, or debt-cancellation coverage and (2) the deduction from the loan principal of such premiums and charges for purposes of computing the total loan amount in cases in which the premiums and charges are financed.

iii. Added the prohibition against creditors, assignees or servicers of a HOEPA loan refinancing the loan within the first year following origination, unless the refinancing is in the borrower’s interest.

iv. Added a presumption that a creditor engages in a pattern or practice of making HOEPA loans based on the consumer’s collateral without regard to the consumer’s repayment ability (which constitutes a violation of HOEPA) if the creditor engages in a pattern or practice of making HOEPA loans without verifying and documenting the consumer’s ability to repay.

3. Pursuant to the public hearing requirement, in the Summer of 2006 the Board held hearings in Chicago, Philadelphia, San Francisco and Atlanta.

a. The Board also invited the submission of written comments.

b. Parties submitting comments included the MBA, industry members and consumer groups.

4. The four main objectives of the Board were to:

a. Gather views on the effectiveness of the 2002 revisions in protecting consumers and the impact of the revisions on the availability of credit in the higher-cost portion of the subprime market.

b. Gather information that will assist the Board’s review of Regulation Z, particularly the rules governing home mortgage loans.

c. Identify matters for which the Board or other entities can develop educational materials to help consumers make informed choices about mortgage loans.

d. Help identify matters for which additional research about the mortgage lending market would be beneficial.

5. The Board identified the following as topics to be addressed:

a. The impact of HOEPA rules and state and local predatory lending laws on predatory lending. The Board invited comment on:

i. Whether the 2002 revisions were effective in curtailing predatory lending practices, the impact of the revisions on the availability of subprime credit, whether other abusive practices emerged since the revisions, and whether certain provisions were particularly effective, or particularly likely to negatively affect credit availability.

ii. The impact of state and local predatory lending laws on curbing abusive practices, whether the laws have adversely affected the access of consumers to legitimate subprime lending, whether certain provisions were particularly effective, or particularly likely to negatively affect credit availability.

iii. What efforts since the 2002 revisions to educate consumers about predatory lending have been successful, and what is needed to help such efforts succeed.

iv. Whether the existing HOEPA disclosures required by Regulation Z should be changed to improve the understanding by consumers of high-cost loan products and, if so, in what way.

b. Nontraditional mortgage products—interest only and payment options ARMs. The Board invited comment on:

i. Whether consumers have sufficient information from disclosures and advertisements about nontraditional mortgage products to understand the risks, such as payment increases and negative amortization, associated with the products.

ii. Whether any disclosures required by Regulation Z should be eliminated or modified because they are confusing to consumers, unduly burdensome to creditors, or are simply not relevant to nontraditional mortgage products, and whether the current required disclosures present information about nontraditional mortgage products in an understandable manner.

iii. Whether some Regulation Z disclosures should be provided earlier in the mortgage shopping and application process to aid consumers’ understanding of key credit terms and costs.

c. Nontraditional mortgage products—reverse mortgages. The Board invited comment on:

i. Whether current Regulation Z disclosures are adequate to inform consumers about the costs of reverse mortgages and to ensure that they understand the terms of the product.

ii. Whether counseling under the HUD reverse mortgage program has been effective in educating consumers about reverse mortgages and in preventing abuses from occurring.

iii. With regard to reverse mortgages that are not made under the HUD program, whether counseling is offered to applicants, whether the borrowers have difficulty understanding the loan terms or encounter other difficulties, and whether the lenders employ alternate disclosure approaches that are proven to be effective.

d. Informed consumer choice in the subprime market. The Board invited comment on:

i. How do consumers who get higher-priced loans shop for the loans, and how do the consumers select a particular lender?

ii. What do consumers understand about the role of mortgage brokers in offering mortgage products, and has their understanding been furthered by state-required mortgage broker disclosures?

iii. What strategies have been helpful in educating consumers about their options in the mortgage market, and what efforts are needed to help educate consumers about the mortgage credit process and how to shop and compare loan terms and fees?

iv. What are some of the “best practices” that lenders, mortgage brokers, consumer advocates and community development groups have employed to help consumers understand the mortgage market and their loan choices?

v. What explains the differences in borrowing patterns among racial and ethnic groups, how much are patterns attributable to differences in credit history and other underwriting factors such as loan-to-value ratio, and what other factors may explain these patterns?

6. Under HOEPA, the Board has the authority to:

a. Except specific mortgage products or categories of mortgage loans from certain HOEPA requirements.

b. Prohibit acts or practices in connection with any mortgage loans that the Board finds to be unfair, deceptive, or designed to evade HOEPA.

c. Prohibit acts or practices in connection with refinance mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.

Read Full Post | Make a Comment ( None so far )

Right to Cancel Notice – Same Lender Refinance

Posted on December 15, 2008. Filed under: Case Law, Foreclosure Defense, Mortgage Audit, Mortgage Law, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , |

JOHNNY SANTOS-RODRIGUEZ;

MARIA BETANCOURT-CASTELLANOS; C/P SANTOS-BETANCOURT;

LYMARY ROJAS-MORALES; RANFI VELEZ-ROMAN;

C/P VELEZ-ROJAS,

Plaintiffs, Appellants,

v.

DORAL MORTGAGE CORPORATION;

DORAL FINANCIAL CORPORATION;

XYZ CORPORATIONS,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

[Hon. Jaime Pieras, Jr., Senior U.S. District Judge]

Before

Selya, Circuit Judge,

Stahl, Senior Circuit Judge,

and Howard, Circuit Judge.

Gary E. Klein, with whom Gillian Feiner, Roddy, Klein & Ryan, Juan M. Suarez Cobo, and Suarez Cobo Law Offices, PSC were on brief, for appellants.

Nestor M. Mendez-Gomez, with whom Heidi Rodriguez, Carlos C. Alsina-Batista, and Pietrantoni, Mendez & Alvarez LLP were on brief, for appellees.

April 19, 2007

STAHL, Senior Circuit Judge. Plaintiffs brought suit against Doral Financial Corporation and Doral Mortgage Corporation (collectively, “Doral”) for violation of the federal Truth in Lending Act (TILA), 15 U.S.C. §§ 1601-1667. Plaintiffs seek rescission of their home loans, and damages, based on Doral’s alleged failure to provide them sufficient notice of their rescission rights. The district court granted Doral’s motion to dismiss plaintiffs’ claims. We affirm.

I. Background

Because this case reaches us on appeal from the granting of a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), we accept as true plaintiffs’ well-pleaded factual allegations. See Rogan v. Menino, 175 F.3d 75, 77 (1st Cir. 1999).

There are two sets of plaintiffs in this case. The first set, Johnny Santos-Rodriguez and Maria Betancourt-Castellanos (“the Santoses”), obtained an original home mortgage from Doral Mortgage in 1998. By March 2004, the Santoses had defaulted on 34 payments under the original loan. To maintain their home, they elected to refinance on March 13, 2004, again with Doral Mortgage. The new loan totaled $78,750, of which $72,883.45 was used to pay off the principal and finance charges due under the original loan, thus cancelling that loan. The parties dispute what was done with the $5,866.55 in additional proceeds from the refinancing. Doral argues that the entire amount was remitted to Doral as financing charges, while the Santoses claim that one month after the transaction was finalized, they received $1,300 in proceeds from Doral. Within a year, Doral Mortgage assigned the Santoses’ new loan to Doral Financial, which was the legal holder of the note at the time this action was brought.

The second set of plaintiffs is composed of Lymary Rojas-Morales and Ranfi Velez-Roman (“the Rojases”). The Rojases obtained an original home mortgage with Doral Mortgage. On August 27, 2003, the Rojases refinanced their original loan, again with Doral Mortgage. The refinancing loan totaled $104,500, of which $94,035.83 went to pay the principal balance and finance charges outstanding on the Rojases’ original loan, which was cancelled. Of the remaining funds, $6,251.76 went to Doral Mortgage for refinancing fees, and $4,212.41 reverted to the Rojases as a new money advance.

Before closing on the refinancing loans, Doral provided the Santoses and Rojases with a Notice of Right to Cancel. The form was modeled on Federal Reserve Board Model Form H-8. See 12 C.F.R. § 226.23 (app. H-8). Both sets of plaintiffs received identical disclosure forms, and they acknowledged receipt by signing the documents. Below, we excerpt the relevant sections of the disclosure form that plaintiffs received:

You are entering into a transaction that will result in a mortgage, lien or security interest on your home. You have a legal right under federal law to cancel this transaction, without cost, within three business days . . .

If you cancel the transaction, the mortgage, lien or security interest is also cancelled.

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, or you may use this notice by dating and signing below. The TILA grants consumers a three-day rescission period for any consumer credit transaction where a security interest will be acquired by the lender in the consumer’s principal dwelling. 15 U.S.C. § 1635(a). This three-day rescission period begins to run when the transaction is consummated or upon delivery of notice of the consumer’s right to rescind, whichever occurs later. Id. However, the three-day rescission period is extended to three years if the lender fails to meet the disclosure requirements of the TILA. 15 U.S.C. § 1635(f). The Federal Reserve Board (FRB) has issued an implementing regulation known as Regulation Z, which governs, among other things, the disclosures that lenders must make to consumers. 12 C.F.R. § 226.1 et seq. Regulation Z includes an appendix of model forms for various consumer transactions, including Model Forms H-8 and H-9, which are at issue here. See 12 C.F.R. § 226.23 (app. H-8, H-9).

In 2005, plaintiffs informed Doral of their intention to rescind their refinance loans, arguing that Doral’s alleged failure to disclose properly their rescission rights had extended the rescission period to three years. Thereafter, Doral issued written rejections of plaintiffs’ attempts to rescind. In response, plaintiffs brought suit against Doral, originally framed as a class action, in the United States District Court for the District of Puerto Rico, seeking rescission of their loans, and statutory and actual damages. The district court granted Doral’s motion to dismiss for failure to state a claim, holding that Doral met its disclosure obligations by clearly and conspicuously informing the plaintiffs of their rescission rights. Plaintiffs now appeal the dismissal of their claims.

II. DiscussionWe review de novo the grant of a motion to dismiss for failure to state a claim, “accepting all well-pleaded facts as true and giving the party who has pleaded the contested claim the benefit of all reasonable inferences.” Palmer v. Champion Mortgage, 465 F.3d 24, 27 (1st Cir. 2006).

Plaintiffs make two arguments to support their assertion that the rescission period for their refinance transactions should be extended from three days to three years. First, they allege that Doral failed to comply with the TILA’s disclosure requirements because it gave plaintiffs a form patterned on Model Form H-8, which is designed for general transactions, rather than one patterned on Model Form H-9, which is designed for same-lender refinancing transactions. See 61 Fed. Reg. 49,237-02 (1996). Second, plaintiffs argue that the form Doral used was misleading because it did not adequately explain the effects of rescinding a same-lender refinancing loan, as opposed to an original loan. We take these arguments in turn.

Plaintiffs’ first approach is a non-starter. They insist, despite clear statutory and regulatory language to the contrary, that “if the creditor does not provide the ‘appropriate form,’ the borrower ‘shall have’ rescission rights.” This is simply incorrect. The statute permits the lender to inform consumers of their rescission rights by using “the appropriate form of written notice published and adopted by the [Federal Reserve] Board, or a comparable written notice of the rights of the obligor.” 15 U.S.C. § 1635(h) (emphasis added). The plain meaning of the word “or” makes clear that the lender may comply with its disclosure obligations by using a model form or, alternatively, a comparable written notice. Regulation Z is equally clear that either type of notice will satisfy the lender’s obligation: “To satisfy the disclosure requirement . . . the creditor shall provide the appropriate model form in Appendix H of this part or a substantially similar notice.” 12 C.F.R. § 226.23(b)(2) (emphasis added). In addition, the TILA plainly states that use of the model forms is not obligatory. See 15 U.S.C. § 1604(b) (“Nothing in this subchapter may be construed to require a creditor or lessor to use any such model form or clause prescribed by the Board under this section.”).

In sum, because the plain language of the statute and regulations does not require exclusive use of the model forms, plaintiffs are incorrect to insist that Doral’s alleged failure to provide the appropriate FRB form is a per se violation of 15 U.S.C. § 1635 and Regulation Z.

Plaintiffs’ second argument requires more analysis. They assert that Doral’s use of a form patterned on Model Form H-8 rather than H-9 significantly misled them as to their rescission rights, because the effects of rescinding a same-lender refinance loan are different from the effects of rescinding an original loan. In particular, plaintiffs highlight that the form they received failed to disclose that if a same-lender refinancing loan is rescinded, the original loan is not cancelled, meaning that the lender retains a security interest in the property under the original loan, and the consumer reverts to paying off the original loan. Plaintiffs argue that a consumer would be less willing to rescind a same-lender refinance loan if he believed that as a result he would also have to repay the original mortgage.          Our analysis of this argument must start with the disclosure standard set forth in the TILA, which requires that lenders “clearly and conspicuously disclose” borrowers’ rescission rights. 15 U.S.C. § 1635(a). Regulation Z elaborates on this disclosure standard by listing the five elements of clear and conspicuous disclosure:

The notice shall be on a separate document that identifies the transaction and shall clearly and conspicuously disclose the following:

(i) The retention or acquisition of a security interest in the consumer’s principal dwelling.

(ii) The consumer’s right to rescind the transaction.

(iii) How to exercise the right to rescind, with a form for that purpose, designating the address of the creditor’s place of business.

(iv) The effects of rescission, as described in paragraph (d) of this section.

(v) The date the rescission period expires.

12 C.F.R. § 226.23(b)(1). The fourth element, requiring disclosure of the effects of rescission, is further explained at 12 C.F.R. § 226.23(d), which delineates several effects of rescission that must be disclosed to the consumer, including:

(1) When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void and the consumer shall not be liable for any amount, including any finance charge.

(2) Within 20 calendar days after receipt of a notice of rescission, the creditor shall return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest.

(3) If the creditor has delivered any money or property, the consumer may retain possession until the creditor has met its obligation under paragraph (d)(2) of this section. When the creditor has complied with that paragraph, the consumer shall tender the money or property to the creditor or, where the latter would be impracticable or inequitable, tender its reasonable value.Id.

Most courts have concluded that the TILA’s clear and conspicuous standard is less demanding than a requirement of perfect notice. See, e.g., Veale v. Citibank, 85 F.3d 577, 581 (11th Cir. 1996), cert. denied 520 U.S. 1198 (1997) (“TILA does not require perfect notice; rather it requires a clear and conspicuous notice of rescission rights.”); Smith v. Chapman, 614 F.2d 968, 972 (5th Cir. 1980) (“Strict compliance does not necessarily mean punctilious compliance if, with minor deviations from the language described in the Act, there is still a substantial, clear disclosure of the fact or information demanded by the applicable statute or regulation.”); Dixon v. D.H. Holmes Co., 566 F.2d 571, 573 (5th Cir. 1978) (“The question is not whether [notice provided under the TILA] is capable of semantic improvement but whether it contains a substantial and accurate disclosure . . . .”); see also Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 568 (1980) (“Meaningful disclosure [under the TILA] does not mean more disclosure. Rather, it describes a balance between competing considerations of complete disclosure . . . and the need to avoid . . . [information overload].”) (internal quotation and citation omitted) (emphasis in original). As this court has recently said, the 1995 TILA amendments, see Truth in Lending Act Amendments of 1995, Pub. L. No. 104-29, 109 Stat. 271, 272-73, were intended by Congress to “provide higher tolerance levels for what it viewed as honest mistakes in carrying out disclosure obligations.” McKenna, 475 F.3d at 424.

Thus, the key question in this case is whether Doral clearly and conspicuously informed plaintiffs of their right of rescission and the effects thereof, in compliance with the requirements laid out in Regulation Z. We conclude that Doral met its disclosure obligations. The form plaintiffs received explained, among other things, that (1) they were entering a transaction that would result in a mortgage on their home; (2) they had a legal right to rescind “this transaction,” without cost, within three days; and (3) if they were to rescind the transaction, the mortgage that would have been created by the refinancing transaction would also be cancelled. Because the form clearly stated that rescission was available only as to “this transaction,” Doral clearly and conspicuously informed plaintiffs that any rescission would only operate as to the current refinancing transaction.

In addition, the form that plaintiffs received satisfied 12 C.F.R. § 226.23(d), which details the effects of rescission that must be disclosed. Most importantly, Doral’s disclosure form informed plaintiffs that, “If you cancel the transaction, the mortgage, lien or security interest is also cancelled.” This statement fulfilled the regulatory requirement that the lender disclose that, upon rescission of the current transaction “the security interest giving rise to the right of rescission becomes void.” 12 C.F.R. § 226.23(d)(1). Contrary to plaintiffs’ assertion, this disclosure is accurate even in same-lender refinance transactions such as those at issue here, because rescission of a refinance transaction does indeed cancel the entire security interest contemplated by the refinance agreement. In addition, rescission of the refinance transaction does not impact the lender’s security interest under the original loan, which is held in abeyance until the rescission period has expired. See 12 C.F.R. § 226.23(c) (“Unless a consumer waives the right of rescission . . . no money shall be disbursed other than in escrow, no services shall be performed and no materials delivered until the rescission period has expired and the creditor is reasonably satisfied that the consumer has not rescinded.”). Here, because Doral’s disclosure correctly stated that rescission of the refinance loan would cancel the security interest contemplated by that loan, and would impact only the refinance transaction, it satisfactorily disclosed the effects of rescission as required by 12 C.F.R. § 226.23(d).

That said, it is true that the disclosure statement plaintiffs received did not affirmatively inform them, as the H-9 form would have, that rescission of the refinance transaction would not also rescind their original mortgage. However, we do not require perfect disclosure. The question before us is not whether the notification in Form H-9 would have been more complete than the notification plaintiffs actually received, but only whether the notification plaintiffs actually received met the requirements of the clear and conspicuous standard laid out in Regulation Z. Evaluating, as we must, Doral’s disclosure from the vantage point of the hypothetical average consumer, see Palmer, 465 F.3d at 28, we conclude that because plaintiffs were told, clearly and conspicuously, that rescission would only operate as to their pending refinance transaction, any conclusions that they might have drawn from that disclosure about their previously existing mortgages were unreasonable (and, thus, not a valid basis for any TILA claim). See Gambardella v. G. Fox & Co., 716 F.2d 104, 118 (2d Cir. 1983) (TILA disclosure that “requires the consumer to exercise some degree of care and study” suffices and “perfect disclosure” is not required). Two other circuits (albeit only one in a published opinion) have reached this same conclusion, where Model Form H-8, or a form patterned on it, was used for a same-lender refinancing transaction. See Veale, 85 F.3d at 580 (“We hold that . . . the H-8 form provides sufficient notice that the current transaction may be canceled but that previous transactions, including previous mortgages, may not be rescinded.”); Mills v. EquiCredit Corp., 172 Fed. Appx. 652, 656 (6th Cir. 2006) (approving of the district court’s conclusion that “assuming that the form used by EquiCredit was technically incorrect . . . the form nonetheless informed Appellants of their right to cancel the loan transaction”) (unpublished opinion). Doral’s disclosures were not perfect in this case, but they were sufficient to meet the statutory and regulatory requirements of the TILA and Regulation Z. See Palmer, 465 F.3d at 29 (“[A]ny creditor who uses plain and legally sufficient language ought to be held harmless.”).

III. Conclusion

For the reasons given above, we AFFIRM the district court’s dismissal of plaintiffs’ claims.

Read Full Post | Make a Comment ( 1 so far )

Set Aside Foreclosure and Decree and Motion for New Trial

Posted on November 8, 2008. Filed under: Case Law, Foreclosure Defense, Mortgage Audit | Tags: , , , , , , , |

By: Kenneth DeLashmutt

Prove Up of the Claim

To recover on a promissory note the Plaintiff (lender) must prove existence of the note.

To recover on a promissory note, the plaintiff must prove:

(1) the existence of the note in question;

(2) that the party sued signed the note;

(3) that the plaintiff is the owner or holder of the note in due course; and (4) that a certain balance is due and owing on the note.

In a foreclosure, if a default judgment is entered you can file a “Motion to Set Aside Foreclosure & Decree and Motion for New Trial.

This motion seeks relief from the judgment of foreclosure on the ground that the lenders failure to produce the original of the promissory note is newly discovered evidence justifying a new trial.

In the new trial you demand discovery of the “holder in due course” of the “ORIGINAL” promissory note. The plaintiff must produce the original promissory note.

Trial court is in error when it does not proceed to take testimony before it enters a default judgment in a foreclosure for the plaintiff; the unsworn statement of plaintiff’s attorney can not support default judgment rendered.

In the case of mortgage foreclosures, prove up of the claim requires presentment of the “original” promissory note and general account and ledger statement. Claim of damages, to be admissible as evidence, must incorporate records such as a general ledger and accounting of an alleged unpaid promissory note, the person responsible for preparing and maintaining the account general ledger must provide a complete accounting which must be sworn to and dated by the person who maintained the ledger.

Supporting Case Law

Where the complaining party cannot prove the existence of the note, then there is no note.

See Pacific Concrete F.C.U. V. Kauanoe, 62 Haw. 334, 614 P.2d 936 (1980),

GE Capital Hawaii, Inc. v. Yonenaka 25 P.3d 807, 96 Hawaii 32, (Hawaii App 2001),

Fooks v. Norwich Housing Authority 28 Conn. L. Rptr. 371, (Conn. Super.2000), and

Town of Brookfield v. Candlewood Shores Estates, Inc. 513 A.2d 1218, 201 Conn.1 (1986). See also Solon v. Godbole, 163 Ill. App. 3d 845, 114 Ill. Dec. 890, 516 N. E.2d 1045 (3Dist. 1987).

Siwooganock Bank in Lancaster NH, in alleged foreclosure suit, failed or refused to produce the actual note which Siwooganock alleges Eva J. Lovejoy owed. To recover on a promissory note, the plaintiff must prove:

(1) the existence of the note in question;

(2) that the party sued signed the note;

(3) that the plaintiff is the owner or holder of the note; and

(4) that a certain balance is due and owing on the note. See In Re: SMS Financial LLC. v. Abco Homes, Inc. No.98-50117 February 18, 1999 (5th Circuit Court of Appeals.)

Volume 29 of the New Jersey Practice Series, Chapter 10 Section 123, page 566, emphatically states, “…; and no part payments should be made on the bond or note unless the person to whom payment is made is able to produce the bond or note and the part payments are endorsed thereon. It would seem that the mortgagor would normally have a Common law right to demand production or surrender of the bond or note and mortgage, as the case may be.

See Restatement, Contracts S 170(3), (4) (1932); C.J.S. Mortgages S 469, in Carnegie Bank v, Shalleck 256 N.J. Super 23 (App. Div 1992), the Appellate Division held, “When the underlying mortgage is evidenced by an instrument meeting the criteria for negotiability set forth in N.J.S. 12A:3-104, the holder of the instrument shall be afforded all the rights and protections provided a holder in due course pursuant to N.J.S. 12A:3-302″

Since no one is able to produce the “instrument” there is no competent evidence before the Court that any party is the holder of the alleged note or the true holder in due course. New Jersey common law dictates that the plaintiff prove the existence of the alleged note in question, prove that the party sued signed the alleged note, prove that the plaintiff is the owner and holder of the alleged note, and prove that certain balance is due and owing on any alleged note. Federal Circuit Courts have ruled that the only way to prove the perfection of any security is by actual possession of the security.

Supporting Case Law

Unequivocally the Court’s rule is that in order to prove the “instrument”, possession is mandatory.

See Matter of Staff Mortgage. & Inv. Corp., 550 F.2d 1228 (9th Cir 1977). “Under the Uniform Commercial Code, the only notice sufficient to inform all interested parties that a security interest in instruments has been perfected is actual possession by the secured party, his agent or bailee.” Bankruptcy Courts have followed the Uniform Commercial Code.

In Re Investors & Lenders, Ltd. 165 B.R. 389 (Bankruptcy.D.N.J.1994), “Under the New Jersey Uniform Commercial Code (NJUCC), promissory note is “instrument,” security interest in which must be perfected by possession.

Find out if you are a Victim of Predatory Lending Practices

Audit your mortgage closing documents to find possible Predatory Lending Practices, mortgage broker fraud and title violations.

Mortgage lenders can trick homeowners into giving up their homes. You may be able to recover TILA violation fines and possibly void the lenders security interest in the property.

In order to find predatory lending violations and lender fraud you will have to gather and assemble your loan and closing documents and put them in order.

Required Documents for your Audit

List of loan paperwork for audit

*anything that was given to you at the time of signing the loan

*Promissory Note (very important)

*Mortgage or Deed of Trust (very important)

*Application for the loan, if available

*Good Faith Estimate (very important)

*Settlement Statement (very important)

*Right to Cancel/Right to Rescission (very important)

Disclosures:

*HUD 1 Statement

*TILA Disclosures (very important)

*RESPA Servicing Disclosures

*Any and all disclosures (very important)

A copy of the current billing statement.

A copy of any notifications from the lender or other party of a change in where the borrower is to send the payments. This may be because the lender sold the note (a new assignee), or sold the rights to collecting the payments (a new servicer).

A copy of any default notices, acceleration papers, or foreclosure paperwork.

A copy of any and all court paperwork if the property is in foreclosure or there is any court process ongoing that involves this property. If you do not have this paperwork, it must be obtained from the court files.

The Audit

What are you looking for?

Now you can audit your closing documents and look for TILA, HOEPA and RESPA violations.

If the answer to any of the following questions is “yes,” You are most likely a victim of predatory lending practices and may be able to void the mortgage and apply 100% of your payments to principal. And, you may also be able to recover money damages.

Such violations can be used as a defense in a mortgage foreclosure.

1. Have you repeatedly refinanced your loan? Was the last refinance within the last 3 years? (A common predatory practice is “flipping,” which involves “repeatedly refinancing a mortgage loan without benefit to the borrower, in order to profit from high origination fees, closing costs, points, prepayment penalties and other charges, steadily eroding the borrower’s equity in his or her home.”).

2. Did you increase rather than lower your rate upon refinancing?

3. Are you paying an interest rate in excess of 9.5%?

4. Was the loan obtained to pay for home improvement work that was not done properly, or even at all?

5. Have you had problems with the mortgage company regarding untimely posting of monthly payments? Sudden increases in payments? Adding amounts to your balance for insurance, “property preservation,” or other “advances”? Does your principal balance never seem to go down?

6. Were you charged high closing costs (points and fees) on the mortgage?

7. Did the terms of the mortgage change to your detriment at the last minute before the closing?

8. Did the lender pay money to your mortgage broker? (Look on your HUD-1 Settlement Statement for a “premium” or yield spread premium “YSP” or Paid outside closing “POC”)

9. If you have an adjustable rate mortgage, were any adjustments done improperly? Can you even tell if the adjustments were correct or not?

10. Does your loan contain a prepayment penalty?

11. Do you believe you were treated unfairly by your mortgage company? Has correspondence with the mortgage company gone unanswered? (Mortgage companies have a statutory obligation to respond to complaints and requests for explanations of accounts. Often, they don’t. Each failure may entitle you to $1,000. If your claim against the mortgage company may exceed the number of monthly payments you allegedly missed, the mortgage company may not be able to prove that you are in default.)

12. Did all collection letters sent to you by debt collectors comply with the Fair Debt Collection Practices Act? (Up to $1,000 more if they did not.)

13. Did you (or anyone else who has an ownership interest in and lives in the house) receive a “notice of right to cancel” that was not completely filled out?

14. Did you receive your copy of the loan documents at the closing (as opposed to being sent to you later)?

15. Did you sign a document at the closing stating that you were not canceling?

16. Did the closing occur by mail, or at your home, or in another city?

The following is an example of some other TILA violations you may find in your closing documents.

Over-escrowing

Junk charges (i.e. yield spread premiums and service release fees)

Payment of compensation to mortgage brokers and originators by lenders

Unauthorized servicing charges (i.e. the imposition of payoff and recording charges)

Improper adjustments of interest on adjustable rate mortgages

Upselling

Overages

Referral fees to mortgage originators. (i.e. a lender who pays a mortgage broker secret compensation may face liability for inducing the broker to breach his fiduciary or contractual duties, fraud, or commercial bribery)

Failure to disclose the circumstances under which private mortgage insurance (”PMI”) may be terminated.

Underdisclosure of the cost of credit

Excessive escrow deposits

Breach of Fiduciary Duty

You may also find breach of contract claims.

Lenders Profit by Foreclosure

There is a common assumption (among judges, borrowers, and the public) that mortgage companies do not desire to foreclose and acquire real estate. This assumption is no longer well founded.

There are an increasing number of “scavengers” that buy bad debts, including mortgages, for a fraction of face value and attempt to enforce them. Such entities profit by foreclosure. “Mortgage sources confide that some unscrupulous lenders are purposely allowing certain borrowers to fall deeper into a financial hole from which they can’t escape. Why? Because it pushes these consumers into foreclosure, whereupon the lender grabs the house and sells it at a profit.

Kenneth M. DeLashmutt “Predatory Lending Defense Specialist”

email: educationcenter2000@cox.net

website: http://www.educationcenter2000.com

You have permission to publish this article electronically or in print, free of charge, as long as the bylines are included. A courtesy copy of your publication would be appreciated.

© Kenneth M DeLashmutt

Mr. Kenneth M. DeLashmutt is a recognized Predatory Lending Defense Specialist and an authority on the subject of predatory lending practices, foreclosure defense, consumer protection and debtor’s rights. He has more than 10 years experience in the area of consumer protection related to predatory mortgage lending practices and debt resolution.

Read Full Post | Make a Comment ( 1 so far )

« Previous Entries

Liked it here?
Why not try sites on the blogroll...