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

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

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

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

Opinion Footnotes

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

20081209


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Putkkuri v. Recontrust Co. (Predatory Lending/TILA)

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

Putkkuri v. Recontrust Co., No. 08cv1919 WQH (S.D.Cal. 01/05/2009)

[1] UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA
[2] CASE No. 08cv1919 WQH (AJB)
[3] 2009.SCA.0000014
[4] January 5, 2009
[5] GERARDO HUGO PUTKKURI, PLAINTIFF,
v.
RECONTRUST COMPANY, DOE 1, DOES 2-50, INCLUSIVE, DEFENDANTS.
[6] The opinion of the court was delivered by: Hayes, Judge
[7] ORDER
[8] The matter before the Court is the Motion to Dismiss Complaint or, in the Alternative, for a More Definite Statement (Doc. # 4).
[9] Background
[10] On or about August 12, 2008, Plaintiff initiated this action by filing a Complaint in the Superior Court of California, County of San Diego. Not. of Removal, p. 2. On October 17, 2008, Defendant Recontrust Company (“Recontrust”) removed the Complaint to this Court (Doc. # 1). The Complaint alleges that Plaintiff owns real property in San Marcos, CA (the “Property”). The Complaint alleges that Plaintiff has a residential loan for the Property secured by a Deed of Trust. The Complaint alleges that Recontrust is the appointed trustee to the Deed of Trust. The Complaint alleges that Defendants Recontrust, Doe 1, and Does 2-50 “are proceeding toward a Trustee’s sale of” the Property. The Complaint alleges that Doe 1 is the “holder of the note identified in the [Deed of Trust].” Complaint, ¶ 7. The Complaint alleges:
[11] Doe 1 has no present right to initiate foreclosure under the [Deed of Trust] identified in the Notice of Sale . . . , nor does it have the right to direct the Recontrust Company to foreclose and sell the subject real property owned by Plaintiff. Recontrust Company has been put on notice of Plaintiff’s claim in this regard, and demand has been made of Recontrust Company to suspend any foreclosure sale unless and until it has obtained proof that Doe 1 actually has in its possession the original note properly endorsed to it or assigned to it as of a date preceding the notice of default recorded by Recontrust Company. Recontrust Company has failed and refused to suspend the sale of the property or to provide proof of the basis of the right of Doe 1 to initiate foreclosure under the [Deed of Trust].
[12] Id., ¶8. The Complaint alleges that Plaintiff demanded written proof of Defendants’ right to proceed in foreclosure, and that no such proof has been offered. The Complaint alleges that Defendants have “engaged[d] in a pattern and practice of utilizing the non-judicial foreclosure procedures of this State to foreclose on properties when they do not, in fact, have the right to do so;” and have used the United States mail in furtherance of their conspiracy. Id., ¶¶9, 13. The Complaint alleges that in pursuing non-judicial foreclosure, Defendants falsely represented that they had a right to payment under Plaintiff’s residential loan, which was secured by the Deed of Trust.
[13] The Complaint alleges causes of action for “Unfair Debt Collection Practices;” “Predatory Lending Practices;” and “RICO.” Complaint, p. 8-9. In support of the cause of action for Unfair Debt Collection Practices, the Complaint alleges that Defendants “have violated provisions of California’s Rosenthal Fair Debt Collection Practices Act, including but not limited to Civil Code § 1788(e) and (f),” (“RFDCPA”), the Federal Fair Debt Collections Act, 15 U.S.C., Title 41, Subchap. V, §§ 1692, et seq.” (“FDCPA”),and the Real Estate Settlement Procedures Act . . . , 12 U.S.C. §§ 2601-2617″ (“RESPA”). Id., ¶¶ 19, 20. In support of the cause of action for Predatory Lending Practices, the Complaint alleges that “[a]ssuming arguendo that Defendant, Doe 1 does have the right . . . to initiate foreclosure . . . then Defendant Doe 1 is subject to defenses that would have been available against Decision One Mortgage Company, LLC” (“Decision One”), the initial Lender identified in the Deed of Trust. Id., ¶ 22. The Complaint alleges that Decision One Mortgage Company, LLC “has engaged in deceptive practices with respect to Plaintiff . . . the specifics of which are unknown,” in violation of the Home Ownership and Equity Protection Act, 15 U.S.C. §§ 1637 (“HOEPA”), the Truth in Lending, 15 U.S.C. § 1601 (“TILA”), Regulation Z, 12 C.F.R. 226, and the Federal Trade Commission Act, 15 U.S.C. §§ 41-58 (“FTC Act”). Id., ¶23. In support of the cause of action for RICO, the Complaint alleges that “Defendants and each of them were participating in and have participated in a scheme of racketeering as that term is defined in RICO 18 U.S.C. §§1961, et seq.” Id., ¶ 26.
[14] On October 24, 2008, Recontrust filed the Motion to Dismiss. Plaintiff has not filed an opposition to the Motion to Dismiss.
[15] Standard of Review
[16] A motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure tests the legal sufficiency of the pleadings. See De La Cruz v. Tormey, 582 F.2d 45, 48 (9th Cir. 1978). A complaint may be dismissed for failure to state a claim under Rule 12(b)(6) where the factual allegations do not raise the right to relief above the speculative level. See Bell Atlantic v. Twombly, 127 S.Ct. 1955, 1965 (2007). Conversely, a complaint may not be dismissed for failure to state a claim where the allegations plausibly show that the pleader is entitled to relief. See id. (citing Fed R. Civ. P. 8(a)(2)). In ruling on a motion pursuant to Rule 12(b)(6), a court must construe the pleadings in the light most favorable to the plaintiff, and must accept as true all material allegations in the complaint, as well as any reasonable inferences to be drawn therefrom. See Broam v. Bogan, 320 F.3d 1023, 1028 (9th Cir. 2003); see also Chang v. Chen, 80 F.3d 1293 (9th Cir. 1996).
[17] Analysis
[18] A. Recontrust’s Right to Initiate the Foreclosure Process
[19] Recontrust contends that, as trustee under Plaintiff’s Deed of Trust, it has the right to initiate the foreclosure process on behalf of Plaintiff’s lender and the owners of the note. Recontrust contends that California law does not require production of the original note to proceed with a non-judicial foreclosure. Defendant therefore contends that “Plaintiff’s allegation that Defendant has no right to foreclose on his property is incorrect.” Mot. to Dismiss, p. 6.
[20] Pursuant to section 2924(a)(1) of the California Civil Code, the trustee of a Deed of Trust has the right to initiate the foreclosure process. Cal. Civ. Code § 2924(a). Production of the original note is not required to proceed with a non-judicial foreclosure. Id. Viewing the allegations in the light most favorable to Plaintiff, the Complaint does not establish that Defendant, as trustee of the Deed of Trust, lacks the right to initiate the foreclosure process.
[21] B. Cause of Action for Unfair Debt Collection Practices
[22] Recontrust contends that the Complaint fails to state a claim under the RFDCPA or the FDCPA because the Complaint does not allege that Defendants engaged in any harassment or abuse; that the Defendants used false or misleading representations; or that Defendants engaged in any unfair practices. Recontrust contends that the Complaint fails to state a claim under the RESPA because “Plaintiff does not allege any improper kickbacks in violation of 12 U.S.C. § 2607,” and “[t]o the extent that Plaintiff claims disclosure-related violations, the claims must be dismissed because there is no private right of action under the disclosure rules of RESPA.” Mot. to Dismiss, p. 7.
[23] To be liable for a violation of the FDCPA or the RFDCPA, the defendant must – as a threshold requirement – be a “debt collector” within the meaning of the Acts. Heintz v. Jenkins, 514 U.S. 291, 294 (1995); Cal. Civ. Code § 1788.2(c). The “activity of foreclosing on [a] property pursuant to a deed of trust is not the collection of a debt within the meaning of the” FDCPA. Hulse v. Ocwen Fed. Bank, FSB, 195 F. Supp. 2d 1188, 1204 (D. Or. 2002) (holding that the plaintiff improperly brought a claim challenging the lawfulness of foreclosure proceedings pursuant to a deed of trust under the FDCPA). The Complaint fails to state a claim under the FDCPA or the RFDCPA because Plaintiff challenges the lawfulness of foreclosure proceedings on her home pursuant to a deed of trust; Plaintiff does not allege that Defendants were debt collectors, collecting a debt within the meaning of the FDCPA or the RFDCPA.
[24] The Complaint does not identify the provisions of the RESPA that Defendants violated. The Complaint does not allege improper kickbacks in violation of 12 U.S.C. 2607, or that Recontrust was a “loan servicer” as required for a violation of 12 U.S.C. section 2605. To the extent the Plaintiff is attempting to assert disclosure-related violations, there is no private right of action under the disclosure rules of the RESPA. Bloom v. Martin, 865 F. Supp. 1377, 1384-85 (N.D. Cal. 1994). The Court concludes that the Complaint fails to state a claim under the RESPA.
[25] C. Cause of Action for Predatory Lending Practices
[26] Recontrust contends that the Complaint fails to state a claim under the HOEPA, TILA, Regulation Z or the FTC Act because Plaintiff has not alleged that Defendants engaged in any deceptive practices, or that Defendants were involved in the origination of Plaintiff’s loan.
[27] In support of the cause of action for Predatory Lending Practices, the Complaint alleges wrongdoing on the part of Decision One. Decision One is a third party not named as a defendant. The Complaint alleges Decision One committed unspecified acts which violated unspecified provisions of federal law. The Complaint does not allege that any of the named Defendants engaged in deceptive practices or otherwise engaged in predatory lending practices. The Court concludes that the Complaint fails to state a claim for predatory lending practices because Plaintiff does not allege that any of the named Defendants engaged in conduct that violated the HOEPA, TILA, Regulation Z or FTC Act.
[28] D. Cause of Action for RICO
[29] Recontrust contends that the cause of action for RICO fails because “Plaintiff’s Complaint does not contain the required allegations.” Mot. to Dismiss, p. 9. Recontrust contends that the Complaint does not allege that Plaintiff’s loan constitutes an “unlawful debt;” or that Defendant engaged in “any indictable acts punishable by a year or more in prison, let alone the two or more criminal acts required to show a ‘pattern of racketeering activity’ under 18 U.S.C. §§ 1961(5) and 1962.” Id., p. 8-9.
[30] To state a RICO claim, the plaintiff must allege the existence of an “enterprise” and the connected “pattern of racketeering activity.” 18 U.S.C. § 1962; United States v. Turkette, 452 U.S. 576, 582 (1981). “The Ninth Circuit has held that allegations of predicate acts under RICO must comply with Rule 9(b)’s specificity requirements.” U.S. Concord, Inc. v. Harris Graphics Corp., 757 F. Supp. 1053, 1061 (N.D. Cal. 1991) (citing Schreiber Distributing Co. v. Serv-Well Furniture Co., 806 F.2d 1393, 1400-01) (9th Cir. 1986). A RICO plaintiff must allege the time, place and manner of each act of fraud, and the role of each defendant in the fraud. Lancaster Community Hospital v. Antelope Valley Hospital Dist., 940 F.2d 397, 405 (9th Cir. 1991). Aside from the conclusory allegation that “Defendants and each of them were participating in and have participated in a scheme of racketeering as that term is defined in RICO 18 U.S.C. §§1961, et seq,” Plaintiff fails to allege with any specificity the existence of a RICO enterprise, or the conduct of a pattern of racketeering. The Court concludes that the Complaint fails to state a claim under RICO.
[31] Conclusion
[32] The Motion to Dismiss (Doc. # 4) is GRANTED. The above-captioned action is DISMISSED.
[33] WILLIAM Q. HAYES United States District Judge


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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


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Forensic Loan Audit Uncovered TILA Disclosure Violations

Posted on January 18, 2009. Filed under: bankruptcy, Case Law, Foreclosure Defense, Mortgage Audit, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , , , , |

By Lane Houk

The borrower in this case had foreclosure filed against them. After retaining an attorney for the foreclosure, the attorney advised them to have an audit of their loan closing file which revealed a material disclosure violation. It is important to note that a loan can ONLY be rescinded when:

  1. The loan is a refinance transaction;
  2. Funded in the last three years
  3. On the borrower’s primary residence;
  4. When a “material disclosure violation” is found

The term “material disclosure violation” is a very important component. Many people (including self-proclaimed experts in loan auditing) think that “any” violation of the Truth in Lending Act gives someone the right to rescind.  That is patently wrong. The four conditions above must be true in order for the borrower to have the possible “extended right to rescind” the loan transaction. There are only 4 potential “material disclosure violations.”

The borrower in this case was given an insufficient amount of the Notice of Right to Cancel. A borrower should receive two (2) copies of the Notice.

If a married couple is identifiable on a Universal Residential Application, then each consumer is entitled to rescind and must be given a copy of the TILA Disclosure Statement with all material information accurately and correctly disclosed, 15 U.S.C. § 1602(u); Reg. Z § 226.23(a)(3) n.48, and two (2) copies each of the rescission notice, 15 U.S.C. § 1635(a); Reg. Z § 226.23(b), irrespective of whether both are obligated on the note (or either, for that matter).

In this case, the borrowers were married and received only 2 copies total. Material disclosure violation. Thus they rescinded. The lender Option One obviously contested the matter.

Once the Consumer rescinds, the security interest arising by operation of law becomes void automatically. The promissory note is also voided since it is part of the same “transaction,” see i.e., 15 U.S.C. § 1635(b) and Reg. Z § 226.23(d)(1).]

This is powerful folks. This is a complete remedy to foreclosure. The mortgage is the security interest and it is the mortgage (and the mortgage only) that gives the lender the right to foreclose. In a rescission, the lender must void the mortgage within 20 days. If it does not, it is another violation of TILA.

After rescinding the loan the borrowers also filed a Chapter 13 bankruptcy. The lender refused to rescind the loan. The borrowers filed an Adversary Proceeding in the Bankruptcy Court. Bottom line: The judge heard all arguments from both Plaintiff (borrower) and the Defendant (Option One). The judge found in favor of the borrower/plaintiff and determined that they had the right to rescind. Victory number one.

But a BIG ruling in this case was that since they had rescinded the loan, the loan became an “unsecured” debt since the mortgage was automatically voided as per TILA. Since 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.

The moral of the story: TILA Rescission is the most powerful remedy to foreclosure if/when the borrower has this remedy afforded to them. The key is to obtain a loan audit by a real expert.

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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

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Altamirano-v-Copiague (TILA)

Posted on January 12, 2009. Filed under: Case Law, Mortgage Law, Truth in Lending Act | Tags: , , , , , |


“Assuming arguendo that the final disclosures had been TILA compliant, Plaintiffs would still be entitled to summary judgment because the initial Truth in Lending Act estimates given to Plaintiffs were not compliant with TILA standards. Pursuant to 15 U.S.C. § 1631(c), estimates may satisfy the statutory standards of the Truth in Lending Act. However, these estimates may only be given “where the provider of such information is not in a position to know exact information.” Id. Estimates must be based information available to the creditor, and if “any information necessary for an accurate disclosure is unknown to the creditor, the creditor shall make the disclosure on the best information reasonably available at the time the disclosure is provided to the consumer and shall state clearly that the disclosure is an estimate.” 12 C.F.R. § 226.17(c)(2). While “variance between estimates and terms of actual loans is not per se evidence of TILA violations,” the Good Faith Estimate and the estimated TILA disclosure given to Plaintiffs not only conflicted with the final TILA disclosure form and the First Payment Letter, they also conflicted with one another.”

Altamirano-v-Copiague

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Lender Found Liable in Mortgage Fraud Case

Posted on January 10, 2009. Filed under: Case Law, Foreclosure Defense, Mortgage Fraud, Mortgage Law, Predatory Lending, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , |

A Florida federal judge has found a mortgage lender liable to borrowers who say they were fraudulently put into unaffordable subprime mortgages.

U.S. District Judge Federico A. Moreno of the Southern District of Florida entered a default judgment against Bankers Express Mortgage Inc.

The judge said the Calabasas, Calif.-based lender did not respond to a lawsuit Maxo and Georgette Petit-Homme filed Aug. 14 and thus was liable for a to-be-determined sum of damages.

Another defendant, loan servicer Litton Loan Servicing LP, is seeking dismissal of the suit.

The Petit-Hommes, who are in foreclosure, sued Bankers Express and Litton in the District Court seeking to rescind the mortgage on their Miami home.

They claim that when they applied for a mortgage they provided the defendants with documentation about their income and financial assets.

The defendants, however, falsely increased the plaintiffs’ income on the loan application to make them eligible for an expensive $180,000 subprime loan with an interest rate of more than 10 percent, the suit says.

The Petit-Hommes claim that when they took out the loan in December 2006 they were unaware that the defendants had falsified their income.

Read more…

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Sterten v. Option One Mortgage Corp.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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.

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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.

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