US Sup Ct Rules TILA Only Requires Written Notice of Rescission w/in 3 Yrs of Consummation, No Lawsuit Required to Exercise Right of Rescission

The U.S. Supreme Court recently held that a borrower exercising his right to rescind under the federal Truth in Lending Act only needs to provide written notice to the lender within the 3-year period under 15 U.S.C. 1635(f), and does not need to file a lawsuit within that period in order to exercise the right to rescind.

 

 http://www.supremecourt.gov/opinions/14pdf/13-684_ba7d.pdf

 

On February 23, 2007, the borrowers refinanced the mortgage on their home.  Exactly 3 years later, on February 23, 2010, the borrowers mailed a letter attempting to rescind the loan.

 

The lender responded to the rescission letter on March 12, 2010, refusing to accept the rescission as valid. The borrowers filed suit in U.S. District Court on February 24, 2011, four years and one day after the loan closed, seeking a declaratory judgment of rescission and damages under the federal Truth in Lending Act.

 

The District Court entered judgment on the pleadings for the lender, ruling that a borrower must file suit within 3 years of the date the loan was consummated in order to exercise his right to rescind the loan under TILA, 15 U.S.C. 1635(a) and (f).  The Eighth Circuit Court of Appeals affirmed, and the borrowers appealed to the U.S. Supreme Court.

 

The U.S. Supreme Court ruled that the Eighth Circuit’s reliance on Kieran v. Home Capital, 720 F. 3d 721, 727-728 (2013), which held that unless a borrower has filed suit for rescission within 3 years of the transaction’s consummation, section 1635 (f) extinguishes the right to rescind and bars relief, was error.

 

The Court then turned to 15 U.S.C. 1635(a), which explains how the right to rescind needs to be exercised.  Relying on the statutory text that a borrower has the right to rescind “by notifying the creditor, in accordance with regulations of the Board, of his intention to do so”, the Court held that as long as the borrower gives written notice within 3 years after the transaction was consummated, rescission under TILA is timely and the statute does not also require the borrower to sue within 3 years.

 

Turning to TILA section 1635(f), the Court clarified that it governs when the right to rescind must be exercised, but says nothing about how the right is exercised.

 

Reversing the Eighth Circuit’s judgment and remanding the case for further proceedings, the U.S. Supreme Court concluded that because the borrowers mailed their written notice of intent to rescind within 3 years after their loan was consummated, that is all they needed to do to exercise the right under TILA and the trial court erred in dismissing the complaint.

 

Glarum Revised Decision

The revised Glarum decision that addressed the issue of how an AOI can be authenticated and admitted into evidence when the AOI is based upon business records from a prior servicer. The original decision implied that the affiant must have personal knowledge of how the payment information is entered into the servicer’s system in order to execute the affidavit. This new decision was just release last week. Look specifically at the footnotes for clarification on the issue.


The Illinois Appellate Court for the First District recently confirmed that an attempt to rescind a mortgage loan made more than three years after the borrowers received the mortgage was untimely, and held that the borrower's earlier alleged attempt at rescission within the three-year period was inadequate, as it was not a written communication that clearly stated that the borrower was rescinding the loan.

A copy of the opinion is available at:

http://www.state.il.us/court/Opinions/AppellateCourt/2011/1stDistrict/November/1103115.pdf

The borrowers defaulted on their mortgage loan, and the investor instituted a foreclosure action. In the course of settlement negotiations, the borrowers frequently alleged TILA violations, and threatened to rescind the subject Note and Mortgage. In one letter, the borrowers included an unfiled counterclaim, which stated that "[t]he borrowers, by the filing of this action, elect to rescind the subject transaction." The borrowers provided the investor's counsel with this unfiled counterclaim within three years of receiving their mortgage.

The borrowers filed their counterclaim "exactly three years and one day" after they entered into the loan agreement. In addition to attempting to rescind the loan, the borrowers' counterclaim sought damages under TILA.

The lower court dismissed the counterclaim on the basis that it was untimely.

The borrowers appealed, contending among other things that (1) that their election to rescind was timely; and (2) even if it was not, the election should survive under a "right of rescission in recoupment under state Law."

As you may recall, TILA provides that "[a]n obligor's right of rescission shall expire three years after the date of the consummation of the transaction." 15 U.S.C. Sec. 1635(f) (2006). TILA's implementing regulation provides that "[t]o exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram, or other means of written communications." 12 C.F.R. Sec. 226.23(a)(2) (2006).

The Court began its analysis by noting that the Supreme Court held that TILA "completely extinguish[es] the right of rescission at the end of the three year period." Beach v. Ocwen Federal Bank, 523 U.S. 410, 412-14 (1998).

Finding that holding unambiguous, the Court turned its attention to the manner in which a borrower must provide notice to the creditor under TILA, which it found to be an issue of first impression in Illinois. Based on the plain language of TILA and its implementing regulation, the Court held that TILA "requires that the written communication clearly state that the borrower is rescinding the mortgage in the present; it nowhere speaks of merely notifying the creditor of an intention to rescind at some unspecified point in the future."


Under the facts at issue here, the Court observed that none of the borrowers' communications contained an unqualified statement of the borrowers' intention to rescind the loan. In particular, the borrowers' counterclaim stated that the borrowers' intended to rescind the loan "by the filing of this counterclaim."

However, the counterclaim was not timely filed. Therefore, the Court held that the borrowers "failed to rescind their loan within the three-year statute of repose" imposed by TILA.

The Court next examined the borrowers' contention that they should be allowed to proceed under a "defense in recoupment" per Illinois law. The Court found that a recent decision held that "Illinois law.does not authorize an action in recoupment in defense of foreclosure actions brought outside of the three-year requisite period." Wells Fargo Bank, N.A. v. Terry, 401 Ill App 3d 18 (2010) ("Terry").

In Terry, the court held that under Illinois law, the right of rescission would only survive the expiration of the three-year period if the relevant portion of TILA were a statute of limitations. Id. at 21.

However, the U.S. Supreme Court in Beach v. Ocwen held that TILA is a statute of repose. See Beach v. Ocwen, 523 U.S. at 417. Therefore, the Court held that the borrowers' argument failed, and their rescission claim was properly dismissed.

TILA Rescission Claim

The U.S. Court of Appeals for the Third Circuit recently held that the testimony of a borrower alone is sufficient to overcome TILA's presumption of delivery of TILA disclosures.

A copy of the opinion is available at:

http://www.ca3.uscourts.gov/opinarch/094055p.pdf

The borrower brought a TILA rescission claim, specifically alleging that she did not receive the notices of her right to cancel at the closing on her home, and further, that to the extent she did receive the notices in the mail after the closing, they were not clear and conspicuous as required by TILA because they listed the wrong final rescission date and because they were received only after the loan funds had been disbursed.

Thus, according to the borrower, TILA's three-year extension of the right to rescind under the mortgages was triggered. The jury entered a verdict in favor of the lender on this TILA rescission claim.

On appeal, the borrower challenged various aspects of the jury instructions, including the District Court's instruction that because her signature was on the notice of right to cancel, "something more than just [her] testimony . . . is needed to rebut the presumption that she received" the notice.

Examining the jury instruction at issue, the Court noted that, unless Congress or the Rules of Evidence provide otherwise, "a presumption in a civil case imposes the burden of production on the party against whom it is directed, but does not shift the burden of persuasion." Further, "the introduction of evidence to rebut a presumption destroys that presumption, leaving only that evidence and its inferences to be judged against the competing evidence and its inferences to determine the ultimate question at issue."

The Court then examined the language within TILA, specifically the provision stating that when a borrower signs a "written acknowledgment of receipt" of the disclosures required by TILA, his or her signature "does no more than create a rebuttable presumption of delivery thereof." The Court concluded that this language in TILA indicated that Congress did not intend that something more than the testimony of a borrower was required to overcome TILA's rebuttable presumption of receipt. Thus, the District Court's jury instruction to the contrary was in error.

New Mortgage Disclosure Form to Help Safeguard Against Default: CFPB

The new Consumer Financial Protection Bureau (CFPB) aims to avert at least one hitch in the home loan process that some market experts say started a whirlwind of mortgage delinquencies - ensuring consumers have a clear understanding of the cost associated with their mortgage. CFPB unveiled two prototypes for a new regulatory disclosure form Wednesday that the agency will begin testing this week. Each of the prototypes combines the two-page TILA disclosure and the three-page RESPA disclosure into a single, abbreviated form.

Each of the prototypes combines the two-page Truth in Lending Act (TILA) disclosure document from the Federal Reserve and the three-page Real Estate Settlement and Procedures Act (RESPA) disclosure from HUD into a single, abbreviated form which lenders will be required to present to borrowers within three days of application for a mortgage.

The new form will consist of two pages. The first will provide a basic overview of the core costs related to the closing of the loan and the monthly payment the consumer can expect, as well as whether or not the amount of that payment will change over time. Page two offers a more detailed explanation of the cost breakdown.

option A http://www.consumerfinance.gov/wp-content/uploads/2011/05/disclosure1.pdf
 


option B http://www.consumerfinance.gov/wp-content/uploads/2011/05/disclosure1.pdf

1st Cir Again Applies Favorable TILA Rulings to MCCCDA

The U.S. Court of Appeals for the First Circuit recently applied its TILA rulings to Massachusetts law, holding that there was no right to rescind under Massachusetts law where the numerical dates and deadlines in the Notice of Right to Cancel were allegedly inaccurate. The First Circuit also held as untimely Appellants’ request to certify questions construing the Massachusetts Consumer Credit Cost Disclosure Act to the Massachusetts Supreme Judicial Court.


The Appellant-borrowers (“the Borrowers”) obtained a refinance loan from Encore Credit Corp. (“Encore”), which later sold and assigned the loan.

The loan closed a day later than it was originally scheduled, and the loan documents were altered by hand to reflect the date change.

Later, the Borrowers fell behind on their payments. The investor initiated foreclosure proceedings, and rejected the Borrowers’ request torescind the loan. After filing for bankruptcy, the Borrowers sought

rescission under Massachusetts law charging that their mortgage was rescindable, because Encore had allegedly failed to provide the proper closing and rescission dates, and allegedly failed to provide the Borrowers with “high cost home mortgage loan” disclosures under Massachusetts law. Both the bankruptcy court and the United States District Court rejected the Borrowers’ arguments, and the First Circuit affirmed.

Despite the four-year limitations period under the Massachusetts Consumer Credit Cost Disclosure Act, Mass. Gen. Laws ch. 140D, § 10(a) (“MCCCDA”), the Borrowers sought to rescind five years after the closing date, based upon the pending foreclosure. The Borrowers sought to show that the disclosures they received from Encore incorrectly stated the loan closing date, and that the disclosures did not provide the deadline to rescind the loan. To prove that adequate disclosures had been provided in a timely manner, however, the investor submitted copies of the right to cancel forms, which the Borrowers had signed and dated, and which also bore a handwritten date of rescission.

The First Circuit noted that the MCCCDA was patterned on the federal Truth in Lending Act (“TILA”) and that both statutes give consumers the right to rescind a mortgage “until midnight of the third business day following the consummation of the transaction.” Mass. Gen. Laws ch. 140D, § 10(a); 15 U.S.C. § 1635(a). Under the First Circuit’s prior TILA rulings, “technical deficiencies do not matter if the borrower receives a notice that effectively gives him notice as to the final date for rescission and has the three full days to act.” The Court determined that the Borrowers clearly had received adequate notice of their right to cancel under the MCCCDA also.

The Court similarly rejected the Borrowers’ claim that they did not receive state high cost home mortgage loan disclosures. As you may recall, the regulations under the MCCCDA require lenders to print a statement on the loan application above the borrower signature line advising borrowers that the loan being offered may not be the least expensive available and that borrowers should shop around for a better loan. Although the statement was not provided on the Borrowers’ loan application form, it was provided separately at the loan closing. Because the regulations provide that consumers can rescind only within three days of receiving the high cost home loan disclosures, and the Borrowers did not dispute that the warning was provided to them at the time of the loan transaction, Court held that their opportunity to rescind had long expired.

Further, the Court also rejected the Borrowers’ renewed request for certification to the Massachusetts Supreme Judicial Court. The Court noted that the Borrowers had waited until after the bankruptcy court had denied their motion for reconsideration before seeking certification. The Court stated that such an approach “is almost always fatal, unless the court sees strong policy reasons” for certification. The Court also stated that it does not “normally certify cases that depend not on a general rule but on a unique fact configuration” as in this situation.

Finally, the Court held that the Borrowers were not entitled to damages under chapter 93A of the Massachusetts General Laws, because liability for damages hinged on a successful claim for rescission, which was clearly not the case here.

FRB Issues Proposed Rule on Dodd-Frank "Ability to Repay," "Qualified Mortgage," PPPs

The Federal Reserve Board issued a proposed rule to implement the Dodd-Frank Act amendments to TILA that would require creditors to determine a consumer's ability to repay closed-end mortgage loans generally, and would establish minimum mortgage underwriting standards.



The FRB is also soliciting comment on two alternative approaches for defining a "qualified mortgage."

The FRB's notice is available at:


http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110419b1.pdf

As you may recall, Regulation Z currently prohibits a creditor from making a "higher-priced" mortgage loan without regard to the consumer's ability to repay the loan. The Dodd-Frank Act expanded the scope of the ability-to-repay requirement to cover any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan). The Dodd-Frank Act also placed limits on prepayment penalties.

The proposal would apply to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans), and provides the following four options for complying with the ability-to-repay requirement:

(1) A creditor can meet the general ability-to-repay standard by considering and verifying certain specified underwriting factors, such as the consumer's income or assets, debt obligations, and credit history.
Underwriting the payment for an adjustable-rate mortgage loan is to be based on the fully indexed rate;

(2) A creditor can make a "qualified mortgage" (which provides the creditor with special protection from liability provided the loan does not have certain features such as negative amortization, the fees are within specified limits, and the creditor underwrites the mortgage payment using the maximum interest rate in the first five years). Importantly, the FRB is soliciting comment on two alternative approaches for defining a "qualified mortgage."

(3) A creditor operating predominantly in rural or underserved areas can make a balloon-payment qualified mortgage. This option is meant to preserve access to credit for consumers located in rural or underserved areas where banks originate balloon loans to hedge against interest rate risk for loans held in portfolio.

(4) A creditor can refinance a "non-standard mortgage" with risky features into a more stable "standard mortgage" with a lower monthly payment. This option is meant to preserve access to streamlined refinancings.

The proposal would also implement the Dodd-Frank Act's limits on prepayment penalties. In addition, the proposal would require creditors to retain evidence of compliance with this rule for three years after a loan is consummated.


http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110419b1.pdf

Under Dodd-Frank, the proposal would provide four options for complying with the ability-to-repay requirement.



http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110419a1.pdf

First, a creditor can meet the general ability-to-repay standard by considering and verifying specified underwriting factors, such as the consumer’s income or assets.



Second, a creditor can make a “qualified mortgage,” which gives the creditor special protection from liability provided the loan does not have certain features, such as negative amortization; the fees are within specified limits; and the creditor underwrites the mortgage payment using the maximum interest rate in the first five years.


Regulators are currently soliciting comment on alternative approaches for defining a “qualified mortgage.”


Third, a creditor operating predominantly in rural or underserved areas can make a balloon-payment qualified mortgage.


a creditor can refinance a “non-standard mortgage” with risky features into a more stable “standard mortgage” with a lower monthly payment.

The FRB reminds that general rulemaking authority for TILA is scheduled to transfer to the Consumer Financial Protection Bureau (or, "CFPB") on July 21, 2011. Accordingly, the FRB states that this rulemaking will become a proposal of the CFPB and will not be finalized by the FRB.







The comments deadline is July 22, 2011.

Federal Reserve System's final loan officer compensation rule

The U.S. Court of Appeals for the District of Columbia Circuit entered  an order dissolving the administrative stay of the Board of Governors of the Federal Reserve System's ("FRB”) final loan officer compensation rule.  The Court held that the appellants did not satisfy the stringent standards required for a stay pending appeal. As the administrative stay is now dissolved, the FRB's final loan officer compensation rule is now in force.

Prior info.
The U.S. District Court for the District of Columbia denied the motions of the National Association of Independent Housing Professionals, Inc. (“NAIHP”) and the National Association of Mortgage Brokers (“NAMB”) for a temporary restraining order and preliminary injunction to enjoin the Board of Governors of the Federal Reserve System ("FRB”) from implementing the loan officer compensation rule, effective on April 1, 2011, that restricts certain compensation practices of loan originators relating to mortgage loans. A copy of the District Court's Opinion is attached.


As you may recall, in their consolidated actions against the FRB, the NAMB and NAIHP allege that the FRB exceeded its authority under the Truth in Lending Act (“TILA”) and the Home Ownership and Equity Protection Act (“HOEPA”) in promulgating the loan officer compensation rule. Alternatively, the trade groups assert, if the FRB did have authority to issue the final rule, the final rule is arbitrary and capricious.

Following the denial of their requests for a TRO and preliminary injunction in the lower court, the trade groups appealed the U.S. Circuit Court of Appeals for the District of Columbia Circuit. The trade groups also filed an emergency motion for expedited relief and emergency motion to stay implementation of final rule pending appeal.

The DC Circuit ordered that the implementation of the final rule under review in the consolidated cases be stayed pending further order of the Court, in order to provide "sufficient opportunity to consider the merits of the motions for emergency relief." The Court specifically noted that the stay "should not be construed in any way as a ruling on the merits of those motions." A copy of the Circuit Court's Order is also attached.

MORTGAGE FINANCE OVERHAUL TO RAISE COSTS, REDUCE HOME-OWNERSHIP

 David Stevens, commissioner of the Federal Housing Administration, which guarantees loans to first-time and low-income home buyers. Ownership rates, which rose from 63.8 percent in 1994 to 69.2 percent a decade later, have since dropped to 66.9 percent, according to the U.S. Census Bureau. Stevens said he expects the rate to fall further.


http://www.bloomberg.com/news/print/2011-01-31/higher-costs-lower-home-ownership-rates-expected-after-housing-overhaul.html



http://www.federalreserve.gov/newsevents/press/bcreg/20110201a.html

FEDERAL RESERVE STEPS BACK ON NEW MORTGAGE DISCLOSURE RULES

The Federal Reserve said this week that it "does not expect" to finalize three pending rule changes under TILA that would have mandated new consumer disclosure requirements for mortgage loans. The Fed began crafting the new regulations more than a year ago in response to claims that borrowers did not understand the terms of the loans they were signing. However, rulemaking authority for TILA and jurisdiction over consumer disclosures is scheduled to transfer to the new Consumer Financial Protection Bureau within a few months.


http://www.dsnews.com/articles/federal-reserve-steps-back-on-new-mortgage-disclosure-rules-2011-02-02

LAWMAKERS URGE FEDERAL RESERVE TO ABANDON TILA RULE CHANGE

The Fed has recommended revising a stipulation that allows homeowners to stop a foreclosure on the grounds that the lender violated the disclosure requirements outlined in the Truth-in-Lending Act (TILA) for certain home-secured transactions, including closed-end mortgages and home equity lines of credit.


Currently, a borrower has up to three years to convince the courts to cancel, or rescind, a mortgage loan if they can prove the lender did not properly disclose the terms of the loan at the time it was signed. It’s a regulation that has been in place since TILA was enacted 42 years ago.

The proposed rule would reverse the traditional understanding of TILA’s right of rescission by requiring a homeowner to pay off the entire mortgage amount before a creditor is required to cancel its security interest in the home.

http://www.dsnews.com/articles/lawmakers-urge-federal-reserve-to-abandon-tila-rule-change-2011-01-17

FRB Issues New MDIA "Payment Shock" Disclosure Interim Rule, Proposes Higher Dollar-Amount Threshold for TILA/CLA

New Interim Rule Regarding MDIA "Payment Shock" Disclosures


In response to public comments, the Federal Reserve Board recently issued a new interim rule, amending the prior interim rule issued a few months ago regarding a mortgage lender's duty to disclose examples of how a loan's interest rate or monthly payments can change.

The FRB's new interim rule is available at:

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20101222a1.pdf

Under the Mortgage Disclosure Improvement Act of 2008 (MDIA), mortgage lenders must alert borrowers to the risks of payment increases before they take out mortgage loans with variable rates or payments. The statutory amendments will become effective on January 30, 2011.

As you may recall, in September of 2010, the FRB issued an interim rule, implementing these provisions of the MDIA. Under the FRB's September interim rule, lenders' cost disclosures must include a payment summary in the form of a table stating the initial rate and corresponding periodic payment and, for adjustable rate loans, the maximum rate and payment that can occur during the first five years as well as a "worst case" example showing the maximum rate and payment possible over the life of the loan.

This new interim rule clarifies that:

1. Creditors' disclosure should reflect the first rate adjustment for a "5/1 ARM" loan, because the new rate typically becomes effective within 5 years after the first regular payment due date;

2. Creditors' disclosures should show the earliest date the consumer's interest rate can change, rather than the due date for making the first payment under the new rate; and

3. Which mortgage transactions are covered by the special disclosure requirements for loans that allow minimum payments that cause the loan balance to increase.

The FRB states that creditors have the option of complying with either the FRB's September 2010 interim rule as originally published, or as revised by this interim rule, until October 1, 2011, at which time compliance with this new interim rule will become mandatory.

The Board is soliciting comment on this interim rule for 60 days after publication in the Federal Register.

Proposed Increase in Dollar-Amount Threshold for TILA and CLA

The Federal Reserve Board recently proposed two rules that would expand the coverage of consumer protection regulations to credit transactions and leases of higher dollar amounts.

As you may recall, effective July 21, 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires that the protections of the Truth in Lending Act (TILA) and the Consumer Leasing Act (CLA) apply to consumer credit transactions and consumer leases up to $50,000, from the current amount of $25,000. This amount will be adjusted annually to reflect any increase in the Consumer Price Index.

TILA requires creditors to disclose key terms of consumer loans and prohibits creditors from engaging in certain practices with respect to those loans. Currently, consumer loans of more than $25,000 are generally exempt from TILA. However, private education loans and loans secured by real property (such as mortgages) are subject to TILA regardless of the amount of the loan.

The CLA requires lessors to provide consumers with disclosures regarding the cost and other terms of personal property leases. An automobile lease is the most common type of consumer lease covered by the CLA. Currently, a lease is exempt from the CLA if the consumer's total obligation exceeds $25,000.

The notices published in the Federal Register are available at:

Regulation M: http://edocket.access.gpo.gov/2010/pdf/2010-31530.pdf

Regulation Z: http://edocket.access.gpo.gov/2010/pdf/2010-31529.pdf

Comments on the FRB's proposals must be submitted by February 1, 2011.