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Rescission Requests under TILA

Rescission Requests under TILA

January 4, 2019

Authored by: Jim Goldberg

In a case of first impression, the Ninth Circuit begins to unravel the mystery of when a claim to enforce a rescission request under the Truth in Lending Act (TILA) may be time-barred. An action by a Washington state borrower to enforce a request for rescission of a loan under TILA is analogous to an action to enforce a contract and must be brought within the Washington state statute of limitations for such a contract claim, given that TILA itself does not provide a limitations period. Hoang v. Bank of America, N.A., 2018 WL 6367268 (9th Cir. December 6, 2018).

To effect rescission of a loan under TILA, the borrower must notify the lender of her intent to rescind within three days, or if required disclosures are not given, three years of the loan’s consummation date; but the borrower need not bring a lawsuit to enforce its rescission request within that three-year period. TILA does not specify when the borrower must bring the enforcement lawsuit.

So, to what limitations should a borrower, her lawyer and the court look when the borrower has not brought the rescission suit within the three years? “Without a statute of limitations in TILA, courts must first borrow the most analogous state law statute of limitations and apply that limitation period to TILA rescission enforcement claims.” Id. at *1. “Only when a state statute of limitations would ‘frustrate or significantly interfere with federal policies’ do we turn instead to federal law to supply the limitations period” to look for an analogous statute of limitations. Id. at *4.

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Lender’s “Boilerplate” Disavowal Dooms Rescission of a Common Loan Modification Agreement

In a case with potentially broad implications, the Sixth Circuit becomes the first federal circuit court to hold that the Truth in Lending Act provides no right to rescind a loan modification agreement entered into with a successor creditor. TILA exempts from rescission “refinancing” transactions with “the same creditor secured by an interest in the same property” but not “refinancing” with a different creditor.

The case impacts those borrowers whose loans were assigned after origination (an everyday occurrence), and who seek rescission after receiving a common form of modification that lowered their interest rate, recalculated the principal due to include only the unpaid balance plus earned finance charges and premiums for continuation of insurance, and perhaps even extended their payment schedule.

Regulation Z provides that a “refinancing occurs when an existing obligation … is satisfied and replaced by a new obligation undertaken by the same consumer” and that a refinancing does not include a “reduction in the annual percentage rate with a corresponding change in the payment schedule.”

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New Mortgage Servicing Rules for “Successors in Interest”

Effective as of April 19, 2018, successors in interest to property secured by mortgage loans that are covered by the Real Estate Settlement Procedures Act (“RESPA”) and Truth In Lending Act (“TILA”) now have certain rights under those acts.

These amendments are part of the Consumer Financial Protection Bureau’s 2016 Mortgage Servicing Rule amendments to RESPA and TILA.  The CFPB issued the new rules because “it had received reports of servicers either refusing to speak to a successor in interest or demanding documents to prove the successor in interest’s claim to the property that either did not exist or were not reasonably available.”  81 Fed. Reg. 72,160 at 72,165. The rules are therefore designed to make it easier for potential successors in interest to communicate with servicers and establish that they are successors in interest.

At the outset, the new rules define a “successor in interest” as anyone who obtains an ownership interest in a property secured by a mortgage loan, provided that the transfer occurs under one of the scenarios listed in the new rule.  The scenarios range from a transfer resulting from the death of the borrower to a transfer from the borrower to a spouse or child.  The person does not have to assume the loan in order to be a successor in interest.

The amendments create several potential pitfalls for servicers because certain obligations are triggered when a servicer receives actual or inquiry notice that someone might be a successor in interest.  As discussed below, the amendments require servicers to “promptly” communicate with anyone who may be a successor in interest.  Servicers must also only request documents “reasonably” required to confirm whether that person is in fact a successor in interest.  And a “confirmed” successor in interest now has the same rights as the original borrower under RESPA and TILA mortgage servicing rules.

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Legal Risks Associated with Mortgage Loan Officer Compensation

How a bank compensates mortgage loan officers can present legal risk for the bank.  Banks need to make sure their compensation practices comply with the federal Fair Labor Standards Act and related state laws, as well as Regulation Z.

Threshold Question: Are Loan Officers Exempt or Non-Exempt?

The exempt / non-exempt status of mortgage loan officers has been heavily-litigated in recent years and has been the subject of several Department of Labor opinion letters.  The inquiry remains very fact-specific and depends on what the loan officers actually do not just on their job descriptions. Relevant questions include:

  • How the mortgage loan officers are compensated (salary basis, hourly basis, commissions, etc.)
  • How much time (hours/week) the loan officers spend in the office (including a home office)
  • What the loan officers do while in the office.
  • What they do while working outside of the office.
  • How involved the loan officers are in generating sales. (e.g., meeting with prospective borrowers at their homes or other locations, meeting with referral sources such as real estate agents, developers, etc.)
  • How much time (hours/week) the loan officers spend generating sales.
  • Others duties and responsibilities of the loan officers.
  • How much time (hours/week) loan officers spend on those other duties and responsibilities (e.g., completing loan applications, gathering credit information and other documentation for the loan application process, etc.)
  • How much judgment and discretion the mortgage loan officers exercise.
  • How much flexibility the mortgage loan officers have in setting work hours and schedules.
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CFPB Proposes New Amendments to Mortgage Servicing Rules

On May 6, 2014, the CFPB issued proposed amendments to the mortgage rules under the Truth in Lending Act (TILA) affecting Regulations Z and X.  The proposed amendments affect the small servicer/small creditor exceptions to the mortgage rules and the “Qualified Mortgage” determination.  The CFPB proposes to partially re-define who may qualify as a “small servicer” under § 1026.41 of Regulation Z (incorporated by cross reference in Regulation X), revise the scope of the nonprofit small creditor exemption from the ability-to-repay rule in § 1026.43(a)(3)(v)(D) of Regulation Z, and establish a limited cure procedure where a creditor inadvertently exceeds the “Qualified Mortgage” points and fees limits.

Amendment to the “Small Servicer” Definition:  The CFPB originally presumed that most nonprofits would qualify for the “small servicer” exemptions.  However, during implementation of the mortgage rules, the CFPB learned that certain nonprofits might not qualify as “small servicers” because they were part of a larger association of nonprofits that are separately incorporated but that may operate under mutual contractual obligations, share a charitable mission, and use a common name or trademark.  In order to save resources, such associations sometimes consolidate servicing activities, with one of the associated entities providing loan servicing to one or more others, for a fee.  Under current rules, such nonprofit servicers would not qualify for the “Small Servicer” exemptions because they service, for a fee, loans on behalf of a non-“affiliated” entity.  The CFPB proposes to amend the definition of “Small Servicer” so as not to exclude qualified nonprofit entities within such formal associations where certain requirements are met.  Related changes to the section’s formal comments are also proposed.

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Sooner or Later, You Might Go Pew

For the last few years, the Pew Charitable Trust has been conducting studies of consumer financial services disclosures and urging banks and other financial institutions to adopt simplified disclosure forms. For example, in April 2012, Pew developed a model disclosure form for consumer checking accounts, and Pew reports that 26 major banks have already adopted the form (we are aware of additional banks to have adopted the form). In February 2014, Pew published a similar model disclosure form for prepaid card accounts.

Both of these Pew disclosures are similar to the “Schumer Box” disclosures used for credit cards, though of course less complicated since not written by a regulator. The prepaid form is specifically designed to be printed on the inside flap of the packaging used for many prepaid cards sold in retail locations, and is designed to be opened and reviewed by consumers prior to purchasing the card. If one assumes that consumers read disclosures at all, the Pew-style disclosures arguably are an improvement.

Pew also is recommending legislators and regulators to require banks to use such disclosures, or at least provide information about account terms, conditions and fees in a concise, easy-to-read format. While bankers do not need more regulation, there could be certain upsides to a rule this time, if only the regulators can do it right.

As it stands, Pew-style disclosures for deposit and lending products are dangerously close to being “advertisements” for purposes of Truth in Savings (TISA) and Truth in Lending (TILA). If deemed to be advertisements, then additional information is generally required in the material, somewhat defeating the simplifying purpose of the forms. At the same time, these simplified disclosures do not satisfy the account opening disclosure requirements of TISA or loan closing disclosure requirements of TILA, thus forcing banks to provide more disclosures rather than fewer. And the Pew disclosures certainly omit important contractual details, raising yet another risk that a court or regulator will deem the disclosure to violate various unfair, deceptive and even abusive acts and practices laws (UDAP and UDAAP).

A clear rule that Pew-style disclosures are not subject to advertising rules, with clear standards to minimize UDAP or UDAAP claims, could therefore be useful. The question is whether regulators can write such rules without adding needless complications and liability.

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11th Circuit Clarifies the TILA Servicer “Administrative Convenience” Exception

On May 23, 2013, the Eleventh Circuit upheld an Alabama federal court’s dismissal of a proposed class action brought by a mortgage holder who claimed the servicer violated the Truth in Lending Act (“TILA”) by failing to notify her of a transfer in ownership of her mortgage loan, as required by Section 1641(g).  In an unpublished per curium opinion, a three-judge panel in Giles v. Wells Fargo Bank, N.A. (No. 12-15567)  agreed with the lower court that, under TILA’s “administrative convenience” exception,  the servicer, who was assigned an ownership interest in the mortgage loan prior to foreclosing on the loan, was not obligated to provide notice of the assignment.

Section 1641(g) of TILA provides that a creditor who is the new owner or assignee of an existing mortgage loan must provide written notice to the borrower within thirty days of the date on which the new creditor acquired the loan.  See 15 U.S.C. § 1641(g).   The 11th Circuit explained, “[b]ased on its plain language, section 1641(g)’s disclosure obligation is triggered only when ownership of the ‘mortgage loan’ or ‘debt’ itself is transferred, not when the instrument securing the debt (that is, the mortgage) is transferred.”  The Giles case involved an assignment of the security deed to the servicer prior to foreclosure that was not disclosed to the borrower.  The borrower argued that under Alabama law,  the transfer of the security deed also transfers an interest in the note secured thereby implicating the disclosure requirements of Section 1641(g).

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