Consumer Compliance Outlook: First Quarter 2012

On the Docket: Recent Federal Court Opinions

REGULATION Z — TRUTH IN LENDING ACT (TILA)

A creditor's use of the wrong rescission notice model form does not trigger the right of rescission. Watkins v. SunTrust Mortgage, Inc. External Site, 663 F.3d 232 (4th Cir. 2011). The Fourth Circuit affirmed the dismissal of a lawsuit seeking to rescind the refinancing of a mortgage because the creditor provided the borrower with Regulation Z model form H-8, the general rescission notice form for a new credit transaction, when form H-9 (a refinancing with the same creditor) was appropriate for the transaction. The primary difference between these forms is that form H-9 informs the borrower that the right of rescission applies only to the new credit transaction and does not allow rescission of the prior loan. In affirming the dismissal, the court noted that §1604(b) of TILA permits creditors to modify the model forms by “deleting any information which is not required [by TILA].” Because §1635(b) of TILA requires creditors to provide borrowers with the rescission notice in certain credit transactions but does not distinguish between a refinancing with a new creditor or the current creditor, the court concluded that TILA does not require the additional information in form H-9. The borrower also argued that the use of form H-8 violated TILA because it incorrectly implied that the borrowers had the right to cancel not only the refinancing but also the original loan. The court rejected this argument because if the borrower cancelled the refinancing, the parties would return to their position before the refinancing, which would not affect the original loan. The court also noted that even if the additional language of form H-9 were required, the creditor did not violate TILA because the additional information was substantially included in form H-8, and “TILA's regulations should be reasonably construed and equitably applied.” However, one member of the three-judge panel dissented.

The federal appeals courts are divided over whether a creditor's use of the wrong model rescission form allows a borrower to exercise the right of rescission for up to three years after consummation. The Seventh Circuit (covering the states of Illinois, Wisconsin, and Indiana) holds that it does (see Handy v. Anchor Mortgage Corp., 464 F.3d 760 (7th Cir. 2006)), while the First Circuit (Maine, Massachusetts, New Hampshire, Puerto Rico, and Rhode Island), Eleventh Circuit (Florida, Georgia, and Alabama), and now the Fourth Circuit (Maryland, North Carolina, South Carolina, Virginia, and West Virginia) hold that it does not. See Santos-Rodriguez v. Doral Mortgage Corp., 485 F.3d 12, 18 (1st Cir. 2007), Veale v. Citibank, 85 F.3d 577, 580 (11th Cir. 1996), and Watkins.

Borrower can rebut TILA presumption of receiving rescission notice through testimony. Marr v. Bank of America, N.A. External Site, 662 F.3d 963 (7th Cir. 2011). Outlook reported in the fourth quarter 2011 issue on the recent case of Cappuccio v. Prime Capital Funding LLC, 649 F.3d 180 (3d Cir. 2011), in which the Third Circuit held that a borrower could, through his testimony, overcome the presumption in §1635(c) of TILA that a borrower signing a form acknowledging receipt of disclosures has, in fact, received them. In a new case, the Seventh Circuit reached a similar conclusion. The borrower obtained a refinancing loan. At closing, he was allegedly provided with two copies of the rescission notice and signed a form acknowledging this. However, when the borrower checked his papers several years later, he found only one copy of the rescission notice. The borrower sought to rescind the loan because he received only one copy of the rescission notice, and Regulation Z requires creditors to provide two copies. See §1026.23(b)(1). The trial court dismissed the case because the borrower signed an acknowledgment form, but the Seventh Circuit reversed the ruling. The appeals court, after noting the recent decision in Cappuccio, focused on the text of §1635(c), stating that “this section does no more than create a rebuttable presumption of delivery thereof” and determined that Congress “was warning courts not to overrate the importance of the acknowledgment.” The court held that the plaintiff could overcome the presumption by producing sufficient evidence to convince a jury he did not receive two copies of the rescission notice. The case was remanded for further proceedings.

FAIR HOUSING ACT (FHA)

The city of St. Paul, Minnesota withdraws its Supreme Court appeal to determine if the FHA covers disparate impact claims. Gallagher v. Magner External Site, 2012 WL 469885 (No. 10-1032, Feb. 14, 2012). In November 2011, the Supreme Court granted a petition by the city of St. Paul, Minnesota, to review a decision from the Eighth Circuit, Gallagher v. Magner, 619 F.3d 823, rehearing en banc denied, 636 F.3d 380 (8th Cir. 2010), to determine if the statutory language of the FHA encompasses disparate impact claims. However, on February 14, 2012, the court granted the city's request to voluntarily dismiss the appeal. This case has been closely followed by the banking industry, regulators, and community groups not only because it had the potential to eliminate disparate claims under the FHA but also because such a ruling might affect disparate impact claims under the Equal Credit Opportunity Act (ECOA) and Regulation B.

Disparate impact claims originated under federal employment discrimination law. Both Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act of 1967 (ADEA) contain language prohibiting employer actions that have a discriminatory effect on protected-class employees. Based on this language, the Supreme Court held in Smith v. City of Jackson, Mississippi, 544 U.S. 228 (2005) that disparate impact claims are permissible under the ADEA. The FHA lacks similar language prohibiting discriminatory effects, which prompted the city to seek review in the Supreme Court on this issue. The text of the ECOA also lacks discriminatory effects language. On a related note, the Department of Housing and Urban Development released a rulemaking proposal to clarify the legal standards for disparate impact claims under the FHA. The proposal is available at http://1.usa.gov/fha-disparate.External Site

REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)

The U.S. Supreme Court will resolve a circuit split on RESPA's unearned fee prohibition. Freeman v. Quicken Loans, Inc. External Site, 132 S.Ct. 397 (No. 10-1042, Oct. 11, 2011). The Supreme Court agreed to review a Fifth Circuit case, Freeman v. Quicken Loans, Inc., 626 F.3d 799 (5th Cir. 2010), to determine if RESPA's prohibition in §8(b) on unearned fees applies only when fees are split between two or more parties or also applies to a single party charging an unearned fee. The federal appeals courts are divided on this issue. In the Freeman case, the plaintiffs alleged that a loan discount fee Quicken Loans charged was unearned because the borrower did not receive a reduction in the interest rate. The Fifth Circuit held that the language of §8(b) stating “no person shall give and no person shall accept” requires that at least two parties split a fee for §8(b) to apply. Because Quicken Loans did not split the loan discount fee, the court held that RESPA §8(b) did not apply. A decision in the Freeman case is expected by the end of the court's current term in June 2012.

Fees assessed after a real estate closing are not settlement services subject to RESPA. Molosky v. Washington Mutual, Inc. External Site, 664 F.3d 109 (6th Cir. 2011). The Sixth Circuit affirmed the dismissal of a class-action case alleging that a post-closing payoff statement fee and recording fee assessed by a loan servicer violated the fee-splitting prohibition in §8(b) of RESPA. In affirming the dismissal, the court noted that §8(b) applies only to “settlement services” of federally regulated mortgage loans. Regulation X defines settlement as “the process of executing legally binding documents regarding a lien on property that is subject to a federally related mortgage loan.” Based on this definition, the court determined that “settlement services” are limited to services performed before or at the property transfer. Because the fees at issue were assessed after the property transfer, §8(b) did not apply. The trial court stated as an alternative basis for dismissing the case that RESPA did not apply because the fees in question were not split with another party. The Sixth Circuit declined to address this issue because, as discussed above, that issue is currently before the Supreme Court in the Freeman case.