Sunday, December 18, 2011

FYI: Fourth Cir Says Using Model Form H-8 in Refinancings by the Same Creditor Did Not Violate TILA

The U.S. Court of Appeals for the Fourth Circuit recently held that using
the incorrect model Notice of Right to Cancel form (i.e., using Model Form
H-8 in a refinancing by the same creditor) did not violate TILA.

A copy of the opinion is available at:

The borrowers refinanced their loan with the same lender that had
originally extended the loan. The lender provided the borrowers with
written notice of their right to cancel, using a form that was
substantially similar to Form H-8, the general rescission model form found
in Regulation Z, C.F.R. pt. 226. However, although the model form used by
the lender contained all of the information required by the Truth in
Lending Act ("TILA") and Regulation Z, it did not include some information
found in Form H-9, the model form designed specifically for refinance
transactions by the same creditor.

When borrowers defaulted, the lender scheduled a foreclosure sale. The
borrowers then notified the lender that they were rescinding the
transaction, arguing that the lender's use of Form H-8 was a material
violation of TILA disclosure requirements. The lender did not agree to
rescind the transaction, and the borrowers sued. The lower court granted
the lender's motion to dismiss, on the grounds that the disclosures
provided fully satisfied TILA and Regulation Z. The borrowers appealed.

Although TILA includes a provision requiring the creation of model
disclosure forms to facilitate compliance with its disclosure
requirements, it also provides that "[n]othing in this subchapter may be
construed to require a creditor to use any such model form or clause..."
15 U.S. Sec. 1604(b).

The Fourth Circuit began by scrutinizing the form provided to the
borrowers by the lender, and concluded that it contained "all of the
information required" by TILA and Regulation Z.

The Court then examined the arguments of the parties on appeal. The
borrowers noted that they were not provided with notice that rescinding
their refinance transaction would affect only the new amount financed, and
not the original mortgage loan. Had the lender used Form H-9, the
borrowers would have received such notice. The borrowers contended that
the lender's failure to provide that notice was a material violation of
TILA's disclosure requirements. The lender argued that neither TILA nor
Regulation Z contained any requirement to provide borrowers with such

The Court agreed with the lender. It noted that neither TILA nor
Regulation Z distinguish between initial and refinancing transactions.
Further, the Court noted that TILA provides that lenders comply with
TILA's requirements even if they modify the sample forms provided by
"deleting any information which is not required by this subchapter." 15
U.S.C. Sec. 1604(b).

Therefore, because the lender's "notice to the [borrowers] fulfilled each
requirement imposed by TILA and by Regulation is an unsustainable
argument to maintain that its notice in violation of TILA." Accordingly,
the Fourth Circuit affirmed the judgment of the lower court.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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