FYI: FRB Proposes Significant Changes to TILA Rescission Rules

The Federal Reserve Board recently proposed revisions to the rules and model disclosures, regarding the disclosure and exercise of the right to cancel under TILA.   In proposing the new rules and disclosures, the FRB notes that its consumer testing and studies demonstrated that the existing disclosure forms were often confusing and difficult for consumers to understand.

 

The Federal Register notice for the proposed rule is available at:

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816e1.pdf

 

 

Some of the highlights of the proposed rules are as follows:

 

•  New "Notice of Right to Cancel" Form.

 

The revised notice would include:  (a) the calendar date when the creditor reasonably expects three-business-day rescission period to expire, without the explanation of how to calculate the deadline;  (b) a statement that the consumer's right to cancel the loan may extend beyond the date stated in the notice and in that case, the consumer must send the notice to either the current owner of the loan or the servicer;  (c) a "tear off" form that a consumer may use to exercise his or her right to rescind;  (d) a tabular format, as opposed to a narrative format used in the current model rescission forms.

 

•   Only One NORTC.

 

The proposal also requires creditors to provide just one notice of the right to rescind to each consumer entitled to rescind (as opposed to two copies required under the current regulation).

 

•  Right to Refund During Application Process.

 

The proposed rules would require lenders to refund fees if the consumer decides to withdraw the application within three days after they receive the disclosures.

 

•  New "Material Disclosures."

 

The proposed rules would change the list of disclosures that, if not properly made, can trigger an extended right to rescind (including information about the interest rate, the total settlement charges, and whether a loan has negative amortization or permits interest-only payments for closed-end loans, and the credit limit, and total closing costs with a tolerance provision, for HELOCs).

 

•   Important Litigation Changes

 

"The Board does not believe that Congress intended for the creditor to lose its status as a secured creditor if the consumer does not return the loan balance."  The proposed rules would require a response to a rescission demand within 20 calendar days of receipt, stating whether or not the demand was accepted and stating the tender amount, and then release of the lien following payment of the tender amount.  In litigation, the loan owner would not be required "to release its security interest until the consumer tenders the principal balance less interest and fees, and any damages and costs, as determined by the court."

 

In addition, the rules would provide that:  (a) a consumer who exercises the extended right may send the notice to the servicer rather than the current holder;  (b) certain events terminate the extended right to rescind, such as a refinancing with a new creditor;  (c) bona fide personal financial emergencies that enable a consumer to waive the right to rescind will usually involve imminent property damage or threats to health or safety, and not the imminent expiration of a discount on goods or services; and  (d) a consumer who guarantees a loan that is subject to the right of rescission and who pledges his principal dwelling has a right to rescind.

 

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

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From: Ralph Wutscher [mailto:rwutscher@kahrlwutscherllp.com]
Sent: Friday, August 27, 2010 12:47 PM
To: Ralph Wutscher
Cc: SoCalOffice; D.C. Office; Chicago Office
Subject: FYI: FRB Proposes Revisions to Rules Requring New TILA Disclosures for Loan Mods

The Federal Reserve Board recently proposed revisions to the rules for determining when a modification of an existing closed-end mortgage loan secured by real property or a dwelling is a new transaction requiring new disclosures. 

 

The Federal Register notice for the proposed rule is available at:

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816e1.pdf

 

The proposed rules would provide that new TILA disclosures are required when the parties to an existing closed-end loan secured by real property or a dwelling agree to modify key loan terms, without reference to state contract law.

 

New disclosures would be required when, for example, the parties agree to change the interest rate or monthly payment, advance new money, or add an adjustable rate or other "risky" feature such as a prepayment penalty.

 

The proposal also provides that whenever a fee is imposed on a consumer in connection with a modification, including a modification for a consumer in default, a "new transaction" would occur requiring new TILA disclosures.

 

In addition, if a new transaction is created, and the new transaction's APR exceeds the threshold for a "higher-priced mortgage loan" under the FRB's 2008 HOEPA rules, then special HOEPA protections would apply to the new transaction.

 

Importantly, the FRB notes that, "[c]onsistent with the current rule, the proposal would exempt modifications reached in a court proceeding, and modifications for borrowers in default or delinquency, unless the loan amount or interest rate is increased, or a fee is imposed on the consumer."

 

Certain beneficial modifications, such as "no cost" rate and payment decreases, would also be exempt from the requirement for new TILA disclosures.

 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

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From: Ralph Wutscher [mailto:rwutscher@kahrlwutscherllp.com]
Sent: Friday, August 27, 2010 11:02 AM
To: Ralph Wutscher
Cc: SoCalOffice; D.C. Office; Chicago Office
Subject: FYI: FRB Proposes Significant Changes to Reverse Mtg Disclosures and Ads

The Federal Reserve Board recently proposed significant changes to reverse mortgage advertisements and disclosures. 

 

The Federal Register notice for the proposed rule is available at:

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20100816e1.pdf

 

These proposed rules would:

 

• Impose rules for reverse mortgage advertising to ensure advertisements contain accurate and balanced information.

 

• Change the disclosures consumers receive for reverse mortgages, including:  (a) at application, creditors must provide a new, two-page disclosure which highlights in simple language the basic features and risks of reverse mortgages;  (b)  within three days after receiving the consumer's application, creditors must provide transaction-specific disclosures that reflect the actual terms of the reverse mortgage being offered, which must be presented in a tabular format;  (c) at least three days before closing the loan, creditors must provide final disclosures in the same format, to facilitate comparison with the earlier disclosures; and  (d) creditors also must ensure that their advertisements for reverse mortgages are accurate and balanced. 

 

• Prohibit certain unfair practices in the sale of financial products with reverse mortgages, such as:  (a) prohibiting creditors from conditioning a reverse mortgage on the consumer's purchase of another financial or insurance product;  (b) requiring that a consumer receive counseling about reverse mortgages before a creditor can impose nonrefundable fees for a reverse mortgage or close the loan; and  (c) prohibiting creditors from steering consumers to specific reverse mortgage counselors or compensating counselors or counseling agencies.

 

The comment period ends 90 days after publication of the proposal in the Federal Register, which is expected shortly.

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

 

FYI: Cal App Holds Prior Judgments Against Consumers Barred Classwide UCL Claims

A California appellate court recently held that California's Unfair Competition Law does not empower a trial court to disregard previously secured judgments or grant affirmative relief from them on a classwide basis, thus affirming a trial court's dismissal with prejudice against all class members against whom the defendant lender had previously secured judgments in separate collection actions.

A copy of the opinion is available at: http://www.courtinfo.ca.gov/opinions/documents/H033044.PDF

This action arose from a defective notice to cure and reinstate that was sent to a consumer by a car dealership's assignee.  The notice purporting to state the conditions on which the consumer could cure her default and reinstate the contract overstated the amount due by some $2,700.  The consumer failed to cure, the car was sold and the contract assignee sued the consumer for the deficiency.  The consumer counterclaimed on the grounds that, by proceeding to collect deficiencies despite the service of a defective redemption notice, the assignee had engaged in an unlawful business practice in violation of the California Rees-Levering Motor Vehicle Sales and Finance Act (CA Civ. Code, §§ 2981–2984.4 ).  The consumer's motion to certify her counterclaim as a class action was granted and was coordinated with a similar class action matter pending against the assignee. 

The class claims in both actions included class members against whom the assignee already obtained judgments and the counterclaims sought, among other things, to overturn or bar the assignee from enforcing deficiency judgments it had previously obtained against these judgment debtors.  The trial court granted the assignee's motion to strike any such language that sought to set aside previously obtained judgments from the counterclaims.  The trial court then approved a class action settlement that excluded judgment debtors from any relief and dismissed their claims with prejudice.  This appeal followed. 

In affirming the trial court's decision to strike all allegations specifically seeking relief by the judgment debtors, the court first noted the class setting in this matter "greatly complicates the required legal analysis" for res judicata and collateral estoppel claims.  Ordinarily, under California law, a defense of res judicata or collateral estoppel (claim or issue preclusion) must be affirmatively raised, and the conditions for its operation demonstrated, by the party asserting it (here, the assignee that served the defective notices).  Here, the court noted that the assignee "simply asserted that all of the judgment debtor class members' claims were barred by res judicata and collateral estoppel, without troubling to establish or even acknowledge the conditions for operation of those doctrines."   

Moreover, the court acknowledged that "individual members might be able to show that the conditions for preclusion were lacking."   Nevertheless, the court noted that no such attempt was made by individual members in the case below, and held that "the pleading raised a strong suggestion, at least, that critical issues were vulnerable to an assertion of issue preclusion."  Accordingly, the court turned to whether the counterclaims pled, or could plead, some basis on which to avoid the usual effect of the earlier judgments. 

Ultimately, the court disagreed with the consumer's "theory that the UCL rendered the judgments essentially irrelevant," without a factual showing of grounds to avoid the judgments against them.  Although the UCL empowers trial courts to "make such orders or judgments . . . as may be necessary to prevent the use or employment by any person of any practice which constitutes unfair competition . . . or as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition,"  the court disagreed with the consumer's assertion that this language gives a court the power to make any orders needed to restore sums to cross-complainants despite the judgments in the assignee's favor.    

Notably, the court pointed out that "[t]he law governing the nature and effect of judgments is a fundamental part of the 'culture' governing civil liability" and "we find even less cause to suppose that the Legislature intended to free UCL litigants of the constraints ordinarily imposed on civil plaintiffs by the law of judgments."

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

FYI: Ill App Ct Holds EFT Authorization Needs to Be Disclosed as TILA "Security Interest"

An Illinois appellate court recently reversed a trial court's dismissal
for failure to state a claim of a complaint brought against a small loan
company pursuant to, among other things, the federal Truth in Lending Act
("TILA") for failure to disclose a security interest on a short term
installment loan.

A copy of the opinion is available at:
http://www.state.il.us/court/Opinions/AppellateCourt/2010/1stDistrict/July
/1092318.pdf

Plaintiff took out an installment loan from defendant AmeriCash, a short
term installment loan company. The installment note disclosure statement
given to plaintiff contained a note that stated "[y]our wage assignment is
security for this loan." The forms given to plaintiff also included, on a
separate page, an Electronic Funds Transfer ("EFT") authorization which
authorized defendant to electronically debit or issue a bank draft against
plaintiff's checking account if she defaulted on the loan, which plaintiff
signed.

Plaintiff sued AmeriCash, alleging in part that it failed to accurately
disclose the security interest taken in the EFT Authorization, in
violation of TILA. The trial court granted AmeriCash's motion to dismiss,
finding that the EFT authorization did not create additional rights and
remedies; that it was not a check; that it was not a negotiable
instrument; that it was not collateral; and therefore that it was not a
security interest. This appeal followed.

In addressing plaintiff's contention that because the EFT authorization
form constituted a security interest in her checking account, it should
have been disclosed pursuant to TILA, the appellate court first looked to
the definition of "security interest" under TILA. While TILA does not
include a definition of "security interest," Regulation Z defines it as
"an interest in property that secures performance of a consumer credit
obligation and that is recognized by State or Federal law." Under
Illinois law, a "security interest" is defined as "an interest in personal
property.which secures payment or performance of an obligation," and "[b]y
creating a security interest through a security agreement, a debtor
provides that a creditor may, upon default, take or sell the property - or
collateral - to satisfy the obligation for which the security interest is
given." Accordingly, the court determined that "the question before us is
whether the EFT authorization form can meet the statutory requirements of
'collateral' or 'security interest.'"

The court then turned its analysis to the Seventh Circuit's holding that a
postdated check with a high-interest consumer loan was a security interest
because the check confers rights and remedies in addition to those under
the loan agreement. In so doing, the Seventh Circuit held that, while an
identical second promise to pay would not serve as collateral to secure a
loan because the second promise is of no economic significance, a
postdated check confers on the holder additional rights and remedies of
negotiation, transfer, and bad check remedies. Accordingly a second,
unidentical promise that creates additional value and grants a creditor
rights to collect the debt beyond those contained in the loan agreement
must be disclosed as a security instrument under TILA.

In this case, because any debit to plaintiff's account that was returned
unpaid could be collected in the same manner as an unpaid paper check and
because the EFT authorization allowed defendant to debit plaintiff's
checking account if she breached on her promise to repay the loan through
the wage assignment option, the court ruled that plaintiff sufficiently
stated a claim that AmeriCash took a security interest in her checking
account and accordingly reversed the trial court's dismissal of
plaintiff's claim.

Let me know if you have any questions. Thanks.

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (866) 581-9302
Mobile: (312) 493-0874
RWutscher@kw-llp.com
http://www.kw-llp.com

NOTICE: We do not send unsolicited emails. If you received this email in
error, or if you wish to be removed from our update distribution list,
please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com

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