Thursday, January 12, 2012

FYI: 1st Cir Holds Waiver of TILA Rescission in Loan Mod Valid, APR as to Performance-Based Rate Correct, and Omission of "Monthly" Did Not Violate TILA

The U.S. Court of Appeals for the First Circuit recently held that:  (1) a borrower's waiver of his right to rescind his mortgage loan under TILA was valid and binding; and  (2) the lender's interest rate disclosures incorporating a performance-based interest rate did not violate either the federal Truth in Lending Act, or the Massachusetts Consumer Credit Cost Disclosure Act; and  (3) omission of the word "monthly" from the disclosure of the payment schedule did not violate TILA
A copy of the opinion is available at:
Appellant-borrower (the "borrower") entered into an agreement with appellee-lender (the "lender") for a mortgage loan.  At the loan closing, the borrower received various Truth-in-Lending disclosures, including of the Annual Percentage Rate ("APR") for the loan.  The APR was calculated using a performance-based rate, for which the borrower would become eligible if he made two years of timely payments. 
The borrower filed for bankruptcy, and began extensive loan modification negotiations with the servicer of his home loan.  Those negotiations resulted in an agreement whereby, among other things, the borrower agreed to waive and relinquish all claims that he might have regarding the loan
The borrower did not meet the terms of the loan modification agreement, and attempted to rescind the loan.  The borrower then sued, alleging violations of the Massachusetts Consumer Credit Cost Disclosure Act ("MCCCDA") -- specifically, he alleged that APR calculation was not made in conformity with applicable regulations; that the finance charge was underestimated; and that the time of the installment payments was not specified. 
The bank moved to dismiss the borrower's complaint, arguing that it was time-barred and that the borrower had not stated a claim under either the Truth in Lending Act ("TILA") or the MCCCDA.  In the alternative, the bank argued that the borrower had waived any TILA or MCCCDA claims he might have pursuant to the modification agreement.  The bankruptcy court granted the motion to dismiss.  The borrower appealed, and the district court affirmed the bankruptcy court's holding.  Again, the borrower appealed.
The First Circuit began its analysis by noting the substantial similarities between TILA and MCCCDA, and citing case law providing that the MCCCDA should be construed in accordance with TILA.  Turning to the substance of the borrower's appeal, the First Circuit first examined the borrower's argument that, by signing the loan modification agreement, he did not waive his right to rescind the transaction. 
As you may recall, TILA provides that the Federal Reserve Board (the "Board") may prescribe regulations authorizing modification or waiver of "any rights created under this section."  15 U.S.C. Sec. 1635(d) (emphasis added).   The borrower argued that as no regulations had been prescribed by the Board authorizing waiver under his circumstances, the loan modification agreement's provisions regarding waiver were ineffective. 
The First Circuit disagreed. It noted that the statutory language cited by the borrower provided for waiver only of rights created under Section 1635.  However, the borrower attempted to rescind his transaction some six years after the loan was originated, and thus the borrower was pursuing a "rescission in recoupment" under state law.  The First Circuit explained that both TILA and MCCCDA preserve, but do not create, borrowers' rights to rescission in recoupment.  Therefore, the FRB's regulations were irrelevant, and the First Circuit held that the borrower's waiver was valid.
The borrower also argued that recognizing his waiver would thwart the policy goals of TILA and the MCCCDA.  The Court disagreed, noting that the borrower's waiver was made with the assistance of counsel, was approved by the bankruptcy court, and was the product of extensive negotiations.   Therefore, TILA's policy of ensuring informed decision-making for unsophisticated consumers did not apply. 
Next, the First Circuit turned to the borrower's contentions regarding the disclosures he received at the closing of his loan transaction.  The Court concluded that even if the borrower had not waived his rescission claims, he nevertheless "failed to state a claim for relief under the TILA or the MCCCDA." 
The Court addressed the borrower's claim that including the performance-based reduction in interest in the APR calculation was improper.  It noted that TILA requires that the disclosures, including the APR disclosures, "reflect the terms of the legal obligation between the parties."  12 C.F.R. Sec. 226.17(c)(1).  As the borrower was legally obligated to make timely payments, and the lender was legally obligated to reduce the interest rate following a certain number of timely payments, the First Circuit held that the lender complied with TILA's APR disclosure and calculation requirements.  The First Circuit further relied on the FRB's Official Staff Commentary, which states that the APR should account for changes in the interest rate over the life of the loan.
The borrower also argued that the increased interest rate consequent to his failure to make timely payments constituted an undisclosed finance charge.  Again, the First Circuit disagreed, noting that TILA's commentary provides that interest rate increases resulting from late payments are unanticipated, and therefore not considered "finance charges."  Commentary, 12 C.F.R. Sec. 226.4(c)(2)-1. 
Finally, the borrower argued that the disclosures he received specified that he would make 360 payments within 30 years, but did not specify monthly payments.  The First Circuit stated that "we believe that a reasonable person reading the TIL disclosure would have understood that his payments were to made on a monthly basis."  Therefore, and relying on the fact that the First Circuit has not adopted "hypertechnicality" with regard to TILA cases, the Court held that the failure to specify monthly payments did not violate TILA. 
Accordingly, the First 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
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