Thursday, August 9, 2012

FYI: 10th Cir Rules Ability to Tender in TILA Rescission Case Need Not Be Pled in Complaint, No Private FCRA Claim w/o Pre-Suit Dispute Notice

The U.S. Court of Appeals for the Tenth Circuit recently held that borrowers seeking to rescind a loan under the federal Truth in Lending Act: (1) were not required to plead in their complaint ability to tender the loan proceeds to the lender; and (2) could not simply surrender the property that secured the debt if doing so did not restore the lender to its pre-loan status.
The court also ruled in part that borrowers have no private right of action under the federal Fair Credit Reporting Act against furnishers for providing allegedly incorrect credit information to credit reporting agencies, if the borrowers do not initiate any dispute with the furnisher regarding the information.
A copy of the opinion is available at: 
Plaintiffs-borrowers ("Borrowers") refinanced their home mortgage loan with a lender ("Lender") that supposedly reported incorrect credit information to credit reporting agencies.  Almost two years later, Borrowers applied via telephone to Lender for a second refinancing loan.  Lender denied their application at the end of the phone call.
Borrowers subsequently sent written notification to Lender within the three-year rescission period under the federal Truth in Lending Act ("TILA"), rescinding their loan and claiming that Lender provided only one copy of TILA's required disclosures when they were entitled to two. 
In the ensuing law suit, Borrowers alleged that Lender: (1) failed to provide the required TILA disclosures, thereby entitling borrowers to rescind the loan;  (2) violated the Equal Credit Opportunity Act ("ECOA") by failing to provide a notice of adverse action after the denial of Borrowers' application for a second refinancing loan; and  (3) violated the federal Fair Credit Reporting Act ("FCRA") by furnishing inaccurate credit information to credit reporting agencies.
The district court dismissed Borrowers' claims, ruling in part that Borrowers had failed to plead their ability to tender the loan proceeds to Lender, and that Borrowers could not simply turn over their home to Lender as full satisfaction of their rescission obligations if Lender would not be restored to its pre-loan position.  The district court also held that Borrowers had not submitted a "completed application" under ECOA, and that they had no private right of action against the furnisher under FCRA as they had not initiated any dispute of the information with the furnisher. 
Borrowers appealed.  The Tenth Circuit reversed in part and affirmed in part.
As you may recall, TILA provides that a consumer may rescind a loan for any reason three business days following the later of the "consummation of the transaction" or the delivery of required TILA disclosures.  15 U.S.C. § 1635(a), (f); 12 C.F.R. § 226.23(b)(1).  After the initial three day period, the consumer's right to rescind for non-delivery of the required disclosures ultimately expires three years later.  15 U.S.C. § 1635(f).  In addition, when a consumer rescinds under TILA, the creditor must release its security interest and return any money collected from the consumer, after which time the consumer must tender to the creditor the loan proceeds or their "reasonable value."  See 12 C.F.R. § 226.23(d).
Disagreeing with the district court's ruling that Borrowers' failure to plead their ability to repay the proceeds of the loan was fatal to their TILA rescission claim, the Tenth Circuit held that the district court essentially created a new pleading rule that impermissibly modified TILA's rescission procedures.  In so ruling, the Court observed that, although courts may exercise their equitable powers to ensure that consumers will perform their rescission obligations before requiring creditors to release their security interests, the district court's pleading requirement added a condition to the rescission remedy not found in TILA or its regulations, and would further provide categorical relief to creditors even where such relief may not be warranted. 
Accordingly, without reaching the merits of Borrowers' TILA rescission claim, the Tenth Circuit reversed the district court's judgment and remanded. 
Moreover, rejecting Borrowers' contention that TILA's regulations afforded them the option to tender either the loan proceeds or the property obtained with the proceeds, the Tenth Circuit  ruled that, because TILA requires that the creditor be restored to its pre-loan position, simply surrendering Borrowers' home to Lender may not necessarily satisfy their tender obligations.  The Court concluded that there was a factual question in this case as to whether Borrowers' proposed surrender of their home would restore Lender to its pre-loan position.
As to Borrowers' ECOA claim, contrary to the district court's conclusion, the Tenth Circuit ruled that there was a factual question as to whether Borrowers had submitted a "completed application" for credit that triggered Lender's obligation to provide Borrowers with a notice of adverse action.  See 15 U.S.C. § 1681(d)(1), (2).
Finally, agreeing with the lower court, the Tenth Circuit ruled that, because the Borrowers never disputed the information furnished by the Lender, they had no private right of action against the Lender for reporting the allegedly inaccurate information to credit reporting agencies.  "While a breach of those [verification and correction] duties might expose the furnisher to liability, see 15 U.S.C. § 1681s-2(c) (noting the private action limitation applies only to violations of the duties listed in § 1681s-2(a)), the [Borrowers] do not claim to have initiated this process."

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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