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William M. LeRoy - ModeratorPresident & CEOAmerican Legal & Financial Network “ALFN”

Matthew C. Abad, Esq. - PanelistHead of Operations - Indiana Blommer Peterman, S.C.

James V. Noonan, Esq. - PanelistPrincipalNoonan & Lieberman, Ltd.

Nancy M. Wilson, Esq. – PanelistPartner / Supervising Attorney, Litigation DepartmentSouth and Associates, PC

Webinar Introduction

Attack the remedies

Persons to whom claim or defense is directed

Standing

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TILA claims and defenses are oftentimes plead in a deliberately vague and general manner. Examples:

a mortgagor will allege that the APR was overstated, but not explain how.

a mortgagor will allege that certain charges should not be exempt from the finance charge calculation but not identify which ones or why they should not be exempt

a mortgagor will allege that a fee is not exempt because it is not “reasonable and bona fide” 12 C.F.R. § 226.4(c)(7)) but not identify which fee, why it should not be exempt, or conflate “reasonable” or “bona fide” and leave the mortgagee to figure it out.

a mortgagor will allege that he or she was not given proper notice of right to cancel, but will not explain if the form was defective, if it was not provided in a timely manner, or if the required number of copies were not provided.

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The strategy of pleading TILA claims this way is to avoid early dismissal and summary judgment.

It makes defending the claims on substantive grounds expensive and time consuming

From the mortgagors perspective it pressures mortgagees to modify the mortgage or agree to another loan work out solution just to avoid the cost and time of litigation.

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Mortgagee’ Strategy:

Attack the remedies and the parties at whom

the claim or defense is directed.

At the pleading stage, if you cannot

successfully dispose of a counterclaim or

affirmative defense on the merits then try

attacking the remedies and/or the person at

whom the claim or defense is directed.

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Is the Mortgagor able to tender the Proceeds?

Yamamoto v. Bank of New York, 329 F.3d 1167 (9th Cir. 2003) Judicially created pleading requirement that the

mortgagor have the means to tender before considering the substance of the rescission claim

Dismissed a TILA claim because the Mortgagors could not provide proof of ability to repay Several California courts have extended this analysis Some require the mortgagee to plead ability to tender

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Garza v. American Home Mortg., 2009 WL 188604 (E.D.Cal. Jan.27, 2009)

“[r]escission is an empty remedy without [plaintiff]'s ability to pay back what she has received”);

Carlos v. Ocwen Loan Servicing, LLC, No. CV F 09-0260LJOGSA (E.D.Cal. May 08, 2009)

Sitanggang v. Indymac Bank, F.S.B., No. CVF09-0367LJOSMS (E.D.Cal. May 06, 2009)

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Guerrero v. Citi Residential Lending, Inc., No. CVF08-1878 LJO GSA (E.D.Cal. Apr. 03, 2009)

Pagtalunan v. Reunion Mortg. Inc., No. C-09-00162EDL (N.D.Cal. Apr. 08, 2009)

A claim for rescission requires a plaintiff to allege that the plaintiff can or will tender the borrowed funds back to the lender

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Lapse of the Right to Rescind?

15 USCS § 1635(f) right of rescission expires

3 years after date of consummation of the

transaction, or sale of the property, whichever

occurs first notwithstanding the fact that the

information and forms required have not been

delivered

So what is a sale?

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Doss v. Clearwater Title, Co., 2007 WL 1141599 (N.D. Ill. Apr. 17, 2007) rev'd and remanded sub nom. Doss v. Clearwater Title Co., 551 F.3d 634 (7th Cir. 2008)

TILA claim dismissed because the mortgagor had previously sold the house

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“Sale” - not necessarily limited to transfer of the deed

“Sale” could be termination of the redemption

Bestrom v. Bankers Trust Co., 114 F. 3d 741 (8th Cir., 1997).

Timing Before sale/After Sale

Marschner v. RJR Fin. Services, Inc., 382 F. Supp. 2d 918 (E.D. Mich. 2005).

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Is the right to rescind terminated after the mortgagor contracts to sell the home?

Hefferman v. Bitton, 882 F.2d 379 (9th Cir. 1989)

Dailey v. Leshin, 792 So.2d 527 (Fla. App. 2001)

In re Estate of Burgin, 196327, 1998 WL 1993382 (Mich. Ct. App. Jan. 23, 1998).

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Mortgagor’s pursuit of a short sale could terminate the right to rescind Regardless of whether the transfer of title actually

occurs

What about a “refinance?”

King v. State of Cal., 784 F.2d 910 (9th Cir. 1986).

Although favorable – it is the minority position

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The majority of the courts do not equate a refinance with a sale under 15 USCS 1635 (f)

Handy v. Anchor Mortg. Corp., 464 F.3d 760 (7th Cir., 2006)

Barrett v. JP Morgan Chase Bank, N.A., 445 F.3d 874, 881 (6th Cir. 2006)

Duren v. First Gov't Mortgage and Investors Corp., 2000 WL 816042 (D.C.Cir. June 7, 2000

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Transfer versus Sale? Official Staff Commentary to 12 C.F.R. §

226.23(a)(3) Mortgagor's rescission rights extinguish after

transfer of the consumer's interest Transfer

Mortgagor quitclaims interest Mortgagor takes legal title back through a purchase

money mortgage Mortgagor retains title through an installment sale

contract16

Statute of Limitations (SOL)

SOL – also stands for - Stiff out of Luck

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Beach v. Ocwen Fed. Bank, 523 U.S. 410, 419, 118 S.Ct. 1408, (1998)

Court characterized § 1635(f) as a statute of repose

No right to assert a rescission as affirmative defense in a collection action brought more than three years after consummation of the transaction

§ 1635(f) “completely extinguishes the right of rescission at the end of the 3-year period”

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Court stated that 1635(f) “talks not of a suit's commencement but of a right's duration.”

“[TILA] permits no federal right to rescind, defensively or otherwise, after the 3-year period of § 1635(f) has run.”

State statutes which extend time to bring otherwise time-barred claims do not apply to time-barred rescission claims

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True even where the counterclaim is brought in recoupment

Wells Fargo Bank, N.A. v. Terry, 2010 WL 1223581 (Ill. App. Ct. Mar. 29, 2010)

In re Williams, 276 B.R. 394 (Bankr. E.D.Pa.2002)

Green Tree Acceptance, Inc. v. Anderson, 1999 OK CIV APP 46, 981 P.2d 804

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Other timing issues Hypothetical Notice of rescission sent before the expiration of

the 3 yrs Claim/defense not brought within 3 yrs Is it time-barred?

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Miguel v. Country Funding Corp., 309 F.3d 1161 (9th Cir. 2002)

Mortgagor sent a rescission demand to the then-current servicing agent

Mortgagor filed the lawsuit within three years naming the servicing agent

Mortgagor failed to name the holder (Real Party in Interest!!!)

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Mortgagor amended complaint naming holder (more than three after consummation)

Right expired “[b]ecause [the borrower/plaintiffs] did not attempt to rescind against the proper entity within” three-years

Other examples: Harris v. OSI Financial Services, Inc, 2009

WML 212138 (N.D.Ill) Ramos v. Citimortgage, Inc., 2009 WL 86744

(E.D.Cal)23

Relation Back Issues

Original creditor not added as a party before three years, but was notified within the three years?

Hubbard v. Ameriquest Mortg. Co. 2008 WL 4449888 (N.D.Ill)

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Relation Back Borrower preserved the claim against the

assignee by notifying the original creditor within three years

BUT - not added to the suit within 3 yrs Schmit v. Bank United FSB, 2009 WL 320490

(N.D.Ill.)

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SOL arguments can take many forms

Borrower timely notified/requested rescission

Did not file suit until after three years

In re Hunter, 400 B.R. 651, Bankr.N.D.Ill.  2009

TILA does not preclude a subsequent suit to enforce the right after the passing of the three-year period as long as the consumer timely exercised the right to rescind within the three-year period

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12 CFR 226.23 a (2). . .

Notice of rescission must be in writing

By mail, telegram or other written means

considered given when mailed or filed for telegraphic transmission or, if sent by other means, when delivered to

Proper Notice of the Right to Rescind specifies the address for rescission purposes

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Did the borrower properly give notice?

Does the mortgagor’s pleading constitute notice?

See Jones v. Saxon Mortgage, Inc., 537 F.3d 320, 327 (4th Cir.1998)

“the filing of a lawsuit can be sufficient written notice of rescission under TILA so long as the complaint seeks rescission”

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Does it matter if the notice is only served on the assignee?

It depends – Hubbard v. Ameriquest Mortg. Co. 2008 WL 4449888 (N.D.Ill) Borrower notified the original creditor of the

rescission within three years The right to rescind against an assignee was

preserved (assignee added to suit after the three years)

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Schmit v. Bank United FSB, 2009 WL 320490 (N.D.Ill.)

Timely notice to the original lender may be sufficient to effectuate rescission as to assignee who was not sued within three years

15 U.S.C. §1641(c) - Any consumer who has the right to rescind a transaction under section 1635 of this title may rescind the transaction as against any assignee

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What if the notice is served only the servicer?

Borrower only served notice on servicing agent

The court rejected the argument that a notice of rescission was effective

Miguel v. Country Funding Corp., 309 F.3d 1161 (2002)

“no authority supports the position that notice to [the servicing agent] should suffice for notice to the Bank”

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What if the Rescission is served on the creditor’s or assignee’s attorney?

In Re: Holland, 1994 WL 772758 (B.Mass.)

rescission claim rejected where the notice of rescission was sent to counsel for the holder, but not to the holder

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“Strict compliance does not necessarily mean punctilious compliance.”

Will the court disallow rescission for a de minimus violation?

1st Circuit: Palmer v. Champion Mortgage, 465 F.3d 24 (1st Cir. 2006); Santos-Rodriguez v. Doral Mortg. Corp., 485 F.3d 12, 17 (1st

Cir. 2007)

5th Circuit Smith v. Chapman, 614 F.2d 968, 972 (5th Cir.1980)

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How is that for strategy?

Real Estate Values are down!

Cost benefit analysis

Will the time/expense/amount recovered in foreclosure exceed the amount the borrower may be forced to tender?

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Do the loan proceeds (minus finance charges) exceed the value of property?

Mortgagor must be able to tender the amount

If not, claim is moot - move to strike or dismiss

Nkengfack v. Homecomings Financial, LLC, 2009 WL 1663533, (D.Md. June 15, 2009)

Nichols v. Greenpoint Mortg. Funding, Inc., 2008 WL 3891126 (C.D. Cal.)

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Personius v. HomeAmerican Credit, Inc., 234 F.Supp.2d 817, 819 (N.D.Ill.2002)

Court dismissed plaintiff's rescission claim

Creditor's “offer to rescind the loans rendered plaintiffs' claims for rescission moot ...”

Relief sought was available to them and fulfilled by servicer’s agreement to rescind

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PRACTICE TIP Couch letter in affirmative language Do not condition rescission on mortgagor’s

tender Ask the court to set tender as a condition Compare, Velazquez v. HomeAmerican Credit,

Inc., 254 F.Supp.2d 1043, 1045 (N.D.Ill.2003)

Creditor’s promise to rescind when mortgagor tenders does not satisfy mortgagee’s obligations under Regulation Z

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Statute of Limitations

Any action for damages must be brought within one year from the date of the occurrence of the violation. 15 U.S.C. § 1640(e).

However, a person is not barred from asserting a violation of TILA more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law. 15 U.S.C. § 1640(e).

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Savings statutes

Many states savings statutes allow a defendant to bring a counterclaim after the period authorized in the applicable statute of limitations has elapsed, as long as the plaintiff's claim arose before the cause of action brought as a counterclaim was barred.

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In a mortgage foreclosure context where the mortgagee’s right to recover on the debt did not arise until the mortgagor went into default more than one year after disclosures were given means that the mortgagor’s cause of action for foreclosure did not arise until after the claim was barred. See, e.g. Bank of Oklahoma v. Briscoe, 911 P. 2d 311 (Okl. App. 1995); Vikowsky v. Savannah Appliance Service Corp., 179 Ga. App. 135, 345 S.E. 2d 621 (1986).

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Is the TILA claim “closely related” to a claim to collect a debt?

Some courts have held that a claim on the debt is not closely related or lacks a foundational connection to the TILA damage claim so state law recoupment theories do not apply. See, Hennigan v. Heights Savings Ass’n, 576 S.W.2d 126 (Tex. App. 1978); New York Guardian Mortgage Corp., v. Deitzel, 524 A. 2d 951 (Pa. Super Ct. 1987); Franklin State Bank & Trust Co., v Herring, 608 So. 2d 643 (La. App. Ct. 1992).

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Does the TILA violation authorize statutory damages?

Actual damages are recoverable for any violation of TILA but statutory damages are available "only" for closed list of violations

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Brown v. Payday Check Advance, Inc., 202 F.3d 987, 992 (7th Cir.2000).

Only defects in material disclosures authorize statutory damages

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Thus, statutory Damages are not available for the following violations:

Use of the wrong form or format of the disclosures

The disclosures were not clear and conspicuous

The omission of descriptive explanations in violation of § 1638(a)(8)

The appearance of extra matter in the federal box in contravention of § 1638(b)(1)

Failing to clearly disclose the APR

Failing to disclose the existence of a variable interest rate feature

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Practice Pointer:

To defeat a claim for damages try to solicit an

admission from the mortgagor that has no actual

damages and, if the TILA violation is one where

statutory damages are unavailable, then

mortgagors damage claim fails and his attorney cannot recover fees.

 

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Detrimental reliance standard

Mortgagor must show detrimental reliance to recover actual damages

Smith v. Gold Country Lenders, 289 F. 3d 1155(9th Cir. 2002)

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Overstated Finance Charge arguments

An otherwise excluded fee, or portion of that fee, is not reasonable or bona fide

12 C.F.R. § 226.4(c)(7)

Reasonableness versus bona fide

Distinct terms

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If the creditor imposes an “unnecessary service” the fee may not be bona fide

Some courts equate it with fraud or deceit Claim or defense may be subject to the

heightened pleading rules required for fraud claims

Hickey v. Great Western Mortgage Corp., 1995 WL 153372 (N.D.Ill. 1995)

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Reasonableness is less exact

Requires expert testimony

Comparison - Creditor’s charges versus prevailing industry practices/charges

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Practice Tip Borrower alleges fee should have been

included in the finance charge calculation Fee was not reasonable If the unreasonable portion is subtracted from

the total charge and the remainder is within the tolerance

Seek dismissal

Scott v. IndyMac Bank, FSB, 2004 WL 422654 (N.D.Ill.)

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Creditors are treated differently than Assignees

For both actual and statutory damages Creditor liability attaches to “creditors who fail to

comply with any requirements imposed” under TILA, 15 U.S.C. §1640(a)

Assignee liability - limited to violations of TILA that are apparent on the face of the disclosure

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To determine if the violation is “Apparent on the face”

Compare the disclosure statement to the Note Any itemization of the amount financed Any other disclosure of disbursement See 15 U.S.C. §1641(e)

Violation in two circumstances

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First - disclosure can be determined to be incomplete/inaccurate by comparison among The disclosure statement Any itemization of the amount financed The note, or Any other disclosure of disbursement

Second – disclosure does not use the terms or format required to be used 15 U.S.C. §1641(e)

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Assignee versus creditor continued If mortgagor’s claim is based in whole or in part

Current holder’s failure to honor § 1635(g) rescission Argument that assignee not be liable If the underlying violation is not apparent on the face

15 U.S.C. §1635(g)

“[a]ny creditor who fails to comply with any requirement under this part . . . with respect to any person is liable to such person . . .”

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Argument is by analogy 15 U.S.C. §1640(a) addresses only a creditor’s

liability It follows that §1635(g) only applies to creditors

as well Brodo v. Bankers Trust Company, 847 F.Supp.

353 (E.D.Pa. 1994)

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“neither Section 1641 nor any other section provides for a statutory penalty and award of attorney’s fees to a plaintiff should an assignee fail to respond to a valid rescission notice. Congress did not wish to impose liability for damages and attorney’s fees on an assignee who is not responsible for or who had no notice of TILA disclosure violations at the time of an assignment. Rescission is, therefore, the only remedy against [the assignee] to which plaintiff is entitled”

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Parker v. Potter, 8:06-cv-183 –T-26EAJ (October 22, 2008)

Court found Plaintiff entitled to rescind due to TILA violations occurring at the loan’s origination

Court rejected Plaintiff’s argument for fees from the assignee No evidence that the assignee was responsible for

and had notice of the disclosure violations

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Brodo rejected in some IL courts Fairbanks Capital Corp. v. Jenkins, 231

F.Supp.2d 737 (N.D.Ill. 2002) Court rejected the conclusion that an assignee

has no monetary liability for failure to honor a rescission notice

In Jenkins the violation was apparent on the face of the assigned documents

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General Rule - Mortgagor cannot assert a TILA claim against the servicer of a loan

Exception – If the servicer also owns or owned the loan obligation

A servicer is not considered an Assignee for the purposes of 15 U.S.C. §1641(f)

Jackson v. US Bank Nat’l Ass’n Trustee, 245 B.R. 23 (E.D. Pa. 2000)

Servicing agent not liable - TILA only provides liability for original lenders and their assigns

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Let’s use it against them for a change What if the claimant is an assignee of the

original borrower? TILA provides a duty to the “borrower” No mention of borrowers assignee Move to dismiss/strike the claim What about borrowers that file BK?

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Review BK filing creates the BK Estate Trustee owns the BK Estate

“all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1)

Trustee owns the claim Mortgagor lacks standing to raise a TILA

defense if she had been discharged

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Rowland v. Novus Financial Corp., 949 F.Supp. 1447 (D.Haw.1996)

Plaintiff-borrower sought rescission Plaintiff subsequently filed for Chapter 7 Court held plaintiff lacked standing to bring suit

cause of action existed before the bankruptcy and therefore [was] included in the bankruptcy estate

“bankruptcy estate [was] the proper plaintiff

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Also, is the party bringing the TILA claim the consumer for TILA purposes?

Estate of the mortgagor have standing?

Co-obligors?

Mixed purposed Consumer/Business loan?

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If you have any further questions that were not addressed in this presentation, or want to contact one of our speakers, please email Matt Bartel, COO of ALFN, at mbartel@alfn.org. Thank you for your participation in this webinar. Please complete the brief survey which you will be directed to at the conclusion of this presentation.

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