• Certain Technical Deficiencies under Truth in Lending Act No Longer Fatal
  • August 7, 2009
  • Law Firm: Frost Brown Todd LLC - Office
  • The U.S. Court of Appeals for the First Circuit recently held that technical deficiencies contained within a notice of rescission sent to borrowers are not fatal under the Truth In Lending Act, 15 U.S.C. §1635 ("TILA"). Melfi v. WMC Mortgage Corp., 568 F.3d 309, 312 (1st Cir. June 11, 2009).

    TILA was designed to ensure a meaningful disclosure of credit terms to the consumer. While creditors who violate the disclosure requirements may be ordered to pay actual or statutory damages depending upon the nature and extent of the violation, TILA also provides borrowers with the right to rescind certain loan transactions. A borrower's incentives to rescind a loan transaction may be substantial where a new loan is available, especially if rates have fallen or substantial interest has been paid during the period of the original loan.1

    Borrowers must be given appropriate notice under TILA that they may rescind the loan transaction by midnight of the third business day after the transaction. See §1635(a). But this three-day postclosing “cooling off” period is extended if the creditor does not deliver adequate notice of the right to rescind in compliance with TILA, in which case the borrower's deadline to rescind is extended to three years after closing. See §1635(f); 12 C.F.R. §226.23(a)(3).

    Under TILA, the requirements for right to rescind notices are established by the Federal Reserve Board in its Regulation Z, 12 C.F.R. §226.23. Both TILA and Regulation Z mandate that the notice contain clear and conspicuous disclosures, including the date the rescission period expires. The Federal Reserve Board has created a model form, the use of which insulates a creditor from most insufficient disclosure claims. 12 C.F.R. §226.23(b)(2); 15 U.S.C. §1604.

    In a recent case handed down on June 11, 2009, the creditor used the model form, but inadvertently left blank the spaces for the date of the transaction and the deadline for rescission (although the date of the transaction was stamped without a label on the top of the form). Melfi, 568 F.3d at 312-313. Twenty months after closing, the borrower argued the notice was deficient and, therefore, the borrower was still entitled to rescind the loan. The U.S. Court of Appeals for the First Circuit ("First Circuit") rejected prior cases, including other circuit court cases, holding that technical violations of TILA were fatal. The First Circuit found there to be no evidence that Congress or the Federal Reserve Board intended that any flaw, blank, or deviation in a form notice of rescission would automatically render the notice a nullity. The First Circuit determined that Congress aimed, in general, to guard against widespread rescissions for minor violations with its 1995 amendments to TILA.

    Consequently, the First Circuit took a notably different approach than the prior cases, and instead considered whether flaws in the notice compromised an effective disclosure process. The court held that technical deficiencies are irrelevant if the borrower receives a notice that effectively gives it notice as to the final date for rescission and allows the borrower three full days to act. Consequently, the First Circuit adopted a test that considers whether any reasonable person, in reading the form provided, would understand it. In applying this test, the court concluded that the dates left blank on the notice made no difference and did not entitle the borrower to extend the deadline to rescind to three years after closing.

    While the First Circuit took a similar approach in 2006 involving a different flaw in the notice 2, the First Circuit's recent decision affirms its commitment to apply the new standard to other deficiencies within TILA notices and may be instructive to other circuits.

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    1In rescinding a loan transaction, a creditor terminates its security interest and returns any payments made by the borrower in exchange for the borrower's return of all funds or property received from the creditor (i.e., the loan proceeds). "Rescinding a loan transaction under TILA requires unwinding the transaction in its entirety and thus requires returning the borrowers to the position they occupied prior to the loan agreement." Andrews v. Chevy Chase Bank, 545 F.3d 570, 573-574 (7th Cir. 2008) (citation omitted); Barrett v. JP Morgan Chase Bank, N.A., 445 F.3d 874, 877 (6th Cir. 2006). The process is intended to work privately “with the creditor and debtor working out the logistics of a given rescission.” Andrews, 545 F.3d at 573-574 (quotations omitted). While Section 1635(b) of TILA sets forth certain deadlines and duties that apply to the creditor upon receipt of a notice of rescission from the borrower (e.g., return of earnest money, down payment, or other payments, and initiating the termination of the security interest), if disagreements over the particulars of a given rescission arise, the court may tailor the remedy to the circumstances Id.

    2See Palmer v. Champion Mortgage, 465 F.3d 24 (1st Cir. 2006).