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From Banking and Finance Law Daily, October 16, 2013

Bank foreclosing on residence could not assert closing agent’s notice delivery failure was bona fide error

By Richard A. Roth, J.D.

A bank being sued by homeowners who claimed to have suffered damages from the bank’s refusal to rescind a mortgage loan could not invoke the Truth in Lending Act bona fide error defense by asserting that the original lender had established procedures that were reasonably adapted to ensure that required notices were given, according to the U.S. District Court in Hawaii. The lender’s procedures fell short of what was required to show that the closing agent’s failure to give the homeowners two copies of the notice of their right to rescind the transaction was a bona fide error, the judge said. Other attempts by the bank to convince the judge to grant summary judgment against the homeowners’ damages claims also failed (Abubo v. The Bank of New York Mellon, Oct. 15, 2013, Seabright, District Judge).

The facts as related by the judge were that the homeowners refinanced their property in 2007, then defaulted on the mortgage loan in 2009. The loan was assigned to the bank (which was the trustee for the securitization that included the loan) to proceed with foreclosure. The day before the scheduled nonjudicial foreclosure sale, the homeowners had a rescission notice delivered to the bank’s attorney; however, the attorney disregarded the notice and continued with the sale.

The basis of the homeowners’ rescission claim was that they had not been given the two copies of the notice of their foreclosure rights at the 2007 loan closing that were required by 15 U.S.C. §1635 and 12 C.F.R. 226.23 (now 12 C.F.R. 1026.23). They claimed to have received only a single copy of the notice. As a result, their three-day right to rescind the loan transaction was extended to three years, they said.

Earlier proceedings. Precisely one year after their cancellation notice, the homeowners filed suit against the bank, the original lender, and other companies involved in the transaction. However, the judge noted, earlier rulings had narrowed their suit to a single claim—that the bank’s refusal to honor their rescission demand had caused injury, making the bank liable for damages (12 U.S.C. §1640 and 12 U.S.C. §1641.)

The bank then asked the judge to enter summary judgment against the homeowners, asserting that there were no genuine issues of material fact on several points that were fundamental to the bank’s claimed liability.

Presumption of delivery. The judge first addressed the significance of an acknowledgment of delivery signed by the homeowners at the closing. The acknowledgment raised a rebuttable presumption that the homeowners each had received the two required copies, but it was not conclusive proof, the judge decided.

TILA made clear that a written acknowledgment of receipt created only a rebuttable presumption, the judge said, pointing to 15 U.S.C. 1535(c). The homeowners’ denial during their depositions that they had received the copies, despite the contrary acknowledgment, was enough to allow a jury to find in their favor.

Bona fide error. TILA does not automatically impose liability for all violations; instead, it provides creditors with a bona fide error defense. Under 15 U.S.C. §1540(c), a creditor—or assignee, such as the bank—is not liable for an unintentional violation that occurred despite the maintenance of procedures that were reasonably adapted to avoid such violations. According to the bank, the original lender’s procedures for closing loans met the standard. The failure to deliver the notice was the closing agent’s error, not the lender’s error, so it was a bona fide error under TILA.

The judge disagreed. The test for what was a bona fide error had two parts, the judge said, and the bank failed both.

The first part related to the nature of the error—it had to be unintentional and clerical in nature, the judge said. An error in fulfilling TILA’s notice requirements could not be considered clerical, the judge said, because “providing proper disclosures is at TILA’s very core.” Failing to meet the notice delivery requirements was informational, not clerical.

The judge also rejected the bank’s argument that a TILA amendment in 1980 restricted liability for errors in a way that shielded the bank in this case. The amendment clarified what was considered to be a bona fide error. However, it did not go so far as to say there was no liability for that any unintentional minor or technical error, as the bank’s argument claimed, the judge said. The amendment did not affect liability for errors in disclosures that were basic to a consumer’s understanding of a transaction.

The bank failed the second part of the test as well, the judge said, because the original lender had no process in place to check the work of the closing agent. A procedure to avoid errors calls for more than just handing responsibility off to another person, it also requires that the other person’s performance be reviewed and verified.

Obtaining the written acknowledgment was not an adequate verification method, the judge continued. After all, if the written acknowledgment were a verification method, it would be considered as proving delivery, not just as raising a rebuttable presumption of delivery.

Other issues. The judge also rejected two other attempts by the bank to end the suit. First, he noted that while the homeowners’ claim for rescission was time-barred, their claim for damages arising from the bank’s refusal to rescind survived. The two were different remedies, he noted.

He then said that whether the homeowners had the ability to carry out the rescission when they demanded it was unclear, so that summary judgment could not be entered. If the homeowners did not have the ability to repay the loan proceeds when they demanded a rescission, then the bank would have had no obligation to honor their demand. However, they were entitled to an opportunity to prove they could have done so.

The case is No. 11-00312 JMS-BMK.

Attorneys: Frederick J. Arensmeyer (Dubin Law Offices) for Edward Yuzon Abubo. Patricia J. McHenry (Cades Schutte) for Bank of New York Mellon, Countrywide Home Loans, Inc., Mortgage Electronic Registration System, Inc., and Bank of America

Companies: Bank of America, N.A.; The Bank of New York Mellon; Countrywide Home Loans, Inc.; Mortgage Electronic Registration Systems, Inc.

MainStory: TopStory ConsumerCredit Mortgages Loans TruthInLending HawaiiNews

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