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From Banking and Finance Law Daily, July 17, 2014

Homeowners rescinding mortgage need not include tender in complaint

By Richard A. Roth, J.D.

Homeowners who wished to enforce their Truth in Lending Act right to rescind a mortgage loan were not required to claim in their complaint that they had tendered the loan proceeds to the lender, or even that they were able to do so, the U.S. Court of Appeals for the Ninth Circuit has decided. While TILA gives courts the authority to set the order of steps in a rescission, the law does not give them the ability to do so without some look at the facts, the court said. Separately, the court decided that the homeowners’ Real Estate Settlement Procedures Act claims could be saved from the statute of limitations by equitable tolling (Merritt v. Countrywide Financial Corp., July 16, 2014, Berzon, Circuit Judge).

The court noted initially that this was another case addressing Countrywide Financial Corporation’s mortgage lending practices before the financial crisis, when “novel practices by lenders resulted in widespread distress.” The homeowners’ complaint, filed without the assistance of an attorney, said they had purchased their home using a combination of an adjustable rate first mortgage and a home equity line of credit. They claimed a long list of abusive practices, including that Countrywide colluded with the seller to arrange an inflated appraisal, deceived them about interest rates and payments, and failed to provide disclosures required by TILA for several years after the loan closing.

Eventually, the consumers, burdened by mortgage payments much higher than they anticipated and suffering from a decline in their income, fell behind on their mortgage. When they were unable to work out a satisfactory restructuring agreement with either Countrywide or Bank of America, which acquired Countrywide, they sued, demanding to rescind their mortgage and asserting violations under TILA, RESPA, and other laws.

Trial court proceedings. The homeowners’ complaint apparently was typical of the efforts of unrepresented consumers. It began with 398 paragraphs over 68 pages, according to a dissenting opinion, and later grew with the addition of 69 more paragraphs over 16 more pages. The homeowners amended their complaint four times, the dissenter noted.

Eventually, the federal district judge dismissed the homeowners’ suit. The homeowners appealed, and the Ninth Circuit reversed the dismissal, analyzing the TILA and RESPA issues in a published opinion and the remaining issues in a not-for-publication memorandum.

Rescission rights. TILA gives residential mortgage borrowers a unilateral right to rescind a mortgage loan for three days, and extends the time period to three years if the lender does not give the consumers required disclosures. This right does not apply to purchase-money mortgages, the appellate court noted, so the homeowners’ rescission efforts could apply only to the HELOC, not the first mortgage. (The appellate court declined to consider an argument by Countrywide that the HELOC should be considered a loan to acquire the residence because the claim had not been raised in the trial court.)

According to the court, TILA creates a three-step process for rescission (see 15 U.S.C. §1635):

  1. the homeowner notifies the creditor of the intent to rescind;

  2. within 20 days, the creditor returns to the homeowner any money or property paid and ends the security interest;

  3. the homeowner then tenders to the creditor any property or money the homeowner received.

However, the law also gives courts the ability to change the order of this process by requiring the homeowners to tender the money or property at an earlier stage of the process. The district court judge decided that the homeowners should be required to, at least, claim in their complaint that they could repay what was due the creditor and dismissed their suit for not doing so. The tender obligation could not be imposed at the pleading stage of a suit, the appellate court said.

Required factual inquiry. A court’s ability to change the order of the rescission steps was established in the Ninth Circuit by Yamamoto v. Bank of New York, the court said. According to Yamamoto, when it was clear from the evidence that a borrower could not repay what had been advanced by the creditor, a court could refuse to enforce the TILA rescission right. When the evidence made the borrower’s inability clear on summary judgment, the court could act before a trial.

However, at the pleading stage of a suit, the trial judge had no evidence to consider, the appellate court pointed out. Deciding whether to alter the statutory order of the rescission steps called for “an evidence-grounded, case-by-case approach” that was not possible based on the face of the homeowners’ complaint.

The appellate court noted that changing the rescission order based solely on the consumer’s complaint would encourage creditors not to agree to appropriate rescissions. “The result would be to allow creditors to vary the statutory sequence simply through intransigence,” the court said. Also, maintaining the statutory order could make it easier for a consumer to raise the money to repay what the creditor had advanced by selling the home or setting the amount off against damages for related TILA violations.

Some vs. all. Requiring only some homeowners to include tender in their complaints was no better than requiring all of them to do so, the court said. There would be no way to determine, in advance, which consumers would be subject to the compliant-based tender requirement. Equally, there would be no principled way to distinguish those who had to allege tender from those who did not.

RSEPA time limits. The homeowners claimed that Countrywide violated the RESPA ban on kickbacks and unearned fees. The statute of limitations on such a claim is one year from the closing, while the homeowners did not file their suit until nearly three years has passed. This led the district court judge to dismiss the suit. The appellate court, however, decided that the time limit could have been equitably tolled until Countrywide gave the homeowners the closing documents that revealed the violation.

Whether equitable tolling applies to RESPA claims was an open issue in the Ninth Circuit, the appellate court first said. However, the doctrine did apply to TILA cases. After considering a number of factors, the court decided that equitable tolling could apply to RESPA claims as well.

To begin with, the one-year time limit in RESPA was not jurisdictional, the court said. The law said that a suit “may” be brought within one year, not that it “must” or “shall” be brought within one year. The time limit was separated from the RESPA provision that created court jurisdiction—the relevant provision related only to venue, the court said. Also, what historical guidance there was indicated that the time limit was not a restriction on the court’s jurisdiction.

Since the statute of limitations was not jurisdictional, the court said there was a presumption that equitable tolling would apply. While that presumption could be rebutted by a statement of congressional intent, no such statement existed.

As a result, the appellate court instructed the district court to consider when the homeowners discovered or had a reasonable opportunity to discover their potential RESPA claims. The one-year statute of limitations would begin to run on that date.

Potential RESPA claims. The appellate court did examine whether the homeowners actually had described violations of RESPA but refrained from deciding the issue. The two claims raised complex legal issues that both were matters of first impression in the Ninth Circuit, and the court decided that it would be prudent to allow the district court to develop the matters more fully.

First, the homeowners claimed that Countrywide had illegally marked up settlement services by charging them more for copying, insurance, and other third-party costs than the creditor actually paid. This violated the RSEPA ban on splitting unearned fees, they alleged (see 12 U.S.C. §2607(b)). However, there was no clear precedent on whether marking up third-party fees violated the law, the court said.

Second, the homeowners claimed that Countrywide referred the appraisal business to the appraiser in exchange for an inflated appraisal. This, they alleged, was an illegal kickback (see 12 U.S.C 2607(a)). Whether an inflated appraisal could be a “thing of value” that could be a kickback was not clear, the court said, and the question could not be decided based on the current record.

Dissenting opinion. In dissent, Senior Circuit Judge Kleinfeld argued for affirming the dismissal without considering the merits of the appeal. He said the complaint violated the requirement that it be “a short and plain statement” showing the homeowners were entitled to relief.

Even with the leeway that is given to unrepresented litigants, the homeowners had imposed an excessive burden on the court and the bank, the dissenter asserted. Noting that “The majority does a heroic job of stating claims clearly” for the homeowners, he argued that the homeowners had not stated those claims and it was unfair for the court to do so on their behalf.

The case is No. 09-17678.

Attorneys: Jacob N. Foster (Kasowitz, Benson, Torres & Friedman LLP) for David Merritt and Salma Merritt. James Goldberg (Bryan Cave LLP for Countrywide Home Loans Inc., Countrywide Financial Corporation, Bank of America Corporation, Michael Coyler, David Sambol and Kenneth Lewis. Charles Elder (Irell & Manella LLP) for Angelo Mozilo. Susan H. Handelman (Ropers, Majeski, Kohn & Bently) for John Benson.

Companies: Bank of America NA; Countrywide Financial Corporation; Countrywide Home Loans Inc.

MainStory: TopStory AlaskaNews ArizonaNews CaliforniaNews ConsumerCredit GuamNews HawaiiNews IdahoNews Loans MontanaNews Mortgages NevadaNews OregonNews RESPA TruthInLending WashingtonNews


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