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Home-Equity Borrower Can Sue Under TILA

A Charlottesville U.S. District Court says a borrower can sue the lender for a home equity line of credit under the Truth in Lending Act because the lender misrepresented the borrower’s rights by purporting to require the borrower to sign any documents or take any actions in connection with reducing the security interest; the notice of right to cancel for this credit transaction allegedly did not clearly disclose how to rescind, in violation of 12 C.F.R. § 226.15(b)(3).

On Jan. 12, 2007, plaintiff entered into two credit transactions. The first was a mortgage refinance loan evidenced by a note payable to Countrywide Home Loans Inc. in the amount of $187,500. The second credit transaction was a home equity credit line extended by and payable to Countryside Bank N.A. in the maximum amount of $37,500. Both transactions were secured by liens on plaintiff’s principal residence.

At some point prior to Nov. 3, 2009, plaintiff received notice that nonjudicial foreclosure proceedings were being initiated pursuant to the first credit transaction. On that date, plaintiff sent BofA, then the note holder as to both credit transactions, a notice of rescission. BofA received the notice, but took no action within 20 days, presumably because it felt plaintiff was not then entitled to rescind. Plaintiff then brought this suit to enforce her rescission rights. BofA remains the note holder as to the second credit transaction, but Fannie Mae is now the note holder as to the first credit transaction.

I find that the disclosure of the finance charge for the first credit transaction was accurate; however, the notice of right to cancel for the second credit transaction was deficient.

Plaintiff argues the lender failed to disclose as part of the finance charge for the first credit transaction a $265 payment to National Real Estate Information Services. She characterizes this as a “hidden” finance charge that was a “condition precedent” to the first transaction. However, I am persuaded by defendants’ characterization of the $265 sum not as a charge, but as a disbursement to plaintiff. I will grant the motion to dismiss this claim. Plaintiff’s averment cannot overcome what is plain on the face of the HUD-1 statements: that the parties directed funds disbursed under the first credit transaction to payees associated with the second credit transaction.

As to the second credit transaction, plaintiff fails to make a plausible case that the waiver provision in the loan agreement for the second transaction made the notice of right to cancel unclear. Courts are reluctant to find that an extrinsic provision makes a separate notice of right to cancel unclear when that provision is consistent with rights under TILA.

The waiver provision does not misrepresent rights under TILA. As there is no reason an ordinary borrower would perceive the waiver as having any bearing on plaintiff’s right to rescind, plaintiff’s claim that the waiver made the notice of right to cancel unclear is without merit.

Courts generally do not find that a notice is unclear merely because it is complicated. There is near unanimity that the lender’s omission of a rescission deadline does not make the notice unclear, because ordinary borrowers can calculate the date from the other information provided. However, courts will generally find that a notice is unclear where it tends to misrepresent a right under TILA.

However, plaintiff’s remaining claim has merit. Plaintiff essentially contends the language on cancellation misrepresented the means of exercising the right to rescind. She cites the notice language stating, “If we require you to sign any documents or take any actions in connection with reducing the security interest, you must do so.”

The 4th Circuit has recently clarified in American Mortg. Network Inc. v. Shelton, 486 F.3d 815 (4th Cir. 2007), that TILA § 1635(b) should not be interpreted literally as requiring the creditor to relinquish its security interest regardless of whether the borrower is able to return the loan proceeds.

However, nothing in Shelton suggests that a lender may impose its own requirements on a borrower to effect termination of the lender’s security interest. The plain language of TILA and Regulation Z provides that when a borrower properly exercises his right to rescind, the lender’s security interest becomes “void” by operation of law. The lender in this case misrepresented the borrower’s rights by purporting to require the borrower to sign any documents or take any actions in connection with reducing the security interest. Thus the notice of right to cancel for the second credit transaction did not clearly disclose how to rescind, in violation of 12 C.F.R. § 226.15(b)(3).

Motion to dismiss granted in part and denied in part.

Jacobsen v. Bank of America N.A. (Moon, J.) No. 3:09cv00077, Dec. 13, 2010; USDC at Charlottesville, Va. VLW 011-3-077, 14 pp.

VLW 011-3-077

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