Consumer Compliance Outlook: Third Quarter 2013

On the Docket: Recent Federal Court Opinions

REGULATION Z — TRUTH IN LENDING ACT (TILA)

Eighth Circuit holds that a borrower does not preserve the three-year statute of limitations for rescission claims by only sending the creditor a right to cancel but must also file suit within three years. Keiran v. Home Capital, Inc., PDF External Link 720 F.3d 721 (8th Cir. 2013). The Eighth Circuit affirmed the dismissal of two rescission lawsuits under TILA because they were not filed within three years of consummation. (Borrowers usually have three business days after consummation to rescind certain types of credit transactions secured by a dwelling, but TILA extends the rescission period to three years if the creditor fails to provide the notice of the right to cancel or the material disclosures.) The borrowers invoked their right of rescission by sending the creditors completed right-to-cancel forms within three years of consummation, but the creditors rejected the requests. The borrowers later filed lawsuits seeking rescission more than three years after consummation, which the trial courts dismissed as untimely.

On appeal, a divided three-judge panel of the Eighth Circuit affirmed the dismissals, with one judge dissenting. The court held that the three-year period for rescission claims under §1635(f) of TILA requires a borrower to file a lawsuit within three years and that sending the right-to-cancel form to the creditor did not preserve the statute of limitations, based on the Supreme Court’s decision in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998). In Ocwen, the Court held that Congress intended for the right of rescission to terminate three years after consummation and could not be extended. The court also relied on recent decisions from the Ninth and Tenth Circuits, holding that rescission lawsuits must be filed within three years. See Rosenfield v. HSBC Bank, USA, 681 F.3d 1172 (10th Cir. 2012) and McOmie-Gray v. Bank of America Home Loans, 667 F.3d 1325 (9th Cir. 2012). The borrowers noted that the Third and Fourth Circuits have reached contrary results, holding that a rescission notice sent to a creditor within three years preserves the borrower’s right to rescind. See Sherzer v. Homestar Mortgage Services, 707 F.3d 255 (3d Cir. 2013) and Gilbert v. Residential Funding LLC, 678 F.3d 271 (4th Cir. 2012). But the Eighth Circuit was not persuaded by the reasoning of these decisions.

Obligation to notify borrower of new or current owner of loan does not apply to loan servicer. Henson v. Bank of America, External Link __ F.Supp. ___ 2013 WL 1222095 (D. Colo. 2013). A federal court in Colorado dismissed claims under TILA against a loan servicer alleging that the servicer failed to respond to written requests to identify the current owner of the loan and failed to provide notice when the owner changed. The borrowers obtained a mortgage from a lender. The servicing rights were later acquired by Countrywide Home Loans Servicing, a company that Bank of America later acquired and renamed BAC Home Loans Servicing. After the borrowers defaulted, BAC Home Loans Servicing filed a foreclosure action. In response, the borrowers sued Bank of America, alleging various claims, including two claims under TILA. The court granted Bank of America’s motion to dismiss the TILA claims because §1641(f) of TILA specifically provides that a servicer is not considered an assignee of a loan it is servicing unless the servicer also owns the loan. Because Bank of America was only a servicer, it was not subject to obligations that only apply to the creditor or its assignees, and the court dismissed the TILA claims.

REGULATION V — FAIR CREDIT REPORTING ACT (FCRA)

Eighth Circuit reviews damages under the FCRA. Taylor v. Tenant Tracker, Inc., PDF External Link 710 F.3d 824 (8th Cir. 2013). The Eighth Circuit affirmed the dismissal of a lawsuit under the FCRA against Tenant Tracker, a consumer reporting agency, because the consumer failed to present evidence that she suffered actual damages from incorrect information in her Tenant Tracker report. The plaintiffs, Catherine Taylor and her husband, applied for federal housing assistance from a federal housing agency. During a required background check, the agency pulled the applicants’ consumer reports from Tenant Tracker, which showed two criminal records for a Chantel Taylor, who was born on the same day as the plaintiff. The report stated Chantel could be an alias for Catherine. The housing agency concluded that Chantel Taylor had a different physical description and was not an alias for Catherine and approved the housing application. After the housing agency provided updated information to Tenant Tracker, the consumer report was revised to remove the reference to Chantel Taylor and her convictions. The plaintiffs sued Tenant Tracker for violating the FCRA by failing to follow reasonable procedures to ensure that the information in her report was accurate. The lower court dismissed the lawsuit because the plaintiff failed to establish that the information was technically inaccurate. On appeal, the Eighth Circuit affirmed, but for a different reason: the plaintiff failed to show that she suffered any actual damages from the allegedly incorrect information.

REGULATION B — EQUAL CREDIT OPPORTUNITY ACT (ECOA)

Lender’s acceleration of mortgage debt triggers duty to provide adverse action notice. Schlegel v. Wells Fargo Bank, N.A., PDF External Link 720 F.3d 1204 (9th Cir. 2013). The plaintiffs defaulted on their mortgage loan and filed for bankruptcy protection. While the bankruptcy case was pending, Wells Fargo (Wells) acquired the loan and entered into a loan modification agreement that extended the maturity date from February 2039 to February 2050. A few months later, Wells inadvertently sent a default notice to the borrowers stating that the loan balance would be accelerated if payment were not made. When the borrowers inquired about the notice, Wells said to ignore it. However, Wells sent four additional default notices to the borrowers, two of which stated that the loan balance was accelerated and that the matter would be referred to an attorney to begin foreclosure proceedings. The plaintiffs then filed a lawsuit alleging that Wells violated ECOA by failing to send an adverse action notice when the loan balance was accelerated and the loan modification agreement was effectively terminated. The plaintiffs also alleged violations of the Fair Debt Collection Practices Act (FDCPA). The trial court dismissed both claims. On appeal, the Ninth Circuit affirmed the dismissal of the FDCPA claim because Wells was collecting debts for its own account and did not meet the statutory definition of a debt collector. But the court reversed the dismissal of the ECOA claim. The court noted that ECOA defines adverse action to include “revocation of credit” and found that the acceleration notice terminated the modification agreement and the borrowers’ ability to defer repayment of debt, thus constituting adverse action.

PROTECTING TENANTs AT FORECLOSURE ACT (PTFA)

Ninth Circuit holds that the PTFA does not provide a private cause of action. Logan v. U.S. Bank National Association, PDF External Link 722 F.3d 1163 (9th Cir. 2013). Congress passed the PTFA to prevent tenants in residential leases from being evicted when the property they occupy is in foreclosure. The law requires 90 days’ notice to a tenant in a foreclosed property before eviction and also allows, with exceptions, tenants to stay in a foreclosed property until their lease expires. The plaintiff sued U.S. Bank for damages because after the bank foreclosed on the landlord’s property it served the plaintiff with a three-day eviction notice instead of providing the 90 days required by the PTFA. The issue on appeal was whether the PTFA provides tenants with a private cause of action to sue for damages. After examining the PTFA and its legislative history, the court determined that Congress did not intend to provide such remedies and instead intended that the PTFA be raised by tenants as a defense to eviction proceedings to which it applied. Accordingly, the Ninth Circuit affirmed the trial court’s dismissal of the lawsuit.

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