Consumer Compliance Outlook
On the Docket: Recent Federal Court Opinions
Regulation Z - Truth in Lending Act (TILA)
Right of rescission applies only to consummated credit transactions. Weintraub v. Quicken Loans, Inc. , 594 F.3d 270 (4th Cir. 2010). The Fourth Circuit held that a borrower’s right to rescind a mortgage loan under TILA does not apply until after consummation of a consumer credit transaction. The plaintiffs applied for a mortgage refinancing loan with Quicken Loans and provided a $500 deposit. At application, they were notified that in the event of cancellation, Quicken Loans would refund the deposit less any out-of-pocket costs. During underwriting, Quicken Loans added a half-point discount fee to the loan’s closing costs after conducting an appraisal of the property and determining that it was worth $32,000 less than the plaintiffs’ estimate of $340,000. In response, the plaintiffs sent Quicken Loans a “notice of right to cancel” and requested a refund of their deposit. Quicken Loans returned the deposit, less the costs of the appraisal and credit report fees. The plaintiffs filed a lawsuit alleging that Quicken Loans was required to refund the entire deposit once the plaintiffs invoked their right of rescission under §1635 of TILA. The issue on appeal was whether the right of rescission applies before a credit transaction is consummated. In analyzing this issue, the court focused on the language in §1635 stating that the right of rescission applies to a “consumer credit transaction.” The court noted that TILA defines “transaction” with respect to a residential mortgage transaction, 15 U.S.C. §1602(w), and a reverse mortgage transaction, 15 U.S.C. §1602(bb), and both definitions treat “transaction” as a consummated credit event. Further, Regulation Z and its Official Staff Commentary (OSC) require that a security interest arise from a credit transaction before the right of rescission applies. The court concluded from this that “the right to rescind a transaction creating a security interest can only arise from a consummated transaction, because only upon consummation of the transaction is the security interest retained.” The court therefore affirmed the dismissal of the case because the plaintiffs never consummated their credit transaction.
Court analyzes Regulation Z issues in reducing a home equity line of credit (HELOC). Malcolm v. JPMorgan Chase Bank, N.A. , 2010 WL 934252 (No. 09-4496, N.D. Cal. March 15, 2010). Plaintiff obtained a HELOC from JP Morgan Chase Bank, N.A. (Chase) in March 2006 based on his property’s appraised value of $1 million. In August 2009, Chase notified the plaintiff that it was suspending future draws because the property’s value had declined to $826,000 and no longer supported the HELOC. Plaintiff appealed the suspension and paid for an appraisal by a Chase-approved appraiser. That appraisal showed the property’s value at $1.070 million, but Chase did not reinstate the HELOC and reimburse plaintiff the cost of the appraisal. Plaintiff filed a class-action lawsuit against Chase alleging violations of TILA with respect to Chase’s procedures for suspending HELOCs based on property valuations. Chase filed a motion to dismiss the lawsuit, which the court granted in part and denied in part. Chase argued that its appraisal was reasonable when conducted and that a subsequent reappraisal does not establish that the initial appraisal was invalid. The court rejected this argument because the plaintiff’s appraisal occurred within one month of Chase’s appraisal, suggesting that Chase’s appraisal was incorrect. Chase also argued that the plaintiff’s claim that Chase violated TILA by relying on an automated valuation model (AVM) in reducing plaintiff’s credit line was not a valid claim. The court dismissed this claim because neither TILA nor Regulation Z prohibits the use of an AVM for purposes of determining if a “significant” decline in property value has occurred, which would allow a suspension or reduction in a HELOC credit line. The plaintiff also argued that Chase violated TILA because the HELOC agreement permitted Chase to suspend the credit line even when the decline in property value amounted to less than a 50 percent reduction in the difference between the credit limit and the borrower’s available equity in the property. The court found that while the OSC states that a 50 percent reduction constitutes a significant decline, the OSC also suggests that a smaller reduction could be significant based on individual circumstances. Accordingly, the court rejected this claim.
Regulation X - Real Estate Settlement Procedures Act (RESPA)
Overcharges for settlement services do not violate RESPA §8(b). Martinez v. Wells Fargo Home Mortgage, Inc. , 598 F.3d 549 (9th Cir. 2010). The Ninth Circuit ruled that an overcharge for settlement services does not violate RESPA’s ban on unearned fees under §8(b). The plaintiffs paid Wells Fargo an underwriting fee of $800 when they refinanced their mortgage. Their lawsuit alleged that the fee violates §8(b) of RESPA because the fee is not reasonably related to Wells Fargo’s actual costs for performing the underwriting service. The court found that the text of §8(b) prohibits settlement service providers from charging fees when no services are provided but does not prohibit overcharges: “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.” The court also noted that three other circuit courts of appeals have concluded that §8(b) does not prohibit charging excessive fees for settlement services. Friedman v. Market Street Mortgage Corp., 520 F.3d 1289, 1291 (11th Cir. 2008); Santiago v. GMAC Mortgage Group, Inc., 417 F.3d 384, 385 (3d Cir. 2005); Kruse v. Wells Fargo Home Mortgage, Inc., 383 F.3d 49, 56 (2d Cir. 2004). The Ninth Circuit therefore affirmed the lower court’s dismissal of the case.
RESPA allows referral fees paid to employees. McCullough v. Hanna , (No. 09-2858 N.D. OH March 26, 2010). Plaintiff purchased residential real estate and was assisted in the transaction by Hanna, a business that provides real estate settlement services. Hanna provided the services through Barristers, with which Hanna has an affiliated business arrangement (ABA). Plaintiff filed a class action against Hanna and Barristers, alleging that Hanna violated RESPA’s ban on referral fees under §8(a) by paying referral fees to its employees for referring class members to Barristers for settlement services. The court rejected the allegation because the plaintiff did not allege that Hanna paid referral fees to Barristers but rather to its own employees. The court noted that Regulation X, 24 C.F.R. §3500.14(g)(1)(vii), specifically states that “RESPA permits ... [a]n employer’s payment to its own employees for any referral activities.” Plaintiff also alleged that Hanna failed to comply with RESPA’s requirements for disclosing an ABA. Under §8(c)(4) of RESPA, a business can make referrals to an affiliate if there are no kickbacks and the following requirements are satisfied: (1) the arrangement is disclosed prior to or at the time of the referral; (2) the person being referred is not required to use the referred service; and (3) nothing of value other than permissible payments is provided. Plaintiff alleged that Hanna violated RESPA by failing to comply with the ABA disclosure requirements. The court dismissed this claim because even if Hanna did not comply with these requirements, the plaintiff did not allege a prohibited kickback. The court found that failing to comply with the ABA disclosure requirements alone does not violate RESPA.