CFSL Bulletin : Consumer Finance Lawyers & Attorneys for Financial Litigation & Class Action Defense

In Rubio, the plaintiff alleged that Capital One violated the Truth in Lending Act (TILA) relating to a February 2004 direct-mail credit card solicitation. The solicitation listed the credit card’s APR for purchases in its “Schumer Box” (a table required by federal law) as a “fixed rate of 6.99%.”  An asterisk was included, linked to a paragraph printed just below the Schumer Box that stated:

All your Annual Percentage Rates (APRs) are subject to increase if any of the following conditions (“Conditions”) occur: (i) you fail to make a payment to us when due; (ii) your account is overlimit; (iii) or your payment is returned for any reason.

Further down on the same page, under the heading “Terms of Offer,” the solicitation provided, as part of the terms: “I will receive the Capital One Customer Agreement and am bound by its terms and future revisions thereof. My Agreement terms (for example, rates and fees) are subject to change.”

In 2007, Capital One increased the interest rate on the plaintiff’s card due to the rise in market interest rates, not because of her meeting any of the three enumerated Conditions. The Ninth Circuit held that “it is not ‘clear and conspicuous’ to describe an APR as ‘fixed’ when the creditor has reserved the right to change the APR for any reason.” The Court made this decision based upon empirical evidence from the very same consumer studies that motivated the new regulation quoted above.

In other words, the court determined that the use of the word “fixed” in a 2004 solicitation to describe an APR was deemed misleading based upon studies in 2006 and 2007, upon which a regulation not effective until 2010 was based. Yet, the Ninth Circuit emphasized that this did not make the new regulation retroactive, and stated:

What was misleading in 2006 and 2007, when the consumer studies were conducted, was also misleading in 2004, when Rubio received Capital One’s solicitation. The new regulation and the empirical studies it relies on are therefore relevant and informative for this case.  For even where not binding, an agency’s interpretation of a statute certainly may influence courts facing questions the agency has already answered. . . . TILA has always prohibited misleading APR disclosures. Our holding is simply a concrete application of that prohibition.

One judge on the three-judge panel dissented, pointing to a discussion in the Comments to Regulation Z showing that a fixed-rate account is one not tied to an index or formula as a part of the credit plan. The dissenting judge, therefore, deemed the use of the term “fixed” as accurate because the account did not involve pre-planned rate changes. Thus, the dissent explains, the real dispute should be the clarity of the disclosure, which is a question of fact that could be decided either way and; therefore, should not be decided by the court as a matter of law.

Whether you agree with the majority or the dissent, Rubio presents a cautionary tale of the danger of liability under TILA for prior disclosures despite the governing regulations at the time.

The home appraisal revealed a loan-to-value ratio which was greater than what the Good Faith Estimate contemplated.  Quicken Loans then added a half-point discount fee to the closing costs for the loan.  As a result, the Weintraubs decided not to close the loan.  They notified Quicken Loans in writing of their decision to cancel the loan, and also requested a refund of their $500 deposit.  Quicken Loans refused to return the $500, citing the Deposit Agreement which provided that:

The deposit will not be refunded to you if you . . . choose to withdraw your application, or choose not to close the transaction for any reason (including changing interest rates).

Notwithstanding the language in the Deposit Agreement, Quicken Loans refunded approximately $130 to the Weintraubs after deducting from the deposit certain expenses.  The Weintraubs sued Quicken Loans for failure to provide them with a full refund, allegedly in violation of Section 1635(b) of TILA.  The Weintraubs sought recission under Section 1635(a) of TILA, which gives borrowers, under certain circumstances, a right of recission for “any consumer transaction.”  Once the right is exercised, the lender must give the borrower back “any money, or property given as earnest money, down payment, or otherwise.”  

In granting summary judgment in favor of Quicken Loans, the District Court relied on TILA’s definitions of “residential mortgage transaction” and “reverse mortgage transaction” — both of which treat a “transaction” (left undefined by TILA) as a completed event — to conclude that there was no “consumer credit transaction” between the Weintraubs and Quicken Loans and, thus, the District Court held, the Weintraub’s right to rescind under TILA was never triggered.  In addition, the District Court relied on prior Fourth Circuit cases “which hold in the context of an automobile loan that liability for improper disclosures under § 1638 of TILA does not attach until after consummation of a consumer credit transaction” (citing cases). 

Based on all of this, the Fourth Circuit framed the issue on appeal as “whether there can be a ‘consumer credit transaction’ giving rise to the right to rescind before the transaction is consumated or closed.”  The Weintraubs argued that a “consumer credit transaction” exists and can be rescinded anytime after the parties begin negotiating for an extension of credit.  According to the Weintraubs, Section 1635(a) of TILA does not require a consummated loan before the borrower’s right to rescind is triggered, and that the broad remedial provisions of TILA should be liberally construed. 

The Fourth Circuit reviewed its prior decisions dealing with TILA liability under Section 1638 of TILA and found that:

[T]he principle that a credit transaction must be consummated to trigger TILA liability applies with equal force to the right to rescind created by § 1635(a). . . .

[T]hese cases stand for the broader principle that only when a loan has been consummated does a ‘credit transaction’ exists that gives rise to liability under TILA. Because ‘credit transaction’ is a term used in both § 1635 and § 1638, indeed throughout TILA, we think that [our prior decisions] are relevant to understanding what constitutes a ‘transaction’ that may, under § 1635(a) of TILA, be rescinded.

The Fourth Circuit rejected the Weintraubs reliance on a broad definition of “transaction” found in Black’s Law Dictionary, because “they have failed to account for the alternative definition geared toward business contexts.” Instead, the Fourth Circuit looked to a “commonsense reading” of Section 1635(a) that suggests “that ‘transaction’ refers to a consummated, binding agreement, rather than to the whole course of the parties’ interactions.” Indeed, if the Weintraubs’ view of the term transaction were adopted, a borrower could rescind the entire course of dealing between parties, which “would be essentially meaningless.”

The Court ultimately held “that a consumer cannot exercise the right to rescind created by § 1635(a) until after consummation of a consumer credit transaction,” thereby affirming the decision of the District Court. This conclusion, the Court found, was consistent with Fed’s interpretation of TILA as presented in Regulation Z.

The Court noted that TILA provides for two types of compensatory damages — statutory and actual — which are treated differently under the Act. Citing Black’s Law Dictionary, the Court defined actual damages as the “amount awarded to a complainant to compensate for a proven injury or loss . . . .” Section 16040(a)(1) of TILA provides that a successful plaintiff may recover “any actual damage sustained by such person as the result of the failure” to disclose. Taken together, the Third Circuit found that TILA requires a link between the loss and the failure to disclose:

The compensatory remedy of actual damages is permitted only in cases where the violation caused the harm–where the harm was “sustained by [the consumer] as a result” of the violation. 15 U.S.C. § 1640(a)(1). Without detrimental reliance, only statutory damages are available.

The Third Circuit went on to reject various arguments that Vallies advanced regarding the legislative history of TILA, supposed textual support in other consumer statutes (e.g., ECOA, EFTA), and conflict with other decisions of the circuit. The Court concluded that:

Because we find that a showing of detrimental reliance is required to recover actual damages for a TILA disclosure violation, and Vallies neither pled nor made such showing, the grant of summary judgment was proper on the claim for actual damages.

In Levin v. Citibank, N.A., 2009 WL 3008378 (N.D. Cal. 2009), the Northern District of California affirmed in part and denied in part a creditor’s motion to dismiss a claim that the creditor unlawfully reduced the plaintiff’s HELOC limit. The plaintiff alleged that Citibank reduced his credit limit based on faulty AVMs when the value of his home had only decreased by ten percent. Citibank argued that the plaintiff’s claims must be dismissed because he did not allege that the equity in his home did not significantly decline. The Court, however, held that the plaintiff was not required to negate Citibank’s theory behind its determination that there has been a significant decline in plaintiff’s property.

We will keep you updated as more opinions are expected to be issued in the next few months.

The district court granted Chase’s motion to dismiss, finding that, among other things, under the Federal Reserve Board’s Regulation Z, Chase was not required to provide advance notice of end-of-the-month adjustments that applied from the start of the month where the credit card agreement permitted the practice.

The First Circuit acknowledged the current split among federal circuit courts on the issue of whether notice is required for a rate increases under TILA and Regulation Z prior to the enactment of the Credit Card Accountability, Disclosure, and Responsibility Act (Credit CARD Act). In McCoy v. Chase Manhattan (2009), the Ninth Circuit held that the plaintiff had stated a claim under TILA. In Swanson v. Bank of America (2009, rehearing and rehearing en banc denied with opinion), the Seventh Circuit rejected a similar claim. These opinions both issued earlier this year within weeks of each other.

The First Circuit examined Section 226.9(c)(1) and (2) of Regulation Z which, pre-Credit CARD Act amendment, provided that 15 days notice was required for most changes to the terms of a credit card agreement. However:

The 15-day timing requirement does not apply if the change has been agreed to by the consumer, or if a periodic rate or other finance charge is increased because of the consumer’s delinquency or default; the notice shall be given, however, before the effective date of the change. . . . No notice under this section is required . . . when the change results from an agreement involving a court proceeding, or from the consumer’s default or delinquency (other than an increase in the periodic rate or finance charge).

12 C.F.R. § 226.9(c)(1), (2).

The First Circuit looked to the Board for guidance on Section 226.9(c). In its brief, the Board stated its “position that at the time of the transactions at issue in this case, Regulation Z did not require a change-in-terms notice to be provided when a creditor increased a rate to a figure at or below the maximum allowed by the contract in the event of default.” The First Circuit viewed the Board’s position as “controlling,” and held that Shaner’s TILA claim failed. The Court also rejected Shaner’s arguments that the increase in APR constituted an illegal penalty and was an impermissible retroactive adjustment in violation of Massachusetts’ unfair and deceptive trade practices law.

The appellants/borrowers alleged that their lender failed to disclose a title insurance charge set at the “basic rate,” rather than the lower “refinance rate.” Although TILA specifically exempts title insurance fees from the definition of “finance charge,” Section 226.4 of Regulation Z requires the disclosure of title insurance fees that are not “reasonable in amount.” From this provision, the borrowers argued that TILA imposes strict liability requiring lenders to disclose title insurance fees where they exceed what is set forth in the TIRBOP Manual. The lender argued that it was not required to disclose the fees because the borrowers did not provide notice of their right to a lower rate prior to closing.

The Third Circuit held that “irrespective of which party bears notice burdens under TILA,” the borrowers, when confronted with a summary judgement motion, were required to establish that there was a genuine issue of material fact; that is, “that under the TIRPOP Manual they were entitled to receive the refinance rate” instead of the basic rate charged by the lender. Because the borrowers failed to do this, the Court held that summary judgment was appropriate on the borrowers’ TILA claim.

Click here for a copy of the Third Circuit’s decision.