Friday, June 12, 2009

TILA Violation Not Strictly Construed

In Melfi v. WMC Mortgage Corp. (09-1066), the First Circuit reviewed the appellants Truth in Lending Act ("TILA") claim regarding his home mortgage. TILA requires certain notice be given to the borrower.

"Assuming that the notice complies with TILA, a borrower is given three "business days" to rescind the transaction; otherwise, the period is much longer. Id. The question in this case is whether the notice given Melfi adequately complied."

The appellant "argued that the notice of his right to cancel was deficient because it left blank the spaces for the date of the transaction (although the date was stamped on the top right corner of the notice) and the actual deadline to rescind...TILA provides that '[t]he creditor shall clearly and conspicuously disclose, in accordance with regulations of the Board, to any obligor [here, Melfi] in a transaction subject to this section the rights of the obligor under this section.' 15 U.S.C. § 1635(a). Regulation Z says what the notice of the right to cancel must clearly and conspicuously disclose; pertinently, the regulation requires that the notice include '[t]he date the rescission period expires.' 12 C.F.R. § 226.23(b)(1)(v).

The Board has created a model form; a creditor must provide either the model form or a 'substantially similar notice.' 12 C.F.R. § 226.23(b)(2). The use of the model form insulates the creditor from most insufficient disclosure claims. 15 U.S.C. § 1604(b). WMC gave Melfi the model form, but the spaces left for the date of the transaction and the date of the rescission deadline were not filled in. The form Melfi received had the date of the transaction stamped at its top (but it was not so designated)...

A number of district court cases, along with two circuit court opinions, support Melfi's position,1 although one of the circuit cases also involved more serious substantive flaws.

[However] The date that Melfi closed on the loan can hardly have been unknown to him and was in fact hand stamped or typed on the form given to him. From that date, it is easy enough to count three days...So the argument for allowing Melfi to extend his deadline from three days to three years depends on this premise: that any flaw or deviation should be penalized automatically in order to deter such errors in the future. If Congress had made such a determination as a matter of policy, a court would respect that determination; possibly, this would also be so if the Board had made the same determination. See Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 844 (1984). Melfi argues at length that we owe such deference to the Board. The answer is that there is no evidence in TILA or any Board regulation that either Congress or the Board intended to render the form a nullity because of an uncompleted blank in the form or similar flaw where, as here, it could not possibly have caused Melfi to think that he had months in order to rescind. The central purpose of the disclosure--the short notice period for rescission at will--was plain despite the blanks. Melfi's argument assumes, rather than establishes, that a penalty was intended.

In any event, in the absence of some direction from Congress or the Board to impose a penalty, we see no policy basis for such a result. Where, as here, the Board's form was used and a reasonable borrower cannot have been misled, allowing a windfall and imposing a penalty serves no purpose and, further, is at odds with the general approach already taken by this court in Palmer."


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