Three recent decisions, one by the U.S. 1st Circuit Court of Appeals, one by a California state appeals court and one by a U.S. District Court for the Eastern District of Wisconsin, have been issued within the last few weeks with respect to whether plaintiffs may assert class claims for rescission under the Truth in Lending Act. The 1st Circuit and California cases held that class claims for rescission are not available under TILA. The U.S. District Court in Wisconsin reached the opposite conclusion.
In the California case, LaLiberte v. Pacific Mercantile Bank (in which Sheppard Mullin represented the Bank), which was the first California state court case to rule upon this issue, the court first stated that section 1635 of TILA, which provides the borrower with the right to rescind his or her mortgage loan under certain circumstances, provides a personal remedy which requires the party seeking to rescind to provide the lender with a notice of rescission. Since plaintiffs did not (and indeed could not) assert that any of the class members served a notice of rescission, it was doubtful that most of the class members would even desire this remedy, the court therefore held that it was not at all clear that a justiciable controversy would exist between the class and the Bank.
The court went on to point out that Congress had expressly provided for class actions under section 1640 of TILA, governing statutory damages, and had never amended section 1635, governing rescission, to include any mention of class actions. In addition, section 1640 had been amended to cap money damages recoverable in a class action at the lesser of $500,000 or one percent of the net worth of the creditor. According to a House of Representative conference report, this was done "to protect small business firms from catastrophic judgments." The court added that it would be "difficult to believe that Congress would carefully balance the deterrent effect of class actions under TILA against the potential harm to businesses in the context of statutory damages, and yet allow class action rescission to proceed without any safeguard for the affected business." Finally, in order to demonstrate the efficacy of this point, the court stated that if 100 class members with loan amounts similar to that of plaintiffs were to seek rescission through a class action, the Bank could face the loss of security exceeding $37 million, a result that would likely be "catastrophic" (i.e., exactly the type of result Congress apparently sought to avoid through its enactment of a cap on class action monetary damages).
In the 1st Circuit case, McKenna v. First Horizon Home Loan Corp., the court, in the first federal appellate court decision on this issue since 1980, the appeals court reversed a trial court decision certifying a class for a rescission claim and held that based on a review of legislative intent (i.e., that Congress had placed a limitation on statutory damages in class actions under TILA), Congress had not intended that class actions be available for rescission claims. The court stated that "[t]he notion that Congress would limit liability to $500,000 with respect to one remedy while allowing the sky to be the limit with respect to another remedy for the same violation strains credulity." The California and 1st Circuit cases had both been closely watched in the mortgage lending industry, and a number of lender’s groups combined to file an amicus brief in the McKenna case.
In the U.S. District Court case, Andrews v. Chevy Chase Bank, F.S.B., the court rejected the argument that Congress’s amendment of TILA to include a cap on class action monetary damages without referencing rescission claims should be interpreted to mean that Congress intended to not permit class action rescission claims. The court did not analyze the issue at all (as the California court did in LaLiberte and the 1st Circuit Court did in McKenna), but merely stated that it was just as likely that Congress did not intend to limit rescission claims in any way. The court then stated that public policy strongly favors allowing class actions in cases such as this, and that denial of class action status would reward defendants who may have committed wrongs and leave victims who may have been wrong uncompensated (which makes no sense, since those "victims" would still have the right to individually rescind their loans if they chose to do so).
It is worth pointing out that the District Court’s determination that the defendant had been deficient with respect to three material disclosures in the Truth in Lending Disclosure Statement provided to plaintiffs (and which thereby served as the basis for the plaintiffs’ rescission claim) will be quite controversial. The court first stated that defendant had improperly disclosed the payment schedule for the loan, even though defendant had disclosed 60 payments at one amount and 300 payments at a larger amount, because defendant added a sentence to the Disclosure Statement stating that "this loan program allows you to select the type of payment you make each month, in accordance with disclosures provided to you earlier." First the court misquoted the text by inserting the word "may" between "you" and "make", and then ruled that this language would somehow cause the plaintiff to not understand that loan payments were required on a monthly basis, stating that an ordinary consumer would interpret this sentence as permission to decide for herself whether to make a payment and in what amount. The court went on to find other fault with the added sentence.
Next, the court held that an ordinary consumer reading defendant’s disclosures would be confused about the cost of the loan, expressed as an annual percentage rate. This supposed confusion stemmed in large part from the fact that the plaintiff’s loan featured a one month teaser rate of 1.95%. The monthly payment would be fixed for five years, but the interest rate would adjust monthly starting after one month. A disclosure with respect to the terms of the teaser rate is not required to appear in the TILA Disclosure Statement, but the court found fault with defendant’s other disclosures, which the court stated made the defendant’s disclosure of the annual percentage rate in the Disclosure Statement unclear. Among the statements the court criticized was a statement from defendant’s program disclosure form that the plaintiff’s initial rate "may" have been discounted. The court said this could confuse a borrower even though (1) the form is a printed disclosure which is provided to every loan applicant that expresses interest in the program, and does not (and is not meant to) take into account the unique terms of the applicant’s loan, and (2) the language the court criticized is the exact language that is suggested for use by the Commentary to Regulation Z.
Third, the court found fault with defendant’s disclosure that the loan contained a variable rate feature. The main cause of criticism here was again something that defendant added to the TILA Disclosure Statement, i.e., an identifier at the top of the form that the type of loan was a "5-year fixed" and that the note interest rate was 1.95%. The court held that this language could cause the plaintiff to believe that the variable rate did not take effect until after the first five years of the loan, even though this is totally irrelevant in connection with whether the disclosure was correct, since the only requirement is that the Disclosure Statement state whether the loan contains a variable rate feature. In this case, the court even suggested that the problem could have been solved by adding the word "payment" to the type of loan, so it would read "5-year fixed payment." This would certainly have been clearer.
Finally, the court found that the defendant violated TILA by adding information to the TILA Disclosure Statement that is not directly related to required information. The court again focused on the inclusion by defendant of the 1.95% initial interest rate.
The lessons to be learned from this case are threefold: (1) Never include extraneous information in the TILA Disclosure Statement; (2) make sure that all of your disclosures are clear, concise and correct; and (3) regardless of how careful you are, you may end up in front of a judge with an agenda who renders a decision that is questionable at best.