Guise, Carroll v. BWM Mortgage LLC ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-4021
CARROLL GUISE, REGINA GUISE,
and MILDRED GUISE,
Plaintiffs-Appellants,
v.
BWM MORTGAGE, LLC, HOMECOMINGS
FINANCIAL NETWORK, INC., CLEARWATER
TITLE CO., et al.,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 03 C 4123—Suzanne B. Conlon, Judge.
____________
ARGUED APRIL 7, 2004—DECIDED AUGUST 4, 2004
____________
Before FLAUM, Chief Judge, and DIANE P. WOOD and
WILLIAMS, Circuit Judges.
FLAUM, Chief Judge. The plaintiffs claim relief under the
Truth in Lending Act (“TILA”), 15 U.S.C. § 1601 et seq.,
alleging that the defendants engaged in unlawful lending
practices in connection with a mortgage on their home. The
district court dismissed their lawsuit on the pleadings and
denied their motion for leave to file an amended complaint.
For the reasons stated herein, we affirm.
2 No. 03-4021
I. Background
Plaintiffs Regina Guise and Carroll Guise hired The Loan
Arranger, LLC (“The Loan Arranger”) to serve as their
mortgage broker. The Loan Arranger helped them to obtain
a loan from BWM Mortgage, LLC for the purpose of refi-
nancing their existing mortgage loan. On January 28, 2002,
the Guises and BWM Mortgage, LLC closed the loan. The
loan note indicates that the plaintiffs borrowed $180,000
from BWM Mortgage, LLC, and the mortgage note indicates
that the plaintiffs granted BWM a security interest in their
Chicago, Illinois home. In connection with the loan, the
Guises were assessed a finance charge of $434,890.22.
The Loan Arranger aided the Guises in purchasing title
insurance and title endorsements from Clearwater Title
Company (“Clearwater”), a company that is under common
ownership and management with The Loan Arranger.
Clearwater charged $800 for the title insurance and $345
for the title endorsements. According to the U.S. Department
of Housing and Urban Development Settlement Statement
(“settlement statement”) appended to the complaint, the
Guises also paid $450 to Lakeshore Title Agency for the
purpose of conducting a title search.
Plaintiffs brought a multiple count complaint against BWM
Mortgage, LLC; Homecomings Financial Network, Inc.,
Clearwater Title Company; The Loan Arranger; Michael
Robins; and DOES 1-5. Count I of the complaint claims
violations of TILA and seeks damages and rescission of the
mortgage loans on behalf of a putative class, and Count II
sought the same solely on behalf of the Guises. Count III
alleges violations of the Illinois Consumer Fraud Act, 815
ILCS 505/2, on behalf of the Guises and the putative class.
The complaint alleges that the fees paid by the Guises to
Clearwater for title insurance and endorsements exceeded
the $601 fee quoted for the same services by Chicago Title
Insurance Company, a rival title insurance provider. The
No. 03-4021 3
Guises allege that The Loan Arranger profited from the
Guises’ allegedly overpriced transaction with Clearwater, and
that this compensation therefore qualified as additional com-
pensation to the mortgage broker subject to disclosure under
TILA, 15 U.S.C. § 1605(a) and federal Regulation Z, 12 C.F.R.
§ 226.4(c)(7)(I). The plaintiffs argue that because the title
insurance and endorsement fees were not disclosed as
finance charges, the statement of finance fees was under-
stated in excess of the permitted margin of error provided
in 25 U.S.C. § 1605(f)(2)(A) and 12 C.F.R. § 226.23(g). For
that reason, the plaintiffs argue that they are entitled to
rescind their loan.
The defendants moved to dismiss the plaintiffs’ suit on
the pleadings. Shortly afterward, the plaintiffs moved for
leave to amend their complaint. The district court granted
BWM’s motion for judgment on the pleadings with respect
to the plaintiffs’ rescission claim, finding that the finance
charges disclosed were within the applicable TILA tolerance.
The district court also denied the plaintiffs’ motion for leave
to amend the complaint, concluding that the plaintiffs’
proposed amendments could not cure the deficiencies in the
first complaint. The plaintiffs now appeal.
II. Discussion
The plaintiffs argue that the district court erred in dis-
missing their claims for rescission on the pleadings. This
Court reviews a decision to grant judgment on the pleadings
pursuant to Federal Rule of Civil Procedure 12(c) de novo,
using the standard applicable to dismissals under Federal
Rule of Civil Procedure 12(b)(6) for failure to state a claim
on which relief can be granted. R.J. Corman Derailment
Serv., LLC v. Int’l Union of Operating Eng’rs, 335 F.3d 646,
647 (7th Cir. 2003). We accept the facts alleged in the
complaint in the light most favorable to the plaintiffs, the
non-moving party. Id. We also “consider new factual
4 No. 03-4021
allegations raised for the first time on appeal provided they
are consistent with the complaint.” Chavez v. Illinois State
Police, 251 F.3d 612, 650 (7th Cir. 2001) (internal quota-
tions omitted). “A court will grant a Rule 12(c) motion only
when it appears beyond a doubt that the plaintiff cannot
prove any facts to support a claim for relief and the moving
party demonstrates that there are no material issues of fact
to be resolved.” Brunt v. Serv. Employees Int’l Union, 284
F.3d 715, 718-19 (7th Cir. 2002).
The stated purpose of TILA is to “assure a meaningful
disclosure of credit terms so that the consumer will be able
to compare more readily the various credit terms available
to him.” 15 U.S.C. § 1601(a). To aid consumers in assessing
the cost of obtaining credit, TILA requires lenders to furnish
a written statement summarizing the loan transaction,
including all related finance charges. 15 U.S.C. § 1605(a).
The statement of finance charges need not be perfectly
accurate in order to be in compliance with § 1605(a). In
credit transactions secured by real property, a finance charge
“shall be treated as being accurate . . . [if] the amount dis-
closed as the finance charge . . . does not vary from the ac-
tual finance charge by more than an amount equal to one-
half of one percent of the total amount of credit extended.”
15 U.S.C. § 1605(f)(2)(A). The regulation implementing this
provision, known as Regulation Z, follows this language:
“the finance charge. . . shall be considered accurate for
purposes of this section if the disclosed finance charge . . .
is understated by no more than 1/2 of 1 percent of the face
amount of the note or $100, whichever is greater.” 12 C.F.R.
§ 226.23(g). In this case, the plaintiffs borrowed $180,000.
Therefore, any finance charge disclosed by The Loan
Arranger is accurate for purposes of TILA and Regulation
Z if it is within 0.5% of $180,000, or $900, of the actual
finance charge incurred.
TILA defines the types of fees and charges that must be
included in the computation of finance charges. When the
No. 03-4021 5
extension of credit is secured by an interest in real prop-
erty, the “[f]ees or premiums for title examination, title in-
surance, or similar purposes,” in addition to other fees not
relevant here, are to be exempted from computation of the
finance charge. 15 U.S.C. § 1605(e)(1). Regulation Z, the
federal regulation that implements TILA, similarly provides
that “fees for title examination, abstract of title, title
insurance, property survey, and similar purposes” are not
finance charges “if the fees are bona fide and reasonable.”
12 C.F.R. § 226.4(c)(7)(i).
The plaintiffs allege that the title insurance fees charged
by Clearwater were not exempt from computation in the
finance fee due to an alleged collusion between The Loan
Arranger and Clearwater. In the Guises’ view, Clearwater
may have billed them for title insurance and title endorse-
ments in name, but in substance, these charges were actu-
ally for the purpose of providing additional compensation to
their mortgage broker, The Loan Arranger. Their complaint
illustrates this alleged fraud by stating that the title
insurance charges were “double a reasonable charge” as
compared with prevailing market rates. If The Loan
Arranger benefitted from Clearwater’s overpriced sale of
title insurance, The Loan Arranger was required by
§ 1605(e)(1) and 12 C.F.R. § 226.4(c)(7)(i) to disclose the
profit as a finance charge, the Guises allege.
On appeal, the plaintiffs have expanded upon the al-
legations put forth in the complaint. Before this Court, the
plaintiffs argue that they paid $450 to Lakeshore for title
insurance, and that this fee must be aggregated with the
$1145 paid to Clearwater in order to accurately assess the
full extent of the overcharge. Because this new allegation is
inconsistent with the assertion in the complaint that the
$450 paid to Lakeshore was for a title search, rather than
for title insurance, we confine our analysis to the original
allegation. See Holman v. Indiana, 211 F.3d 399, 405-06
(7th Cir. 2000) (stating that new facts alleged on appeal are
6 No. 03-4021
irrelevant if they are inconsistent with the complaint).
Additionally, because the settlement statement appended
to the complaint confirms that Lakeshore charged the $450
fee in exchange for undertaking a title search, we need not
consider the plaintiffs’ new position. See Ogden Martin
Systems of Indianapolis, Inc. v. Whiting Corp., 179 F.3d
523, 529 (7th Cir. 1999) (stating that the written instru-
ment annexed to a pleading controls when a plaintiff pre-
sents an inconsistent allegation).
Confining our analysis to the allegations in the pleadings,
it is our conclusion that the plaintiffs have failed to state a
claim under TILA. Even if Clearwater passed a portion of
the allegedly overpriced title insurance and title endorse-
ments fees to The Loan Arranger, the understatement of
the finance fee is too insignificant to entitle the Guises to
rescission of their loan under 15 U.S.C. § 1635. Clearwater
collected $1145 from the plaintiffs. According to the com-
plaint, $1145 is “double a reasonable charge,” as it is
“nearly twice the amount ($601) quoted by Chicago Title . . .
for the same coverage.” The complaint does not insinuate
that Clearwater failed to furnish title insurance and title
endorsements in exchange for the $1145 paid. Therefore,
the basis of the plaintiffs’ claim is that Clearwater charged
fees that exceeded the market rate by $544, and that this
$544 was a hidden financing fee. Because the alleged over-
charge of $544 is well within the permitted margin of error
of $900 under § 1605(f) and 12 C.F.R. § 226.23(g) for a loan
of $180,000, the Guises’ claim is not cognizable under TILA.
The plaintiffs urge that TILA and Regulation Z require a
different calculation. In their view, if any portion of the title
insurance and endorsement fee was unreasonable or not
bona fide, then the entire $1145 paid to Clearwater qua-
lifies as an undisclosed broker’s fee, notwithstanding the
fact that the Guises received title insurance in exchange.
They maintain that Regulation Z compels this result.
Regulation Z excludes title insurance fees from the calcula-
No. 03-4021 7
tion of the finance charge only “if the fees are bona fide and
reasonable in amount,” 12 C.F.R. § 226.4(c)(7)(i), in contrast
to excluding those fees “to the extent that” the fees are bona
fide and reasonable in amount. Because the plain language
of Regulation Z does not address fees charged for legitimate
title insurance that are above market rates, the plaintiffs
read the regulation to equate merely overpriced title
insurance fees with fees charged for title insurance when no
title insurance is actually provided in return. Under their
theory, because the entire $1145 fee charged by Clearwater
is allegedly not reasonable, and because $1145 is greater
than the tolerated margin of error for a loan of $180,000, see
§ 1605(f) and 12 C.F.R. § 226.23(g), the plaintiffs are
entitled to rescission.
This argument is problematic for at least two reasons. First,
the Guises’ suggested reading of 12 C.F.R. § 226.4(c)(7)(i)
would create tension with the plain language of § 1605(e)(1),
the section of TILA that the regulation seeks to implement.
Section § 1605(e)(1) expressly excludes title insurance fees
from computation of finance charges. To deny Clearwater
credit for the portion of the $1145 that represents a rea-
sonable fee for the title insurance and endorsements it pro-
vided would render the § 1605(e)(1) exemption meaningless
and would subject lenders to liability beyond TILA’s sanc-
tion. Second, the Guises’ approach artificially inflates the
alleged finance charge of $544 by lumping it with the
allegedly reasonable fee of $601 charged for the title in-
surance received. An allegedly partial overcharge does not
convert the entire title insurance transaction into a finance
charge, it only demonstrates that some amount of the fee
was not eligible from exclusion from the finance charge
computation.
Next, the plaintiffs argue that the district court had no
factual basis to conclude on the pleadings that a portion of
the title insurance fee was reasonable or bona fide. The
8 No. 03-4021
plaintiffs argue that only a jury could determine if the
charges were bona fide as a matter of law. We disagree. The
plaintiffs did not allege in their complaint or proposed
amended complaint that they did not receive title insurance
and endorsements from Clearwater, nor did the complaint
allege any facts to give rise to the inference that Clearwater
failed to perform those services. The district court had no
reason to conclude that the transaction was anything but
bona fide. See Brannam v. Huntington Mortgage Co., 287
F.3d 601, 606 (6th Cir. 2002) (stating that a charge is bona
fide if the “services for which the fees are imposed are
performed”). The plaintiffs also argue that the district court
erred in finding that $601 would have been a reasonable fee
for Clearwater to charge for furnishing title insurance and
endorsements. However, their complaint cites the $601 fee
quoted by Chicago Title as a benchmark for the prevailing
market rate for those services and describes the $1145
charge as “double a reasonable charge” in comparison to the
Chicago Title quotation. The district court was correct to
rely on the plaintiffs’ repeated assertions. “Judicial admis-
sions are concessions in the pleadings that bind the party
making them and that withdraw a fact from contention.”
Taylor v. Monsanto Co., 150 F.3d 806, 809 (7th Cir. 1998).
We now turn to the plaintiffs’ final argument. The
plaintiffs maintain that the district court erred in denying
them leave to amend their complaint. Federal Rule of Civil
Procedure 15 states that leave to amend “shall be freely
given when justice so requires.” Fed. R. Civ. P. 15. However,
under Rule 15, a district court may deny leave to amend on
the grounds of undue delay, bad faith, dilatory motive,
prejudice, or futility. Indiana Funeral Directors Ins. Trust v.
Trustmark Ins. Corp., 347 F.3d 652, 655 (7th Cir. 2003).
The district court’s decision to grant or deny a motion for
leave to file an amended pleading is “a matter purely within
the sound discretion of the district court.” J.D. Marshall
Int’l, Inc. v. Redstart, Inc., 935 F.2d 815, 819 (7th Cir.
No. 03-4021 9
1991). In this case, the district court concluded that the
proposed amended complaint failed to cure the deficiencies
of the original complaint.
The proposed amended complaint alleges that, had the
Guises sought a quote for title insurance and endorsements in
connection with their mortgage refinancing from Chicago
Title Insurance Company, Stewart Title Company, or First
American Title Company, they would have been quoted
amounts ranging from $568 to $761. The plaintiffs did not
seek to withdraw their prior allegation that Clearwater had
provided them with title insurance and endorsements for
$1145. None of the allegations in the proposed amended
complaint would entitle the plaintiffs to rescission of their
loan, as the $1145 charged by Clearwater is still within the
allowable tolerance under TILA even if the $568 fee was
taken as the reasonable market rate for the services
provided. The district court did not abuse its discretion in
denying leave to amend on this basis.
III. Conclusion
For the reasons stated herein, we AFFIRM the decision of
the district court.
10 No. 03-4021
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—8-4-04