Handy, Vernon v. Anchor Mortgage Corp ( 2006 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 04-3690 & 04-4042
VERNON HANDY, Administrator
of the Estate of Geneva H. Handy,
Plaintiff-Appellant,
v.
ANCHOR MORTGAGE CORPORATION
and COUNTRYWIDE HOME LOANS, INC.,
Defendants-Appellees.
____________
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 02 C 1401—Wayne R. Andersen, Judge.
____________
ARGUED APRIL 6, 2006—DECIDED SEPTEMBER 29, 2006
____________
Before BAUER, WOOD, and SYKES, Circuit Judges.
WOOD, Circuit Judge. In 2000, Geneva Handy obtained
a new mortgage on her home from Anchor Mortgage
Corporation. As anyone who has taken out such a loan
is doubtless aware, such a transaction requires a strong
wrist and a good pen to sign a bevy of forms and documents.
Many of these forms are required by the Truth in Lending
Act (TILA), 15 U.S.C. § 1601 et seq., one of whose require-
ments is at issue in this case: that a creditor clearly disclose
to a borrower her right to rescind the loan within three days
and provide the borrower with an appropriate form to
2 Nos. 04-3690 & 04-4042
accomplish the rescission. Id. at § 1635(a). If the creditor
fails to do so, the period within which the borrower may
rescind the loan is extended from three days to up to three
years. Id. at § 1635(f); Carmichael v. The Payment Center,
Inc., 336 F.3d 636, 643 (7th Cir. 2003).
Two years after completing her transaction with Anchor,
Handy sought to rescind the loan (which had by that
time been assigned to Countrywide Home Loans, Inc.),
based on Anchor’s alleged violation of TILA’s disclosure
requirements. At the closing, it had given her two different
rescission forms, one of which was inappropriate for her
loan. The district court denied Handy’s claim, explaining
that although Anchor “obviously [ ] made a mistake” by
giving Handy two different forms, both forms provided
her with adequate notice of her right to rescind. We now
reverse.
I
Prior to obtaining the loan from Anchor, Handy held a 30-
year variable rate mortgage on her home that was serviced
by a company known as Homecomings. In September 2000,
Anchor extended Handy a 15-year fixed rate loan of
$80,500, approximately $75,000 of which went toward
paying off the prior mortgage.
On September 18, 2000, Handy attended the closing of
the Anchor loan at a title company’s office. On September
22, 2000, Handy returned to the title company’s office to
sign additional papers relating to the loan. Over the course
of these two sessions, Handy was given five rescission
forms. Four of these forms were identical. These forms,
titled “NOTICE TO CANCEL—REFINANCE,” stated:
YOUR RIGHT TO CANCEL:
You are entering into a new transaction to increase
the amount of credit previously provided to you. Your
Nos. 04-3690 & 04-4042 3
home is the security for this new transaction. You have
a legal right under federal law to cancel this new
transaction, without cost, within THREE BUSINESS
DAYS. . . .
If you cancel this new transaction, it will not affect
any amount that you presently owe. Your home is the
security for that amount.
In contrast, the fifth form, titled simply “NOTICE OF
RIGHT TO CANCEL,” stated:
YOUR RIGHT TO CANCEL:
You are entering into a transaction that will result in
a mortgage, lien, or security interest on/in your home.
You have a legal right under federal law to cancel this
transaction, without cost, within three (3) business
days. . . .
If you cancel the transaction, the mortgage, lien, or,
security interest is also cancelled. . . .
Handy did not seek to rescind the Anchor loan within
three days. Instead, two years later, in September 2002, she
filed this complaint, charging that the notice provided to
her by Anchor violated TILA. While the case was pending
in the district court, Handy died. The court allowed Vernon
Handy, Geneva Handy’s son and the administrator of her
estate, to substitute as plaintiff.
After a bench trial, the district court ruled in favor
of Anchor, explaining that “had Mrs. Handy wanted to
rescind and looked at her closing documents and found
either of these forms, either one of them would have led her
to rescind[ ].” Vernon Handy now appeals.
II
Congress enacted TILA “to assure a meaningful disclo-
sure of credit terms so that the consumer will be able to
4 Nos. 04-3690 & 04-4042
compare more readily the various credit terms available to
him and avoid the uninformed use of credit.” 15 U.S.C.
§ 1601(a). As is relevant to this case, TILA mandates for
borrowers involved in “any consumer credit transaction . . .
in which a security interest . . . is or will be retained or
acquired in any property which is used as the principal
dwelling of the person to whom credit is extended” a three-
day period in which the borrower may rescind the loan
transaction and recover “any finance or other charge,”
earnest money, or down payment previously made to
the creditor. See 15 U.S.C. § 1635(a), (b). In the context
of “[a] refinancing or consolidation by the same creditor
of an extension of credit already secured by the con-
sumer’s principal dwelling,” the right of rescission ap-
plies only “to the extent the new amount financed exceeds
the unpaid principal balance, any earned unpaid finance
charge on the existing debt, and amounts attributed
solely to the costs of the refinancing or consolidation.” 12
C.F.R. § 226.23(f)(2). That is, if a second loan from the same
creditor exceeds the amount of the first loan, the borrower
has the right to rescind only the difference between the two
loans.
In addition to creating the right of rescission, TILA
requires creditors “clearly and conspicuously” to disclose
to borrowers their right to rescind and the length of the
rescission period, as well as to provide borrowers with
“appropriate forms . . . to exercise [their] right to rescind [a]
transaction.” 15 U.S.C. § 1635(a). The Federal Reserve
Board (FRB), one of the agencies charged with implement-
ing TILA, has promulgated an implementing regulation,
known as Regulation Z, 12 C.F.R. § 226 et seq., that, among
other things, requires creditors to disclose the following
elements to borrowers:
(i) The retention or acquisition of a security interest in
the consumer’s principal dwelling.
Nos. 04-3690 & 04-4042 5
(ii) The consumer’s right to rescind the transaction.
(iii) How to exercise the right to rescind, with a form for
that purpose, designating the address of the creditor’s
place of business.
(iv) The effects of rescission. . . .
(v) The date the rescission period expires.
12 C.F.R. § 226.23(b)(1). In order to help creditors comply
with TILA, the FRB has created model forms containing the
required disclosures. Pursuant to Regulation Z, creditors
are required either to provide borrowers with
an “appropriate model form” or, in the alternative, to
give them “a substantially similar notice.” 12 C.F.R.
§ 226.23(b)(2). If a creditor fails to provide a proper form,
the borrower is free to rescind the loan at any time up
to three years from the date of the original transaction.
15 U.S.C. § 1635(f). Failure to provide the proper form
also subjects a creditor to statutory damages. 15 U.S.C.
§ 1640(a).
The two FRB forms relevant to this case are Rescission
Model Form H-8 (General), intended to be used in situa-
tions like Anchor’s loan to Handy, where the new creditor is
a different party from the original lender, and Rescission
Model Form H-9 (Refinancing with Original Creditor),
designed specifically for the situation outlined in
§ 226.23(f)(2), where the original creditor extends a second,
larger loan to the borrower. The two forms provided to
Handy by Anchor were materially indistinguishable from
the FRB’s model forms. Anchor provided Handy with four
copies of a version of Form H-9 and one copy of Form H-8.
Handy’s primary contention is that by providing her
with both the H-8 and H-9 forms Anchor failed to disclose
her right to rescind the loan clearly and conspicuously, as
required by TILA. She argues that, read in the context of
the Anchor loan, the Form H-9’s statement that “[i]f you
6 Nos. 04-3690 & 04-4042
cancel this new transaction, it will not affect any amount
that you presently owe” incorrectly suggests that she “only
had the right to rescind $5,500, the approximate differ-
ence between the Anchor loan and the balance she owed
on the Homecomings loan,” when in fact she had the right
to rescind the entire $80,500 Anchor loan.
Anchor does not deny that it provided Handy with H-9
forms, nor that Form H-8 alone would have been appropri-
ate for this transaction. Instead, Anchor contends that both
Form H-8 and Form H-9 independently provided Handy
with legally adequate notice of her right to rescind. That is,
even if Form H-9 was not the “appropriate form,” it was
“substantially similar” enough to Form H-8 to meet TILA’s
disclosure requirements. It points out that there is no
evidence in the record that Geneva Handy was confused by
either form. With regard to the two forms’ different state-
ments about the “effects of rescission,” Anchor contends
that Form H-9’s statement is “true regardless of whether
the lender is new or old when the borrower is obtaining a
loan greater than the earlier loan.” Anchor reasons as
follows: “There is a new transaction. It does increase the
amount of money previously provided. The home is collat-
eral. And cancelling the new loan does not change the fact
that the home will still be collateral for the earlier loan.”
Finally, Anchor argues that even if it did technically violate
TILA, it should be excused from liability based on the law’s
safe harbor provision for unintentional errors.
“The sufficiency of TILA-mandated disclosures is deter-
mined from the standpoint of the ordinary consumer.”
Rivera v. Grossinger Autoplex, Inc., 274 F.3d 1118, 1121-22
(7th Cir. 2001) (citing Smith v. Cash Store Mgmt., Inc., 195
F.3d 325, 327-28 (7th Cir. 1999)). As a result, Anchor’s
argument that “[t]he most illuminating fact demonstrat-
ing the clarity of Anchor’s Notice is that the Plaintiff simply
was not confused” misses the point. Whether a particular
disclosure is clear for purposes of TILA is a question of law
Nos. 04-3690 & 04-4042 7
that “depends on the contents of the form, not on how it
affects any particular reader.” Smith v. Check-N-Go of Ill.,
Inc., 200 F.3d 511, 515 (7th Cir. 1999).
Although we are sympathetic to the district court’s
common-sense observation that “had Mrs. Handy wanted to
rescind and looked at her closing documents and found
either of [the H-8 or H-9] forms, either one of them would
have led her to rescind[ ],” we nevertheless conclude that
Anchor’s simultaneous provision of both a Form H-8 and a
Form H-9 did not meet TILA’s clear and conspicuous
disclosure requirement, especially with regard to the
“effects of rescission.” TILA does not easily forgive “techni-
cal” errors. See Cowen v. Bank United of Texas, FSB, 70
F.3d 937, 941 (7th Cir. 1995) (stating that “hypertech-
nicality reigns” in TILA cases). Even if Anchor is correct
that a close parsing of Form H-9’s “effects of rescission”
statement might make it possible to reconcile it with the
type of loan extended to Handy, the notice provided remains
insufficient for Anchor to prevail. Where more than one
reading of a rescission form is “plausible,” the form does not
provide the borrower “with a clear notice of what her right
to rescind entail[s].” Porter v. Mid-Penn Consumer Disc. Co.,
961 F.2d 1066, 1077 (3d Cir. 1992).
Nor are we persuaded by Anchor’s argument that TILA’s
safe harbor provision protects it, an argument Anchor
raised below but the district court did not reach. This
provision requires a creditor to “show[ ] by a preponderance
of evidence that the violation was not intentional and
resulted from a bona fide error notwithstanding the mainte-
nance of procedures reasonably adapted to avoid any such
error.” 15 U.S.C. § 1640(c). As far as we can tell, there is no
evidence in the record that Anchor maintains any such
procedures. Although Anchor’s general counsel, who was
called as a witness by the company, was asked twice what
procedures the company had in place to prevent the type of
mix-up that occurred in Handy’s case, she was unable to
8 Nos. 04-3690 & 04-4042
describe any system used to ensure that the correct rescis-
sion forms are provided to borrowers.
Since we hold that the forms Anchor provided to Handy
violated TILA’s requirement of a clear and conspicuous
disclosure of the effects of rescission, we need not reach
Handy’s additional argument that the absence of the
rescission period expiration date on several of the forms
provided another reason to hold Anchor liable.
III
Having established that Anchor violated TILA, we turn
now to the issue of remedies. Under TILA’s civil liability
provisions, a creditor that violates 15 U.S.C. § 1635 is liable
for: “actual damage[s] sustained” by the debtor, 15 U.S.C.
§ 1640(a)(1); “not less than $200 or greater than $2,000” in
statutory damages, § 1640(a)(2)(A)(iii); and “the costs of the
action, together with a reasonable attorney’s fee,”
§ 1640(a)(3). In addition, § 1635(b) itself provides that when
a debtor rescinds she is “not liable for any finance or other
charge”; “any security interest . . . becomes void”; and
“[w]ithin 20 days after receipt of a notice of rescission,” the
creditor must “return to the [borrower] any money or
property given as earnest money, downpayment, or other-
wise.”
Anchor contends that rescission is an inappropriate—
maybe even an impossible—remedy in this case because
Handy’s estate has recently paid off the subject loan. Handy
responds that rescission remains proper because, although
Anchor’s security interest is no longer at issue, “money and
property can just as easily be returned to the borrower after
the loan has been paid off as before.” An opposite rule,
Handy argues, would encourage creditors “to delay for as
long as possible” the resolution of a borrower’s rescission
request in the hope that the borrower will pay off the
Nos. 04-3690 & 04-4042 9
subject loan and relieve the creditor of at least some of its
liability under TILA.
In a recent opinion addressing this issue, the Sixth
Circuit held that “rescinding a loan transaction requires
unwinding the transaction in its entirety and thus re-
quires returning the borrowers to the position they occupied
prior to the loan agreement.” Barrett v. JP Morgan Chase
Bank, N.A., 445 F.3d 874, 877 (6th Cir. 2006). The court
noted that “the statute and regulations refer to a ‘right to
rescind the transaction,’ not just a right to rescind the
security interest.” Id. at 878 (quoting 15 U.S.C. § 1635(a)
(emphasis added)). Although TILA’s Regulation Z identifies
two specific events that extinguish a borrower’s right to
rescind—such as the “transfer of all of the consumer’s
interest in the property” or the “sale of the property,” 12
C.F.R. § 226.23(a)(3)—“[n]owhere do[es] the legislation or
regulations add that the act of refinancing an existing loan
transaction by itself cuts off the right of rescission.” Barrett,
445 F.3d at 878. Finally, the court observed that “[t]he
preservation of the right [of rescission] prevents a refinanc-
ing, even a refinancing prompted by the inadequately
disclosed terms of an earlier loan or by the refusal of the
bank to rescind the earlier loan, from insulating lenders
from responsibility for their noncompliance [with TILA].”
Id. at 879.
The Sixth Circuit recognized that its opinion created some
tension with the Ninth Circuit’s decision in King v. State of
Cal., 784 F.2d 910 (9th Cir. 1986), in which that court
stated, in very cursory fashion, that a loan “cannot be
rescinded . . . [if] there is nothing to rescind.” Id. at 913. As
the Sixth Circuit explained, however, the Ninth Circuit’s
two-sentence discussion of the remedy issue is unpersuasive
because “it does not address the provisions of the Truth in
Lending Act that undermine its conclusion.” Barrett, 445
F.3d at 880.
10 Nos. 04-3690 & 04-4042
We agree with the Sixth Circuit’s well-reasoned opinion
in Barrett and hold that the remedies associated with
rescission remain available even after the subject loan has
been paid off and, more generally, that the right to rescis-
sion “encompasses a right to return to the status quo that
existed before the loan.” Id. Because Homecomings was paid
off long ago and released its security interest, rescission
would have no effect on it. To rescind, Handy would have to
give back to Anchor everything she received on September
18, 2000 (that she has not already given to it, if anything),
and Anchor would release whatever security interest it
might have asserted. Given the statute, Anchor forfeits its
right to collect interest, and so it must reimburse Handy for
any interest paid while the loan was outstanding. In
addition, there are statutory damages and attorneys’ fees.
We leave to the district court on remand the task of deter-
mining precisely what remedy is appropriate, within these
general outlines.
IV
The district court’s judgment is REVERSED and this matter
is REMANDED to the district court for further proceedings
consistent with this opinion.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—9-29-06