Dennis Jacob v. Home Savings and Loan Company

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 11a0401n.06
FILED
No. 10-3165
Jun 16, 2011
UNITED STATES COURT OF APPEALS LEONARD GREEN, Clerk
FOR THE SIXTH CIRCUIT
DENNIS H. JACOB,
Plaintiff-Appellant,
v. ON APPEAL FROM THE
UNITED STATES DISTRICT
HOME SAVINGS AND LOAN COMPANY OF COURT FOR THE NORTHERN
YOUNGSTOWN, OHIO, DISTRICT OF OHIO
Defendant-Appellee.
/
Before: MARTIN, NORRIS, and SILER, Circuit Judges.
BOYCE F. MARTIN, JR., Circuit Judge. Dennis Jacob asserts that Home Savings and Loan
Company of Youngstown, Ohio violated the Truth in Lending Act by failing to provide appropriate
disclosures in connection with his residential construction loan. Jacob also brought several claims
under Ohio state law arising out of this transaction. The district court granted summary judgment
for Home Savings and Loan on all of Jacob’s claims and we AFFIRM.
I.
In June 2006 Jacob took out a $200,000 residential construction loan from Home Savings
and Loan to build a house in Ottawa Lake, Michigan. The loan was divided into two phases: a
“construction period” and a “permanent financing period.” At the closing, Jacob signed several
documents including a note, a mortgage, a “Construction Loan Agreement,” and a one-page
“Construction Loan Addendum.” The Construction Loan Addendum stated in pertinent part:
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Jacob v. Home Savings & Loan Co. of Youngstown, Ohio
Page 2
1. Construction Period
This Addendum shall govern Borrower’s obligations and rights during the
Construction Period, which shall begin on the date of the Note and this Addendum
and end on 04/01/2007, unless Lender in its sole discretion extends that date.
* * *
6. Conversion to Permanent Loan
If at any time the Construction Period ends, construction is not complete or the
property not lawfully occupied, Lender may withhold such portion of the principal
as it deems necessary to ensure the completion of construction and readiness for
occupancy of the property. Borrower will pay interest under the Note as if the full
amount of the principal has been disbursed in that event. Upon conversion, all
accrued and unpaid interest up to conversion date shall be due in full and paid to the
Lender.
During the construction period, Jacob was only obligated to make monthly interest payments
on the monies that had actually been advanced for construction purposes. However, once the loan
entered the permanent financing period, the agreement required Jacob to pay interest as if the full
principal had been disbursed. In order to ensure completion of the home, and to protect its collateral,
the agreement permits Home Savings and Loan to retain the undisbursed funds and treat them as if
they had been disbursed at the end of the construction period.
Construction did not go as planned, and Jacob did not finish building his house until 2009.
After the construction period ended, on April 2, 2007 Home Savings and Loan sent Jacob a letter
informing him that his loan would revert to a conventional permanent mortgage on May 1 and his
first full mortgage payment would be due May 15. Jacob spoke to a representative at Home Savings
and Loan and arranged to extend the construction period for sixty days in exchange for a $200 fee.
With this extension the construction period ended on July 1.
On June 1, Home Savings and Loan sent Jacob a letter explaining that his loan would convert
to a conventional mortgage on July 1, and his monthly payment of $1,313.86 would be due July 15.
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Jacob v. Home Savings & Loan Co. of Youngstown, Ohio
Page 3
Construction, however, still lagged behind. Rather than purchasing additional two-month
extensions, Jacob sought a less expensive way to continue financing construction of his home. Jacob
asserts that he believed that he could convert the loan to permanent status but, because he had only
drawn about $90,000 of the $200,000 total loan amount, he would only be paying interest on the
disbursed amount. This would be substantially less than the $1,313.86 monthly payment, and he
believed that the excess payment would be applied to reduce the principal. Jacob alleges that he
spoke to a Mr. Morgan Stanley at Home Savings and Loan who confirmed his understanding.
Jacob let the loan proceed into the permanent financing period and began making payments.
However, he soon discovered that Home Savings and Loan disagreed with his interpretation of how
his payments would be allocated. Home Savings and Loan treated the loan as if the full amount of
the principal had been disbursed and applied Jacob’s payments accordingly. This meant that a large
portion of Jacob’s payments went to pay interest on money that had not yet actually been disbursed
to him. Jacob continued making monthly payments of $1,313.86 until July 2009 when he refinanced
with a different lender.
In June 2008 Jacob filed a lawsuit against Home Savings and Loan alleging that it violated
the Truth in Lending Act, and specifically Regulation Z. Jacob also brought several claims under
Ohio state law. Both parties moved for summary judgment and the district court granted summary
judgment in favor of Home Savings and Loan on all of Jacob’s claims.
II.
We review the district court’s grant of summary judgment de novo. Bentkowski v. Scene
Magazine, 637 F.3d 689, 693 (6th Cir. 2011). Summary judgment is appropriate where the
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pleadings, depositions, answers to interrogatories, admissions on file, and affidavits show “that there
is no genuine dispute as to any material fact and that the movant is entitled to a judgment as a matter
of law.” Fed. R. Civ. P. 56(a). “The moving party has the initial burden of proving that no genuine
issue of material fact exists,” and the court must draw all reasonable inferences in the light most
favorable to the nonmoving party. Vaughn v. Lawrenceburg Power Sys., 269 F.3d 703, 710 (6th Cir.
2001). When a motion for summary judgment is properly made and supported and the nonmoving
party fails to respond with a showing sufficient to establish an essential element of its case, summary
judgment is appropriate. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
Home Savings and Loan did not violate the Truth in Lending Act or Regulation Z by failing
to provide new disclosures when the construction period ended and Jacob’s loan converted to the
permanent financing period. Regulation Z provides that a refinancing is a new transaction, which
requires lenders to provide new disclosures. It goes on to explain that “[a] refinancing occurs when
an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation
undertaken by the same consumer.” 12 C.F.R. § 226.20(a) (2010). However, Regulation Z also
states that “[a] series of advances under an agreement to extend credit up to a certain amount may
be considered as one transaction.” Id. § 226.17(c)(6). And, it specifically notes that “[w]hen a
multiple-advance loan to finance the construction of a dwelling may be permanently financed by the
same creditor, the construction phase and the permanent phase may be treated as either one
transaction or more than one transaction.” Id. Here, the loan documents explain that Jacob and
Home Savings and Loan treated the construction phase and permanent phase as a single transaction.
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Therefore, this transaction falls well within the exception in section 226.17(c)(6) and Home Savings
and Loan did not need to provide new disclosures when the construction period ended.
Jacob attempts to skirt the plain language of the loan documents and Regulation Z by arguing
that Home Savings and Loan increased his interest rate when the construction period ended.
However, it did not. Jacob computes the interest rate by comparing the amount of his monthly
payment to the $92,795 in principal he had drawn when the construction period ended. But, there
is no basis to compute the interest rate in that manner. Although Jacob had received less than half
of the total loan amount when the construction period ended, paragraph six of the Construction Loan
Addendum anticipated this situation and provides that Jacob must pay “interest under the Note as
if the full amount of the principal has been disbursed.”1 Home Savings and Loan simply charged
the interest rate provided for under the agreement on the full $200,000 principal amount as provided
for under the contract. Therefore, because Regulation Z permitted Home Savings and Loan to treat
the construction phase and permanent financing phase as a single transaction, and it did not change
the interest rate it charged, it did not violate the Act by failing to make additional disclosures when
the construction period ended.
1
Jacob points to several interrogatories where Home Savings and Loan acknowledged that
Jacob paid interest on principal that it had not disbursed to him. However, that is not inconsistent
with the loan documents, which explicitly permit Home Savings and Loan to charge interest on the
full amount of the principal at the end of the construction period.
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III.
Jacob also asserts that Home Savings and Loan is liable under Ohio state law for the tort of
negligent misrepresentation and argues that the loan agreement violates public policy. The district
court did not err by granting summary judgment on these claims.
IV.
The district court properly granted Home Savings and Loan summary judgment and we
therefore AFFIRM.