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4th Circuit: Watkins v. Sun Trust- Incorrect TILA Notice of Right to Cancel Form is not a Material Violation

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By Ed Boltz, 15 December, 2011
Summary: The Debtors refinanced their home original Sun Trust mortgage again with Sun Trust, which provided the Model Form H-8 "Notice of Right to Cancel", which is used for closed-end secured consumer credit transactions.  In fact it should have used Model Form H-9, which applies in a refinancing rather than new extension of credit.  Form H-9 differs from  Form H-8 in two ways- First, instead of Form H-8’s disclosure that the borrower is "entering into a transaction that will result in a security interest in your  home," Form H-9 provides that "[y]ou are entering into a new transaction to increase the amount of credit previously provided to you." Second, Form H-9 adds a sentence, "If you cancel this new transaction, it will not affect any amount that you presently owe." In a divided opinion, the Court of Appeals held that neither the Truth in Lending Act nor Regulation Z, which is promulgated by the Federal Reserve to implement TILA, makes a distinction between a refinancing and an initial financing.  Despite directing the FRD to publish model disclosure forms,   15 U.S.C. § 1604(b) does not require the use of such forms and "goes further" by allowing a lender to use a form that deletes any information not specifically required by TILA.  It rejected the Debtor’s argument that Form H-8 does not make it clear that if a refinancing is rescinded, the Debtor would have returned to the pre-existing loan.  The majority instead found that since all rescissions, whether following an initial financing or refinancing, return the parties to the status quo ante.  TILA, the majority concluded, does not require "a lender specifically to advise the borrower of specific ‘effects’ of rescinding a mortgage refinancing, as distinct from rescinding an initial financing." Judge Wynn dissented, first recognizing that for TILA to be implemented as envisioned "the provisions of the Act and the regulations implementing it [must] be absolutely complied with and strictly enforced."  Mars v.  Spartanburg Chrysler Plymouth, Inc. 713 F.2d 65, 67 (4th Cir.  1983).  He continued  pointing out that, pursuant to 12 CFR § 226.23(b)(2) and 15 U.S.C. § 1604(b),  a lender has two options either to  use "the appropriate model form", in which case it  "shall be deemed to be in compliance with the disclosure provisions of [TILA]", or to provide "a substantially similar notice."   Since Sun Trust choose the option of utilizing the model forms, it was required to use the appropriate form.  Here Sun Trust clearly did not provide the appropriate form. Comments: Judge Wynn position understands that this is also not a mere technicality.  With a TILA rescission of an initial financing the Debtor must tender the entire amount loan, often an impossibility for the Debtor excersing the extended 3 year right of rescission without some new source of financing,  since the previous lender is long-gone.  For a TILA rescission of a refinancing with the same lender, however, the previous mortgage spring back into existence and the Debtor must only return any additional amount received with the refinance.  Given that the lender must also return money the Debtor had paid in the transaction, plus possibly damages, this tender by the Debtor is much more feasible. As this case rather squarely contradicts Handy v. Anchor Mortgage Corp., 464 F.3d 760 (7th Cir. 2006), causing a split between the circuits, as petition for certiorari may be in the future. Watkins v. Sun Trust-Incorrect TILA Notice of Right to Cancel Form is not a Material Violation.PDF

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