On the Docket: Recent Federal Court Opinions
REGULATION B — EQUAL CREDIT OPPORTUNITY ACT (ECOA)
U.S. Supreme Court accepts a case to determine if the ECOA and Regulation B apply to spousal guarantors. Hawkins v. Community Bank of Raymore, 
135 S. Ct. 1492 (March 2, 2015). The scope of the ECOA is generally limited to credit applicants, except that Regulation B defines “applicant” as including “guarantors” for the purposes of the spousal signature provisions of 12 C.F.R. §1002.7(d). In 2014, the Sixth and Eighth Circuits issued conflicting decisions whether spousal guarantors qualify as credit applicants covered by the ECOA. The Eighth Circuit held in Hawkins v. Community Bank of Raymore, 
761 F.3d 937, 941 (8th Cir. 2014) that a “guarantor does not request credit and therefore cannot qualify as an applicant under the unambiguous text of the ECOA.” The Sixth Circuit in RL BB Acquisition, LLC v. Bridgemill Commons Development Group, LLC, 754 F.3d 380, 385 (6th Cir. 2014) held to the contrary that §1002.7(d)’s protections for spousal guarantors was valid because the definition of “applicant” was ambiguous and could “encompass all those who offer promises in support of an application — including guarantors, who make formal requests for aid in the form of credit for a third party.” This case is scheduled to be argued during the Court’s 2015–2016 term, which ends on June 30, 2016.
Sixth Circuit holds that a creditor’s refusal to modify a repayment plan under the Home Affordable Modification Program (HAMP) does not constitute adverse action. Thompson v. Bank of America, N.A., 773 F.3d 741 (6th Cir. 2014). A borrower defaulted on her mortgage and filed suit against Bank of America (BOA), to which her mortgage had been assigned. She alleged, among other things, that BOA’s denial of her request to modify the loan (on the grounds of her having provided insufficient documentation) under HAMP constituted adverse action, for which BOA failed to provide an adverse action notice. The ECOA, as implemented by Regulation B, requires that if a creditor takes adverse action against a credit applicant, it must provide an adverse action notice. See 15 U.S.C. §1691(d)(2) ; 12 C.F.R. §1002.9(a)(1) . The court found that BOA’s denial of the request to restructure the loan under HAMP did not constitute adverse action, which ECOA defines as “a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested.” Accordingly, BOA was not obligated to provide an adverse action notice.
REGULATION Z — TRUTH IN LENDING ACT (TILA)
U.S. Supreme Court holds that the TILA does not require a borrower to file a lawsuit to preserve a rescission claim. Jesinoski v. Countrywide Home Loans, Inc. 135 S. Ct. 790 (January 13, 2015). Under the TILA, 15 U.S.C. §1635(a) , and Regulation Z, 12 C.F.R. §§1026.15(a) , 1026.23(a) , a consumer has three business days to rescind certain credit transactions secured by the consumer’s principal dwelling. But this right can be extended to three years if the creditor fails to provide the consumer with two copies of the notice of the right to rescind or all material TILA disclosures (as defined in Regulation Z). The federal appeals courts have been divided as to whether a consumer exercises — and thus preserves — the right of rescission during the three-year period by notifying the creditor in writing within three years of consummation, as the Third, Fourth, and Eleventh Circuits have held, or instead must file a lawsuit within three years of consummation, as the First, Sixth, Eighth, Ninth, and Tenth Circuits have held.
In Jesinoski, the Supreme Court reviewed an Eighth Circuit decision dismissing a rescission lawsuit because it was filed more than three years after consummation, even though the borrower sent the creditor written notice to rescind within the three-year period. Based on Section 1635(a) of the TILA, which provides that the borrower “shall have the right to rescind … by notifying the creditor … of his intention to do so,” the Supreme Court held “that rescission is effected when the borrower notifies the creditor of his intention to rescind. It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely. The statute does not also require him to sue within three years.” The Eighth Circuit relied on Section 1635(f) of the TILA, which specifies that a rescission claim must be exercised within three years. But the Supreme Court clarified that §1635(f) addresses when a claim must be exercised, not how to exercise it. The Eighth Circuit’s decision was reversed, and the case was remanded for further proceedings.
Rescission period extended to three years because creditor asked borrower to sign a postdated rescission waiver form. Harris v. Schonbrun 773 F.3d 1180 (11th Cir. 2014). In connection with a mortgage loan, a creditor asked a borrower to sign a postdated waiver of her right to rescind, which Regulation Z prohibits (12 C.F.R. §1026.23(e)) , and only provided one copy of the notice of the right to rescind (instead of the two copies that the regulation requires). After the borrower defaulted and the creditor filed a foreclosure lawsuit, the borrower sued the creditor to rescind the loan. The borrower argued that the right to rescind was extended to three years under the TILA because the creditor asked the borrower to sign a postdated waiver of the right to rescind and only provided one copy of the notice of right to rescind. The trial court held that the right of rescission was extended to three years but denied the borrower’s request for statutory damages, attorney’s fees, and court costs. On appeal, the Eleventh Circuit affirmed that the loan could be rescinded because the “simultaneous execution of both a loan and a waiver of the right to rescind preclude[s] the possibility of ‘clear’ disclosure. [The borrower] had no reason to believe she was signing a waiver that would not take effect until the three-day period had expired. If [the borrower] had changed her mind [during the three-day period,] and wished to rescind the transaction, it would have been reasonable for her not to have exercised that right as a direct result of [the waiver].” But the Eleventh Circuit reversed the lower court’s denial of statutory damages, attorney’s fees, and court costs, finding that they are mandatory once a rescission violation has been established. The case was remanded for further proceedings.
REGULATION E — ELECTRONIC FUND TRANSFER ACT (EFTA)
Fifth Circuit holds that a plaintiff alleging an EFTA violation for a missing fee notice on an automated teller machine has legal standing. Mabary v. Home Town Bank, N.A., 771 F.3d 820 (5th Cir. 2014). Regulation E, until it was recently amended, required operators of automated teller machines (ATMs) that impose fees on users to display two fee notices: one on or at the ATM (external notice) and one on the ATM’s screen or on a paper printout before the transaction is completed (screen notice), which must be displayed and accepted before a fee can be imposed. If an ATM transaction fee is imposed without the required notice, the EFTA allows consumers to collect actual damages, statutory damages, costs, and fees. See 15 U.S.C. §1693m(a) . The plaintiff in this class action suit alleged an EFTA violation because the defendant bank failed to display an external notice on or at its ATM, even though she acknowledged seeing a fee notice on the ATM screen before the fee was imposed. The lower court dismissed the lawsuit because it found that the plaintiff did not suffer any concrete injury-in-fact and thus lacked legal standing to pursue a lawsuit. On appeal, the Fifth Circuit reversed. Although the court acknowledged that a violation of a procedural right alone without resulting harm does not confer standing, the court found that the missing fee notice harmed the plaintiff: “Congress’s determination that consumers were entitled to the fee information they need to decline a transaction before investing the time needed to initiate it protects a substantive, if small, right, and its deprivation is an injury-in-fact that allows [the plaintiff] to pursue her claim here.” Effective March 26, 2013, the Consumer Financial Protection Bureau amended Regulation E to eliminate the external notice requirement, although ATM operations must still comply with the screen notice requirement.