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dismissing TILA complaint against assignee of lender for failure to plead any violations apparent on the face of the assigned loan documents
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CIVIL ACTION No. 03-3931
November 21, 2003
MEMORANDUM AND ORDER
Plaintiff Mary Kane brought this action alleging violations of the federal Truth-In-Lending Act ("TILA"), 15 U.S.C. § 1601-1693, by Equity One, Inc. ("Equity One") and Sovereign Bank, ("Sovereign"), and violation of state laws relating to lender liability by Equity One and Michael J. Frankenfield d/b/a Tri-State Financial Services ("Tri-State"). Presently before this Court are Defendant Equity One's and Defendant Sovereign's motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) and 12(b)(1). For the reasons that follow, I deny Defendant Equity One's motion to dismiss and grant in part and deny in part Defendant Sovereign's motion to dismiss.
I. BACKGROUND
This case concerns residential mortgage loan financing provided to Plaintiff Mary Kane on June 8, 2000. (Am. Compl. ¶ 6.) Plaintiff alleges that a broker from Tri-State solicited her to refinance a wrap-around mortgage that included both her own home and the home of her son, Derrick Kane. ( Id. ¶ 5.) According to Plaintiff, she went to the offices of Equity One to sign the loan documents with the expectation that the transaction would be structured as one loan. ( Id. ¶¶ 6, 11.) Despite her expectations and without explanation, the transaction was split into two separate loan documents with separate Federal Truth-in-Lending Disclosure Statements and Settlement Statements. ( Id. ¶ 8.) The larger of the two loans was for $48,805.00 at an annual percentage rate ("APR") of 11.489 percent and a term of 15 years. ( Id., Ex. A, B.) The second loan was for $9,710.00 at an APR of 14.257 percent and a term of 10 years. ( Id., Ex. C, D.) Additionally, Plaintiff alleges that the smaller loan included a charge of $1415.55 for a gas bill despite the fact that Equity One also assessed this charge in a separate loan that was extended to Mr. Derrick Kane, Plaintiffs son, on the same date. ( Id. ¶ 10.) Approximately one month after the loans were extended, Equity sold both loans to Sovereign Bank. (Am. Compl. ¶ 13.) Thereafter, on March 24, 2003, Plaintiffs counsel contacted both Equity One and Sovereign asserting Plaintiffs right to rescind the loan pursuant to TILA. ( Id. ¶ 12.) To date, Sovereign has not responded to Plaintiffs request for rescission. ( Id. ¶ 13.)
II. STANDARD OF REVIEW
In considering a motion to dismiss for failure to state a claim upon which relief may be granted, courts must accept as true all of the factual allegations pleaded in the complaint and draw all reasonable inferences in favor of the non-moving party. See Bd. of Trs. of Bricklayers Allied Craftsmen Local 6 of N.J. Welfare Fund v. Wettlin Assocs., Inc., 237 F.3d 270, 272 (3d Cir. 2001). A motion to dismiss will only be granted if it is clear that relief cannot be granted to the plaintiff under any set of facts that could be proven consistent with the complaint's allegations. See Hishon v. King Spalding, 467 U.S. 69, 73 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).
III. DISCUSSION
1. TILA
A. Claims Against Defendant Equity One
Plaintiff alleges that Equity One violated TILA by structuring her mortgage refinancing as two separate loan transactions instead of as one closed-end transaction in accordance with her expectations. (Am. Compl. ¶¶ 9, 11, 16.) Defendant Equity One responds that TILA permits lenders to structure a transaction as two separate loans with separate disclosures. Equity One's contentions are correct provided that the borrower expected that the transaction would be structured in that manner. However, a lender may violate TILA if a borrower expected to receive a single loan executed in one transaction and nonetheless received two separate loans. See Hemauer v. ITT Fin. Servs., 751 F. Supp. 1241, 1243-44 (W.D.Ky. 1990) (finding lender violated TILA by executing two loans for one transaction on same day despite fact that borrowers only made one request for loan).
Although the Third Circuit has not yet encountered a case alleging "loan splitting" under TILA, other courts have found that such practices violate TILA's mandate that the lender provide a single, comprehensible disclosure of the cost of credit. 12 C.F.R. § 226.17(a) (2003) (requiring that lenders group all disclosures for single transaction in one writing); see Harris v. Ill. Vehicle Premium Fin. Co., No. 99-C-5411, 2000 WL 1307513, *2, 2000 U.S. Dist. LEXIS 13763, at *6-7 (N.D. Ill. Sept. 12, 2000) (denying motion to dismiss because pleadings did not reveal whether plaintiff expected one transaction or two); Hemauer, 751 F. Supp. at 1243-44 (W.D. Ky. 1990); In re Buckles, 189 B.R. 752, 760 (Bankr. D. Minn. 1995) (citing Blair v. Nat'l Constr. Co. of the South, 611 F.2d 80, 83 (5th Cir. 1980)). These courts describe "loan splitting" as "a situation where the debtor wants, requests and expects to get a single loan consummated in a single transaction, but the lender instead documents and makes disclosures for the loan as if it were two separate transactions." Harris, 2000 WL 1307513, at *2, 2000 U.S. Dist. LEXIS, at *6.
In considering Defendant's motion to dismiss, this Court must draw all reasonable inferences in favor of Plaintiff. Bd. of Trs. of Bricklayers Allied Craftsmen, 237 F.3d at 272. Plaintiff's Amended Complaint alleges that Equity One structured this transaction as two separate loans in contravention of her expectations. (Am. Compl. ¶¶ 6, 8 ("Plaintiff received no explanation regarding the terms of the loan and was rushed through a closing . . . Plaintiff did not realize . . . until she appeared at settlement, the transaction was broken into two loans.")) At this stage of the proceedings, this allegation is sufficient to make out a case of loan splitting; an eventual determination of what TILA required for this particular transaction or transactions depends on further factual analysis and can only be resolved after consideration of the circumstances surrounding the transaction and the parties' original agreement as to the nature, number, and purpose of the contemplated transaction. See Buckles, 189 B.R. at 760-1. Therefore, this issue cannot be resolved on Defendant's motion to dismiss and I accordingly deny the motion to dismiss Plaintiff's TILA claims against Equity One.
2. Home Ownership and Equal Protection Act
In 1994, TILA was augmented by the Home Ownership and Equity Protection Act ("HOEPA"), which requires additional disclosures for certain high-cost loans. Pub.L. No. 103-325, tit. I, § 151, 108 Stat. 2190 (1994) (amending 15 U.S.C. § 1601-02, 1604, 1610, 1639-41, 1648). HOEPA applies to consumer credit transactions that are secured by the consumer's principal dwelling, other than a residential mortgage transaction, a reverse mortgage transaction, or a transaction under an open-end credit plan, if:
(A) the annual percentage rate at consummation of the transaction will exceed by more than 10 percentage points the yield on Treasury securities having comparable periods of maturity on the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor; or
(B) the total points and fees payable by the consumer at or before closing will exceed the greater of —
(i) 8 percent of the total loan amount; or
(ii) $400.
15 U.S.C. § 1602(aa) (2003).
Plaintiff contends that if the two loans had in fact been executed as one loan, with the same percentage of equity and with the gas bill included as a finance charge, then the single hypothetical consolidated loan would violate HOEPA. Therefore, Plaintiff suggests, Equity One violated HOEPA by failing to provide the required disclosures for this high-cost loan transaction. In response, Defendants contend that the gas bill payment is not a finance charge as defined by the TILA regulations because Equity One did not require the use of the third-party gas company and Equity One did not retain any portion of the charge. See 12 C.F.R. § 26.4(a)(1) (2003). Although Plaintiff has not identified, and the Court has not uncovered, any case law applying HOEPA in the context of a loan-splitting allegation in which the two loans, if combined, would be covered by the HOEPA provisions, this Court cannot dismiss Plaintiff's novel claim as a matter of law at this time. Furthermore, the threshold question of whether Equity One charged two borrowers for the gas bill and inappropriately retained the excess amount, potentially rendering this loan subject to HOEPA, is factual in nature and is not appropriately resolved at this stage of the proceedings.
3. State Law Claims
Defendant Equity One also moves pursuant to Federal Rule of Civil Procedure 12(b)(1) to dismiss Plaintiff's state law claims under the Pennsylvania Credit Services Act, 73 PA. CONS. STAT. ANN. § 2181 (West 2003), and the Pennsylvania Unfair Trade Practices and Consumer Protection Law, 73 PA. CONS. STAT. ANN. § 201-1 (West 2003), for lack of subject matter jurisdiction. Because this Court has allowed Plaintiff's federal claims against Defendant Equity One to proceed, Defendant's motion to dismiss the pendent state law claims is denied. See 28 U.S.C. § 1367 (2003). In light of the foregoing discussion, Defendant Equity One's motion to dismiss is denied.
B. Claims Against Assignee Defendant Sovereign
Plaintiff asserts that Sovereign, as the assignee of both loans, is liable for TILA violations in the original credit transaction and for failing to rescind the transaction. As fully discussed below, I find that Plaintiff has not alleged a set of facts that would subject Sovereign as an assignee to liability for TILA violations in the original loan transaction. Sovereign is, however, subject to Plaintiff's claim for rescission.
1. Assignee Liability under TILA's General Provisions
"General provisions" refers to those provisions governing non-HOEPA transactions.
Plaintiff alleges in her Amended Complaint that, by virtue of the fact that there were two separate loans, Sovereign "knew or should have known that this was unusual or irregular and that misrepresentations were likely to have been made in the course of the transaction." (Am. Compl. ¶ 18.) Furthermore, Plaintiff states that, through inspection of the loan documents, "Sovereign did or should have noticed the questionable nature of the charges referenced herein and should have been alerted to the fact that it was likely that TILA violations pervaded this transaction." ( Id.) Specifically, the "questionable charge" Plaintiff refers to is the alleged double payment of the gas bill.
TILA imposes assignee liability in consumer credit transactions secured by real property only if the violation is "apparent on the face of the disclosure statement." 15 U.S.C. § 1641(e)(1)(A) (2003). Section 1641(e) further explains that a violation is apparent on the face of the disclosure statement if:
Sovereign cites § 1641(a) as the provision governing its liability as assignee. In cases such as this involving loans secured by real property, however, § 1641(e) is the applicable provision. See Crisomia v. Parkway Mortgage, Inc., No. 00-35085DWS, 2002 WL 31202722, at *6, 2002 Bankr. LEXIS 1112, at *23 (Bankr. E.D. Pa. Sept. 13, 2002).
(A) the disclosure can be determined to be incomplete or inaccurate by a comparison among the disclosure statement, any itemization of the amount financed, the note, or any other disclosure of disbursement; or
(B) the disclosure statement does not use the terms or format required to be used by this subchapter.15 U.S.C. § 1641(e)(2)(A), (B) (2003).
Plaintiff's allegations fail to state a claim of assignee liability under TILA for two reasons. First, TILA's assignee liability provision expressly limits liability to violations apparent on the face of the assigned documents. Plaintiff fails to allege any violations apparent on the face of the assigned loan documents. Plaintiffs contention that Sovereign should have been alerted to a potential violation due to the inclusion of a gas bill charge that was allegedly duplicative of a charge in Plaintiff's son's loan transaction does not constitute an allegation of a facially apparent violation. The loan documents assigned to Sovereign describing Plaintiff's two loans only included one gas bill charge. (Am. Compl., Ex. A-D.) Thus, any potential violation deriving from the duplication of that charge in another borrower's loan documents could not have been "apparent on the face" of the loan documents assigned to Sovereign.
Second, the Third Circuit has held that TILA's assignee liability provisions do not impose any duty of additional inquiry on assignees. Ramadan v. Chase Manhattan Corp., 229 F.3d 194, 198 (3d Cir. 2000) (citing Taylor v. Quality Hyundai, Inc., 150 F.3d 689, 694 (7th Cir. 1998)("Only violations that a reasonable person can spot on the face of the disclosure statement or other assigned documents will make the assignee liable under the TILA.")). In Ramadan, the Court noted that an assignee's experience or outside knowledge does not impose any obligation to investigate beyond the face of the assigned documents. Ramadan, 229 F.3d at 198. Thus, Plaintiff's allegation that the fact that the transaction was split into two separate loans in and of itself should have put Sovereign on notice of potential TILA violations does not state a claim for assignee liability under TILA. Rather, case law suggests that it is permissible to structure transactions as separate loans if the borrower assents. See Rendler v. Corus Bank, 272 F.3d 992, 997-98 (7th Cir. 2001) ("The [TILA] commentary makes it clear that lenders have some flexibility in structuring loan transactions with each consumer, even multiple loan transactions financing a single piece of property."). Thus, the mere fact that two separate loans were assigned does not constitute a violation on the face of the assigned documents.
Although the Court in Ramadan was interpreting § 1641(a), a provision which governs assignee liability generally, the conclusions are nonetheless applicable to the interpretation of § 1641(e), the provision which creates a slightly different scheme governing assignee liability in transactions secured by real property.
In sum, the gravamen of Plaintiff's Amended Complaint — that Equity One violated TILA by structuring the transaction as two separate loans despite Plaintiff's belief that only one loan would be extended — is predicated on the borrower's subjective expectation and therefore is not apparent in the documents describing the transaction that was executed. Thus, even taking her allegations as true, Plaintiff has failed to state a claim of assignee liability under TILA.
2. Assignee Liability under HOEPA Provisions
Under TILA, HOEPA loan assignees are subjected to a broader standard of liability than assignees of non-HOEPA loans. See Cooper v. First Gov't Mortg. and Investors Corp., 238 F. Supp.2d 50, 55 (D.D.C. 2002). The provision for assignee liability for HOEPA loans provides as follows:
Any person who purchases or is otherwise assigned a [HOEPA] mortgage . . . shall be subject to all claims and defenses with respect to that mortgage that the consumer could assert against the creditor of the mortgage, unless the purchaser or assignee demonstrates, by a preponderance of the evidence, that a reasonable person exercising ordinary due diligence, could not determine, based on the documentation required by this subchapter, the itemization of the amount financed, and other disclosure of disbursements that the mortgage was a mortgage [subject to HOEPA].15 U.S.C. § 1641(d)(1) (2003).
As discussed above, Plaintiffs claim that these loans fall within the HOEPA provisions is premised on her allegation that the double payment of the gas bill constituted a finance charge because it could have been "improperly appropriated" by Equity One. (Am. Compl. ¶ 20; Pl.'sResp. to Defs.' Mot. to Dismiss at 6.) Although Plaintiffs contention raises factual issues that compel this Court to deny Equity One's motion to dismiss the HOEPA claims asserted against it at this time, Plaintiff s allegations are clearly not sufficient to state a claim of assignee liability against Sovereign. As discussed above, Plaintiffs loan documents only contained one assessment of the gas bill charge. Thus, there is no way that Sovereign could have determined, based solely on the documentation of the loan, the itemization of the amount financed and other disclosure of disbursements that this loan was a HOEPA loan.
3. Rescission by Assignee
Plaintiff seeks rescission of the loan as well as $2,000.00 in statutory damages and an award of attorney's fees and costs for Sovereign's refusal to respond to Plaintiffs notice of rescission. Under TILA, a borrower who has a right to rescind against the original lender also has the right to rescind against any assignee. 15 U.S.C. § 1641(c) (2003). When a lender takes a security interest in a borrower's principal dwelling in exchange for credit, TILA permits the borrower to rescind the transaction until three business days after the consummation of the transaction or the delivery of the material disclosures required by the statute, whichever is later. 15 U.S.C. § 1635(a) (2003). If the lender does not give the required disclosures, the borrower's right to rescind expires three years after the consummation of the transaction or upon the sale of the property, whichever is first. 15 U.S.C. § 1635(f) (2003). Failure to disclose the proper finance charge, amount financed, APR, total payments, or payment schedule constitutes a material violation which entitles the borrower to rescind the loan. 15 U.S.C. § 1635(a); 12 C.F.R. § 226.23(a)(3) n. 48; see Brodo v. Bankers Trust Co., 847 F. Supp. 353, 356 (E.D. Pa. 1994). Within twenty days of receiving notice of the borrower's intent to rescind, the lender, or subsequent assignee, must "return . . . any money or property given as earnest money, downpayment, or otherwise, and [must] take any action necessary or appropriate to reflect the termination of any security interest created under the transaction." 15 U.S.C. § 1635(b). Violation of the obligations under this section constitutes a separate TILA violation. 15 U.S.C. § 1635(g).
While Plaintiff may assert a valid claim for rescission against Sovereign if she can prove a material violation of TILA's requirements by the original lender, the language of the statute does not permit an award of statutory damages or attorney's fees against an assignee for failure to respond to a valid rescission notice. See Brodo, 847 F. Supp. at 359 ("Congress did not wish to impose liability for damages and attorney's fees on an assignee who was not responsible for and who had not notice of TILA disclosure violations at the time of an assignment.") Although § 1641(c) provides that a material violation by a creditor creates a right to rescind against the creditor's assignee, TILA's civil liability provision only permits "creditor[s]" to be held liable for a monetary penalty or award of attorney's fees for a TILA violation. 15 U.S.C. § 1640(a); Brodo, 847 F. Supp. at 359. Neither § 1641(c) nor any other provision of the TILA provides for a statutory penalty or award of attorney's fees against an assignee for failure to respond to a valid rescission notice. See Brodo, 847 F. Supp. at 359. In the absence of such authority, this Court must dismiss Plaintiffs claim against Sovereign for statutory damages and attorneys fees. Plaintiff may proceed, however, with her claim for rescission against Sovereign.
Therefore, Plaintiff has failed to state a claim for assignee liability under the general provisions of TILA or under HOEPA. Plaintiffs claim for statutory damages, attorney's fees and costs against Sovereign is dismissed. Plaintiff may proceed against Sovereign only for rescission.
IV. CONCLUSION
For the foregoing reasons, I deny Defendant Equity One's motion to dismiss and grant in part and deny in part Sovereign's motion to dismiss. An appropriate Order follows.
ORDER
AND NOW, this 21st day of November, 2003, upon consideration of Defendant Equity One Inc.'s Motion to Dismiss, Defendant Sovereign Bank's Motion to Dismiss, and the response thereto, and for the foregoing reasons, it is hereby ORDERED that:
1. Defendant Equity One's Motion to Dismiss (Document No. 11) is DENIED without prejudice to Defendant's raising these issues in a motion for summary judgment if appropriate.
2. Defendant Sovereign Bank's Motion to Dismiss (Document No. 11) is GRANTED in part and DENIED in part as follows:
a. Defendant's motion to dismiss Plaintiff's claim for rescission is DENIED.
b. Defendant's motion to dismiss is GRANTED in all other respects.