Reply To GMAC 12 (B) 6

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LAW OFFICES Corporatio
TIMOTHY
1 Timothy G. McFarlin (CBN: 223378)

LAW OFFICES OF TIMOTHY G.
2 MCFARLIN, PLC
18881 Von Karman Avenue
3 Suite 760
Irvine, CA 92612
4 Telephone: (949) 206-0400
Facsimile: (949) 206-0404
5 Email: tim@mcfarlinlaw.com
6 Attorney(s) for Plaintiffs Damon K. Lyman and

Claudia M. Lyman
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8 UNITED STATES DISTRICT COURT

9 CENTRAL DISTRICT OF CALIFORNIA- SANTA ANA DIVISION
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11 DAMON K. LYMAN and Case No.: SACV06 – 1174 CJC (ANx)

CLAUDIA M. LYMAN
12 PLAINTIFFS’ REPLY IN OPPOSITION TO
Plaintiff, DEFENDANT IMPAC FUNDING CORP.’S
13 MOTION TO DISMISS PLAINTIFFS
vs. VERIFIED COMPLAINT AND
14 PLAINTIFFS’ MEMORANDUM of POINTS
LOAN CORRESPONDENTS INC., dba and AUTHORITES IN SUPPORT
15 CAPITAL FUNDING GROUP, a California THEREOF
Corporation, GMAC MORTGAGE CORP., a
16 Pennsylvania Corporation, EXECUTIVE Date: May 7, 2007
TRUSTEE SERVICES, INC., a Pennsylvania Time: 1:30 p.m.
17 Corporation, IMPAC FUNDING CORP., a Courtroom: 9B
California Corporation, and DOES 1 THROUGH 10, Before: Hon. Cormac J. Carney
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Defendants.
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20 Plaintiffs Damon K. Lyman and Claudia M. Lyman respond in opposition to the motion
21 under Fed. R. Civ. Proc. Rule 12(b)(6) provided by Defendants IMPAC FUNDING CORP., a
22 California Corporation, (individually hereinafter “Impac”), and GMAC MORTGAGE CORP., a
23 Pennsylvania Corporation (individually hereinafter “GMAC”). Plaintiffs are entitled to prove all
24 facts set forth in Plaintiffs Complaint that would allow relief under their allegations. Plaintiffs’
25 essential elements and claims are material to the instant matter, sufficiently stated, and in support
26 thereof, would offer the attached Memorandum of Points and Authorities.
27 Plaintiffs respectfully asks the Court to deny these Defendants’ motion to dismiss for failure
28 to state a claim, and request that their Complaint be retained on the docket, indulge all inferences in
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PLAINTIFFS REPLY IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS
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favor of the Plaintiffs, and for such other relief as the Court deems honorable and just. In the event
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that Defendants’ motion to dismiss is well founded and granted, then Plaintiffs request leave to
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amend their Complaint. Defendant’s motion is not a responsive pleading to Plaintiffs claims as
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Plaintiff considers amending their Complaint to correct any defects and asserting their motion as
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moot.
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7 Dated: April 16, 2007 THE LAW OFFICES OF TIMOTHY G.

MCFARLIN, PLC
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By: _________________________________
10 Timothy G. McFarlin
Attorney(s) for Plaintiffs Damon K. Lyman and
11 Claudia M. Lyman
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1
MEMORANDUM OF POINTS AND AUTHORITES
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A. Introduction
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4 Plaintiffs Damon K. Lyman and Claudia M. Lyman (hereinafter the “Plaintiffs” or
5 “Plaintiff”) sued Defendants LOAN CORRESPONDENTS INC., dba CAPITAL FUNDING
6 GROUP, a California Corporation, GMAC MORTGAGE CORP., a Pennsylvania Corporation,

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EXECUTIVE TRUSTEE SERVICES, INC., a Pennsylvania Corporation, IMPAC FUNDING
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CORP., a California Corporation and DOES 1 – 10 (collectively “Defendants”) to rescind and
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cancel a security interest and enforce a rescission by way of recoupment and set-off, for
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reimbursement of all fees and costs paid and expended in a consumer credit transaction pursuant to
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12 violations of the Truth in Lending Act,15 U.S.C. §§ 1601 et seq.(“TILA”), and its implementing
13 regulations at 12 C.F.R. § 226 et seq. (Reg. Z), and for violations of the Real Estate Settlement
14 Procedures Act,12 U.S.C. § 2605 (“RESPA”), including punitive damages.
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Defendant GMAC filed a motion to dismiss for failure to state a claim upon which relief can
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be granted and waives any objection to this Court’s personal jurisdiction, venue of the suit, service
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of process, or to this process itself. Defendant GMAC’s argument is that Plaintiffs do not allege any
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19 substantive facts against GMAC under TILA and RESPA to support Plaintiffs claim, and because
20 TILA does not apply to GMAC as a creditor or an assignee, GMAC also mistakenly asserts that
21 Plaintiffs TILA claims are time barred, and Plaintiffs failed to bring their claims within one year
22 from the date of occurrence of the violation, July 15, 2004. In addition, GMAC asserts that
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Plaintiffs’ RESPA claims have no private right of action, and that yield spread premiums (“YSP”)
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are not unlawful kickbacks or unearned finance charges in loan transactions. Further, GMAC
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contends that Plaintiffs cannot recover relief under Cal. Business and Professions Code § 17200 et
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27 seq. because Plaintiffs failed to allege specific facts against this Defendant to support their claim.
28 Plaintiffs now ask the Court to deny Defendant GMAC’s motion to dismiss for failure to
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1 state a claim. Plaintiffs have chosen this forum because they have federal questions with respect to
2 Defendants failure to comply with rescission, misapplication of and inaccurate “Finance Charges”
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that affected other material disclosures, specifically the “Amount Financed” under TILA and
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Regulation Z, and no other remedy at law to seek judicial redress of the non-judicial foreclosure
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proceeding with Defendants election to sell Plaintiffs property and home.
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7 B. Standard of Review
8 A Rule 12(b)(6) motion is similar to the common law demurrer in that it tests the legal
9 sufficiency of the claim or claims stated in the complaint. The Court must decide whether the facts
10 alleged, if true, would entitle Plaintiff to some form of legal remedy. Unless the answer is
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unequivocally “No,” the motion must be denied. Conley v. Gibson (1957) 355 US 41, 45-46, 78
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S.Ct.99, 102; De La Cruz v. Tormey (9th Cir. 1978) 582 F2d 45, 48; SEC v. Cross Fin’l Services, Inc.
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(CD CA 1995) 908 F.Supp. 718, 726-727 (quoting text); Beliveau v. Caras (CD CA 1995) 873
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15 F.Supp. 1393, 1395 (citing text); United States v. White (CD CA 1995) 893 F.Supp 1423, 1428
16 (citing text).
17 Thus, a Rule 12(b)(6) dismissal is proper only where there is either a “lack of cognizable
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legal theory” or “the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri
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v. Pacifica Police Dept. (9th Cir. 1990) 901 F2d 696, 699; Graehling v. Village of Lombard, III. (7th
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Cir. 1995) 58 F3d 295, 297- “A suit should not be dismissed if it is possible to hypothesize facts,
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consistent with the complaint, that would make out a claim”; Hearn v. R.J. Reynolds Tobacco Co. (D
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23 AZ 2003) 279 F.Supp.2d 1096, 1101 (citing text).
24 The 9th Circuit (along with many other courts) views Rule 12(b)(6) motions with “disfavor”
25 because of the lesser role pleadings play in federal practice and the liberal policy regarding
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amendment: “The motion to dismiss for failure to state a claim is viewed with disfavor and is rarely
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granted.” Gilligan v. Jamco Develop. Corp. (9th Cir. 1997) 108 F3d 246, 249 (emphasis added;
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1 internal quotes omitted); Colle v. Brazos County, Texas (5th Cir. 1993) 981 F2d 237, 243- challenges
2 to “bare-bones pleadings” are doomed with respect to an attack based on a failure to state a claim.
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A Rule 12(b)(6) dismissal is proper only in “extraordinary” cases. United States v. Redwood
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City (9th Cir. 1981) 640 F2d 963, 966; Cauchi v. Brown (ED CA 1999) 51 F.Supp.2d 1014, 1016
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(citing text); United States v. White (CD CA 1995) 893 F.Supp. 1423, 1428 (quoting text).
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7 Instead of lavishing attention on the complaint until the plaintiff gets it just right, a district
8 court should keep the case moving. Bennett v. Schmidt (7th Cir. 1998) 153 F3d 516, 518.
9 Furthermore, at this stage of the proceedings, any ambiguity in the documents must be
10 resolved in Plaintiff’s favor. International Audio-text Network, Inc. v. AT&T Co. (2nd Cir. 1995) 62
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F2d 69, 72; Hearn v. R.J. Reynolds Tobacco Co. (D AZ 2003) 279 F.Supp.2d 1096, 1102.
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The Complaint must be construed in the light most favorable to plaintiff. “A complaint
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should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff
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15 can prove no set of facts in support of his claim which would entitle him to relief. Conley v. Gibson
16 (1957) 355 US 41, 45-46, 78 S.Ct. 99; Parks School of Business, Inc. v. Symington (9th Cir. 1995) 51
17 F3d 1480, 1484; In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1403 (9th Cir. 1996); and see Hishon v.
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King & Spalding, 467 U.S. 69, 73, 104 S. Ct. 2229, 2232 (1984) (Only if no possible construction of
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the alleged facts will entitle plaintiff to relief should the court grant defendant’s motion.)
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In reviewing a Rule 12(b)(6) motion, the court must accept as true all material allegations in
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the complaint, as well as reasonable inferences to be drawn from them. Pareto v. F.D.I.C. (9th Cir.
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23 1998) 139 F3d 696, 699; Leatherman v. Tarrant County Narcotics Intellegence & Coordination
24 Unit (1993) 507 US 163, 164, 113 S.Ct. 1160, 1161; United States v. White (CD CA 1995) 893
25 F.Supp. 1423, 1428.
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The sole issue raised by a Rule 12(b)(6) motion is whether the facts pleaded would, if
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established, support a valid claim for relief. Thus, no matter how improbable the facts alleged are,
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1 they must be accepted as true for purposes of the motion. Neitzke v. Williams (1989) 490 US 319,
2 328-329, 109 S.Ct. 1827, 1833; Bernheim v. Litt (2nd Cir. 1996) 79 F3d 318, 321.
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As will be discussed more thoroughly herein, the Complaint sets forth a number of
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“cognizable legal theories” and factual allegations under those cognizable legal theories.
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Specifically, Plaintiffs demonstrate certain actions by Defendants which violate TILA, Reg. Z,
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7 RESPA and California Unfair Competition Laws including failure to accurately deliver four (4)
8 copies of notice of right to rescind, (two for each borrower), misstatement of Finance Charges,
9 inclusion of unlawful fees, unlawful inclusion of unearned interest into a mortgage loan principal,
10 material disclosure violations, and a pattern or practice of unlawful procedures associated with their
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failure to honor a valid rescission, and their failure to seek judicial guidance when they dispute the
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rescission . All factual allegations, for purposes of the present Motion, must be accepted as true by
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the Court. Once the Court accepts these facts as true, it then must resolve any conceivable
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15 ambiguity or doubt in favor of Plaintiffs.
16 C. Operative Facts
17 In June, 2004, the Plaintiffs, who are unsophisticated borrowers, applied over the telephone
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seeking a conventional fixed rate mortgage loan through a mortgage Broker, Chapel Funding Corp.,
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to pay off multiple other debts.
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The mortgage loan consolidation and federally related mortgage transaction at the root of this
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case was subsequently consummated and closed (the “Closing”) at the Plaintiffs’ home on or about
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23 July 15, 2004 and was conducted by an alleged notary.
24 This specific Transaction was not created, or entered into, to finance the acquisition or initial
25 construction of Plaintiffs’ dwelling and failed in one or more material respects to disclose to
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Plaintiffs in a form and manner required by applicable statute and regulation, the true cost of the
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credit transaction (the “Transaction”).
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1 Plaintiffs unwittingly signed and were induced into believing by representations of the
2 Broker that the proposed lender was extending credit at a better interest rate than they would
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otherwise be able to contract for with the original lender, Defendant LOAN CORRESPONDENTS
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INC., DBA CAPITAL FUNDING GROUP (“Capital Funding”).
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Capital Funding authorized and approved the application after reviewing all documents
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7 directly related with the Transaction. The characteristics of this mortgage loan and representations
8 approved by Capital Funding was:
9 • an adjustable rate mortgage,

• initial two year interest only payments,
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• interest rate change tied to an increasing index; and
11 • calculated with a 3.75% margin increase,
• a balloon payment,
12 • prepayment penalty of six months advance interest if paid within the first
13 thirty-six (36) months,
• padded fees calculated with disclosed “Finance Charges,”
14 • a yield spread premium paid outside of closing
15 all encompassing an interest rate that exceeds the lenders par rate and based on the value of the
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Plaintiffs home and credit history. Moreover, Capital Funding has an arrangement or agreement
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with the Broker to pay commissions outside of closing whereby the Broker refers borrowers to
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Capital Funding for mortgage loans with the same profit characteristics.
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20 The Plaintiffs were charged within the loan principal an unreasonable $6,500.00 in loan
21 discount points (a yield spread premium or “YSP”) as well as $18,700.27 in loan origination fees
22 despite the representations that the YSP paid outside of closing was essentially at no cost to the
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Plaintiffs.
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Normally, a Broker compensation statement disclosing the nature of the relationship between
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the Broker and lender, explaining the Broker’s independence as a fiduciary, and disclosing to the
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Plaintiffs the opportunity to pay all the Broker’s fees up front rather than increasing the loan
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28 principal is provided for mortgage loans requiring these specific third party services. The actual
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1 disclosure statement would be among the documents transferred, but is conspicuously missing
2 though the face of documents reveals the “yield spread premium $6,500.00 POC Del Financial,” see
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Complaint Exhibit 7. Plaintiffs have no personal knowledge whatsoever nor any business
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relationship with “Del Financial.”
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The representations on the face of documents ratified by Capital Funding do not conform to
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7 the Department of Housing and Urban Development (“HUD”) policy statements that fees be labeled
8 clearly and properly disclosed. The Good Faith Estimate also indicates a yield spread premium but
9 does not identify who is to pay this amount and who is receiving this compensation for services.
10 Furthermore, if the fee bears no reasonable relationship to the market value of goods, services, or
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facilities provided, the excess is evidence of a referral or unearned fee, see 64 Fed. Reg. at 10086.
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Further, The HUD – 1 Settlement Statement, Line 1101 fails to accurately disclose the actual
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amount, clearly and conspicuously, that was charged as a finance charge on the “Itemization of the
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15 Amount Financed,” p. 2 of the “Truth in Lending Disclosure Statement” when comparing Complaint
16 Exhibits 6 and 7
17 The actual fee charged for Settlement or Closing was $1,450.00 and is a finance charge. The
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fee is substantially and materially higher than the disclosure on the HUD – 1 Settlement Statement
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causing this fee to be unreasonable, and not bona fide. Such fees vary materially affected the TILA
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Disclosure Statement by more than the minimum $100.00 or allowed for tolerance.
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Also, on the face of documents and indicated in the Complaint Exhibit 6 is interest that was
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23 charged as a “Finance Charge,” in the amount of $85.764 X 24 days = $2058.34 and contrary to the
24 interest charged on Line 901 indicated in the HUD – 1 Settlement Statement of $1543.75, Complaint
25 Exhibit 7. In fact, only twelve days would have accrued between Closing and Plaintiffs first
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payment causing this fee to be unreasonable, not bona fide. Such fees vary materially the TILA
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Disclosure Statement by more than the minimum $100.00 or allowed for tolerance.
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1 In addition, the rescission notices provided to Plaintiffs are erroneous and are totally blank
2 with respect to the date of this Transaction or the expiration date for the three-day cooling off period.
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An evaluation of this Transaction under mortgage industry standards for accuracy and
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material disclosure prompted effective notice to rescind sent to the alleged Servicer Defendant
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GMAC Mortgage on or about September 20, 2006. Plaintiffs were never informed by notice under
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7 RESPA concerning the identity of an assignee with alleged ownership of this obligation until the
8 servicer GMAC responded to Plaintiffs rescission notice. All Defendants have sufficient notice to
9 rescind effectively given by the present claim and service of process. All Defendants have utterly
10 failed to take any action to invalidate the security instrument or comply with Reg. Z mandatory
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requirements for rescission.
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D. GMAC May Be Subject to Liability For Foreclosure Decisions Contrary To The Rescission
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Process
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15 Whether GMAC is subject to liability under TILA or under the rules for assignee liability is a
16 quest of fact whether GMAC was part of a series of assignments. Any assignee would be liable even
17 though it only owned the obligation for a brief period under 15 U.S.C. § 1641(e) for transactions
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secured by real property. Likewise, rescission is allowed against “any assignee” under 15 U.S.C. §
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1641(c). [Emphasis added] The facts are clearly supported that Plaintiffs sent their qualified written
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request (“QWR”) under RESPA with a valid notice to rescind under TILA to GMAC MORTGAGE
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CORP. (“GMAC”) the current Servicer. GMAC may be considered a functional creditor or,
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23 alternatively, is a Servicer strictly for administrative purposes. GMAC would not be considered a
24 real party in interest unless GMAC claims a pecuniary interest related to the profits it collects while
25 servicing mortgage loans.
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A notice to the servicing agent should suffice as notice to the actual holder of the obligation
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that Plaintiffs were rescinding the Transaction at bar, disputing the default due to the rescission, and
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1 formally requesting documentation directly related to the obligation and GMAC’s duty to provide
2 the information under RESPA.
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These facts are already quite evident, supported by Exhibits, identified on the face of
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documents, and are without any legal conclusion. The fact that GMAC failed to cease its foreclosure
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proceeding and collection, and facilitate compliance with mandatory rescission process under Reg. Z
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7 § 226.23(d)(2); Effects of Rescission, is already established by this entity. The original notices to
8 rescind given to the Plaintiffs at consummation are erroneous due to omission dates, and the
9 computation of the “Amount Financed” is inaccurate on the face of documents. Plaintiffs are
10 statutorily entitled to extend the rescission period up to three-year (3) under 15 U.S.C. 1635(f), and
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have done so.
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At minimum, GMAC had a fiduciary duty to halt its collection efforts under RESPA, provide
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information and documentation to support any authority to enforce the security instrument under a
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15 Master Pooling and Servicer Contract, or in the alternative, notice all interested parties to invalidate
16 the “Notice of Default and Election To Sell” filed in the public record by a GMAC affiliate
17 EXECUTIVE TRUSTEE SERVICES, INC. Evidently, GMAC failed to do any of the above, and
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merely named Impac Funding Corp. as the owner of the Plaintiffs mortgage loan.
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The Transaction had been rescinded by the Plaintiffs, and from that moment forward, TILA
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and Reg. Z dictated the steps that all Defendants must be follow. GMAC would contribute to its
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own negligence and would be precluded by waiver and equitably estoppel of its untimely failure to
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23 abide by the absolute and dispositive voiding of the security instrument, or evidence thereof as
24 expressed in the statutory language.

25 Strict construction of Regulation Z dictates automatic voiding of the security instrument
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arising by operation of law and is considered absolute, not subject to judicial modification. The
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plain language of Regulation Z specifically states that the creditor must first take the action
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1 necessary to terminate the security interest. The statute does not authorize any of the parties named
2 as Defendants to modify the process unilaterally or extra-judicially by proceeding to a non-judicial
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foreclosure sale, and failing in all aspects to seek judicial guidance if any of the Defendants disputed
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the valid rescission.
5
A Servicer is not considered an assignee for TILA purposes unless it is or was the owner of
6
7 the obligation, 15 USC § 1641(f), a question of fact not subject to dismissal on a Rule 12(b)(6).
8 Nevertheless, the Plaintiffs may be permitted to proceed with an assignee liability claim against a
9 Servicer when the Servicer refuses to reveal the identity of the actual holder or assignee of the
10 mortgage loan pursuant to a qualified written request notice and to this extent becomes a “functional
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holder,” Brown v. Mortgagestar, 194 F. Supp. 2d 473 (S.D. W. Va. 2002). The Post-Simplification
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amendments to TILA (1995) also provide that a Servicer which takes assignment “solely for
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administrative convenience” is not treated as the owner pursuant to 15 USC § 1641(f). Therefore,
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15 unless an assignee falls within this exception, they are subject to TILA assignee liability rules
16 regardless of the transitory nature of the assignment, Myers v. Citicorp Mortgage, Inc., 878 F. Supp.
17 1553 (M.D. Ala. 1995); and Fairbanks Capital Corp. v. Jenkins, 225 F. Supp. 2d 910 (N.D. Ill.
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2002). Whether GMAC is subject to assignee liability and the transitory nature of the assignment is
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a question of fact that should survive a Rule 12(b)(6) motion to dismiss.
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For example, Plaintiffs have sufficiently stated the claim as apparent by simple computation
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on the face of documents. See Murry v. America’s Mortgage Banc, Inc. (and Greenleaf v. BWM
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23 Mortgage, LLC) 2004 U.S. Dist. LEXIS 12818 (N.D. Ill. July 9, 2004, class certification
24 recommended by magistrate judge, 2005 U.S. Dist. LEXIS 11751 (N.D. Ill. May 5, 2005)(Assignee
25 is not liable for statutory damages unless TILA violation is apparent on the face of the TILA
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disclosure but is subject to rescission claim.) An Assignee could be liable for rescission though the
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Court should deny a Servicer’s motion to dismiss, as it would be premature to conclude the Servicer
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1 was not a necessary party, as it would be possible for the Servicer to attempt foreclosure on the
2 Transaction the Plaintiffs are attempting to rescind. See e.g., Adams v. NationsCredit Financial
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Services Corp., 351 F. Supp. 2d 829 (ND Ill. 2004)(Servicer might be necessary party to rescission
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claim because it foreclose; assignee could be liable for rescission.)
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Some courts have conferred standing on Servicers whose agreements with holders give the
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7 Servicer a right to collect and foreclose on a security instrument. Otherwise, naming GMAC
8 prevents the misjoinder of parties, or failure to join an indispensable party, or failure to join a
9 necessary party, all having a pecuniary interest in the outcome and essential to complete adjudication
10 of the claim. The Court should dismiss the Servicer as a Defendant if GMAC claims no independent
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stake in the matter and its presence is unnecessary, which GMAC has failed to do. See e.g., Walker
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v. Gateway Financial Corp. 2003 US Dist. LEXIS 17868 (ND Ill. Oct. 8, 2003)
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In the case of Navara v. Long Beach Mortgage, 2006 U.S. Dist. LEXIS 4908 (N.D. Ill. Jan.
14
15 26, 2006) the District Court stated: “Servicer was a necessary party to a TILA action seeking
16 rescission.” The case involved a plaintiff seeking rescission against a lender who had directed
17 plaintiff to make payments to Washington Mutual Bank, (WAMU), the servicer. The court denied
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the defendant’s motion to dismiss because it held that the plaintiff had properly included WAMU as
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a necessary party because if the loan was rescinded, WAMU would cease to have an interest in the
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loan and the plaintiff might wish to recover late fees and other penalties collected by WAMU. Also,
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see e.g., Smith v. Argent Mortgage Co., 447 F. Supp. 2d 1200, and 237 F.R.D. 436 (D. Colo. 2006)
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23 (Borrowers might be entitled to TILA relief against the servicer because it appeared to be
24 responsible for decisions regarding rescission.) Even though the Plaintiffs’ allegations have
25 indicated that GMAC was not involved in the initial loan Transaction and had no responsibility to
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provide TILA disclosures, it is reasonable to infer that GMAC is at least responsible for decisions
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regarding rescission, or has some stake in the outcome of this proceeding. Nevertheless, it is
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1 statutorily illegal and unlawful for GMAC to continue collecting or demanding payments once they
2 received Plaintiffs QWR and rescission notice.
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If the factual questions before this Court were construed in the Plaintiffs favor, dismissing
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GMAC could impair the Plaintiffs ability to fully protect their interest in rescission because GMAC
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could improperly report to credit bureaus or foreclose on the mortgage loan, the subject of this claim.
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7 D. Plaintiffs TILA Claims Are Not Time Barred
8 The question is raised as to the result when the Plaintiffs sues under TILA § 125, and Reg. Z
9 § 226.23 to rescind a rescindable transaction, whether Plaintiffs TILA claims are barred by the
10 applicable one-year statute of limitations, and additionally to collect civil penalties, including court
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costs and attorney fees for failure to comply with disclosure requirements.
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Even prior to the 1974 amendments, two decisions held that a consumer might exercise their
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right of rescission and also recover civil penalties. See Eby v.Reb Realty, Inc., 495 F2d 646 (9th Cir.
14
15 1974); Palmer v. Wilson, 502 F2d 860 (9th Cir. 1974) However, the 1974 amendments made by Pub.
16 L. No. 93 – 495 § 408 (effective Oct. 28, 1974) greatly expanded the scope of the civil penalty
17 provisions. Civil penalties were provided “except as otherwise provided in …[TILA § 130], [for]
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any creditor who fails to comply with any requirement imposed under [TILA ch. 2 or 4].”
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[Emphasis added]
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Whether or not an informational disclosure requirement was involved, the failure to meet any
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requirements imposed under TILA Chapter 2 or 4 or the Regulation Z provisions implementing
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23 those chapters triggered liability for civil penalties. The rescission section is located in Chapter 2,
24 and a violation of any requirement imposed under Chapter 2 would trigger civil penalties.
25 The Truth in Lending Simplification Reform Act (TILSR) rewrote TILA § 130 so as to
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highlight the fact that Chapter 2, TILA § 125, (the rescission section) would trigger civil penalties,
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and award attorney fees and costs “in any action in which a person is determined to have a right of
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1 rescission under section 125.”

2 Referring to the instant matter, Plaintiffs sent a valid rescission notice and QWR to the
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Servicer Defendant GMAC Mortgage on or about September 20, 2006. The implementing Reg. Z §
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226.23(a)(3) already provides in pertinent part:
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Section 226.23 Right of Rescission
6 (a) Consumer’s right to rescind.
7 (3) The consumer may exercise the right to rescind until midnight of the third
business day following consummation, delivery of the notice required by
8 paragraph (b) of this section, or delivery of all material disclosures, whichever
occurs last. If the required notice or material disclosures are not delivered, the
9 right to rescind shall expire 3 years after consummation, upon transfer of all of
the consumer’s interest in the property, or upon sale of the property,
10 whichever occurs first. [Emphasis added]
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Because the Plaintiffs have not disposed of all their interest in their principal dwelling, and
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the three-year period had not expired, the Plaintiffs would be entitled to maintain an action to rescind
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the Transaction, under the facts clearly indicated in this claim.
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15 While the one-year period of limitations ordinarily applies to civil actions for damages, a
16 different result and a longer period is available for Plaintiffs seeking relief from Defendants’ failure
17 to allow and follow the rescission procedures under Reg. Z § 226.23(d)(2); Effects of Rescission.
18
In Mount v. LaSalle Bank Lake View, 886 F. Supp. 650 (ND Ill. 1995), the court allowed a
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debtor to sue a creditor for damages because the creditor failed to respond to his request for
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rescission, even though the complaint was filed more than one year after TILA violations allegedly
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occurred at loan consummation. The court reasoned that because rescission is allowed up to three
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23 years after loan consummation in some circumstances, under 15 U.S.C. § 1635(f), a suit for damages
24 for the creditors failure to cancel the loan also must be allowed. Mount v. LaSalle Bank Lake View,
25 886 F. Supp. 650 (ND Ill. 1995)(One-year limitations period in TILA § 130(e) does not apply to
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damage claims for creditor’s failure to rescind; three-year period in TILA § 125(f) presumably
27
applies); Mafia v. Household Bank, 825 F. Supp. 1018 (SD Fla. 1993)(The refusal to honor a
28
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1 rescission notice in violation of TILA § 125 gives rise to a separate claim for damages under TILA
2 § 130.); Pedro v. Pacific Plan of California, 393 F. Supp. 315 (ND Cal. 1975) (Consumer was
3
entitled to rescission, a TILA civil penalty for each of two transactions, and attorney fees.)
4
E. RESPA RECOUPMENT
5
The RESPA claims of the Plaintiff are so closely related to the Transaction and the
6
7 Defendants failure to provide accurate material disclosures throughout the course of this Transaction
8 that they form the same basis and subject of claims set forth herein.
9 The structure of RESPA's various statutory provisions indicates that Congress did not intend
10 to create a private right of action for some disclosure violations under 12 U.S.C. § 2603. It is clear,
11
however, that Congress did intend for there to be a private right of action under many other sections
12
of RESPA.
13
Specifically, Sections 8 (12 U.S.C. § 2607) and 10 (12 U.S.C. § 2609) of RESPA provide for
14
15 treble damages and attorneys' fees. 12 U.S.C. §§ 2607(d)(2) & (5) and 2608(b). Other RESPA
16 sections do not contain any such provisions. The inclusion of remedies in certain RESPA provisions
17 and their omission in others is strong evidence that Congress intend to provide a private remedy for
18
violations of many sections of RESPA, but not others.
19
A fundamental purpose of RESPA is the elimination of kickbacks or referral fees that tend to
20
increase unnecessarily the costs of certain settlement services.” 12 U.S.C. § 2601(b).
21
RESPA strictly prohibits kickbacks and referral fees:
22 “No person shall give and no person shall accept any fee, kickback, or thing of value
pursuant to any agreement or understanding, oral or otherwise, that business incident
23 to or a part of a real estate settlement service involving a federally related mortgage
loan shall be referred to any person.”12 U.S.C. § 2607(a).
24
RESPA also prohibits unearned fees:
25 No person shall give and no person shall accept any portion, split, or percentage of
any charge made or received for the rendering of a real estate settlement service in
26 connection with a transaction involving a federally related mortgage loan other than
for services actually performed.” 12 U.S.C. § 2607(b).
27
Unfortunately, for these Defendants, RESPA does contain an express private right of action
28
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1
for illegal kick-back fees and provides for treble damages under 12 U.S.C. § 2607(d). Separate from
2
the issue of legality of the fees, The Department of Housing specifically urges and opines that at
3
minimum, all fees to a mortgage broker (from whatever source) be clearly labeled and properly
4
estimated on the GFE, 64 Fed. Reg. 10086, 10087.
5
F. RESPA Claims Are Properly Asserted Defensively By Recoupment
6
The important distinction between raising RESPA claims offensively and raising them
7
defensively by way of recoupment can not be overstated. This distinction is at the heart of Plaintiffs’
8
RESPA claims. It is critical that the Court take notice that Plaintiffs are raising RESPA claims
9
defensively by way of recoupment in response to the non-judicial foreclosure proceeding initiated by
10
Defendants.
11
Where TILA claims are concerned, courts have allowed assertion of otherwise time-barred
12
claims defensively by way of recoupment, citing § 1640(e)'s qualification of the limitations period as
13
applied to defensive actions. See Roberson v. Cityscape Corp. (In re Roberson), 262 B.R. 312, 323
14
(Bankr.E.D.Pa.2001); Soto v. PNC Bank (In re Soto), 221 B.R. 343, 359 (Bankr.E.D.Pa.1998). No
15
such express provision is found in RESPA, however that certainly does not foreclose its use.
16
In Silverman v. Eastrich Multiple Investor Fund, L.P., 51 F.3d 28, 32 (3d Cir.1995), the
17
Third Circuit reversed the district court's conclusion that a defensive use of the Equal Credit
18
Opportunity Act (“ECOA”), 15 U.S.C. § 1691 et seq., against collection and enforcement of a
19
guaranty was not barred by the statutory scheme of ECOA which limited actions to a period of two
20
years from the date of the alleged violation. Like RESPA, ECOA makes no reference to the right of
21
recoupment. Silverman cited with approval Integra Bank/Pittsburgh v. Freeman, 839 F.Supp. 326
22
(E.D.Pa.1993), which held that the common law doctrine of recoupment is available to allow an
23
ECOA claim to be asserted defensively. In a footnote, the Integra court responded to the argument
24
made by the Defendants in that case, i.e., that recoupment could not be available or Congress would
25
have expressly authorized it as it did in regard to TILA, 15 U.S.C. § 1641. It stated:
26
“Under such logic, however, courts would foreclose actions by way of recoupment in regard
27 to federal statutory rights and obligations unless it was specifically provided for by Congress.
To the contrary, actions by way of recoupment have been recognized by court decisions in a
28 broad variety of federal statutory settings [citations omitted], and-prior to Congressional
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1 clarification-in regard to TILA. 839 F.Supp. at 330 n. 6. While there does not appear to be a
published case applying this principle to a RESPA claim, I find no principled reason to do
2 otherwise. Defendants' argument appears to be solely that the defensive use of RESPA is not
permitted as a matter of law. Although they do not contend that the doctrine is not properly
3 invoked as a matter of fact, I have examined the Complaint to review its sufficiency.
Pennsylvania's common law requires that to assert a claim defensively by way of recoupment
4 the claim arise out of the same contractual transaction. Since the Plaintiff alleges that the
broker's fee was paid out of the proceeds of the Loan (Complaint ¶ 19), the RESPA claim
5 indeed arises out of the same contractual transaction. The Plaintiff therefore has stated a
claim under RESPA, and the Motion to Dismiss Count II as untimely will be denied.”
6
7 Accordingly, RESPA claims are properly asserted defensively by way of recoupment along
8 with TILA claims in the instant action. Again, as discussed previously herein, it would be
9 inequitable and contrary to Congressional intent to allow Defendants to assert foreclosure rights, but
10 then preclude Plaintiffs from asserting defenses thereto. Courts have broadly and liberally accepted
11 that recoupment claims are available defensively notwithstanding the limitations period that those
12 recoupment claims may carry if they had been raised from an offensive (rather than defensive)
13 posture. Plaintiffs’ RESPA claims are therefore properly before the Court.
14 G. Illegality of RESPA Referral Fees
15 The HUD-1 Settlement Statement reveals on the face of this document at “Line 811 Yield
16 Spread Premium $6,500.00 POC Del Financial,” see Complaint Exhibit 7. Plaintiffs had essentially
17 agreed to pay all up front fees for any value of goods, services, or facilities provided by the Broker,
18 though Plaintiffs are unaware of any personal or business relationship whatsoever with “Del
19 Financial,” nor are Plaintiffs acquainted with any services or facilities provided by this entity.
20 A Yield Spread Premium is a lender’s payment to a mortgage broker for increasing the loan
21 interest to a rate above “par,” which is a rate higher than the rate at which the lender would
22 otherwise be willing to make the loan. This $6,500.00 payment generally supplements the
23 $18,700.27 origination fee already agreed upon, and being paid, by the Plaintiffs to a Broker for the
24 Broker’s services and was not in exchange for any services or facilities Plaintiffs contracted for, and
25 bears no reasonable relationship to the value of any “services” the Broker could say he provided to
26 the Plaintiffs or the alleged Lender in the instant matter.
27 The 1999 Policy statement issued and published by the Housing and Urban Development
28 (“HUD”) sets forth a two-part test for broker fees, see 64 Fed. Reg. 10079 (March 1, 1999). Further,
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1
HUD has issued several rules and additional policy statements interpreting RESPA ban on unearned
2
fees. The first question is whether “there were … services actually performed for the total
3
compensation paid to the Broker.” See 64 Fed. Reg. at 10085. HUD then identifies fourteen (14)
4
discrete and compensable services normally performed in the origination of a mortgage loan. A
5
review of the “Itemization of the Amount Financed,” see Complaint Exhibit 6, itemizes the
6
compensable services paid to a Broker on the face of this document, i.e., a “Loan Origination Fee.”
7
If the Broker took the application and also performed five other tasks identified under the
8
HUD policy statement as a minimum requirement, then some quantum of services was provided that
9
would justify a fee. The instant matter reveals no disclosure confirmed concerning counseling
10
employment verification, debt service obligations, ability to pay, income verification, or other
11
discrete tasks the Broker at minimum performed to be compensated by a total of $18,700.27. The
12
Closing was conducted at the Plaintiff’s home without a justifiable facility for this compensation.
13
Conversely, if the Broker did not meet the minimum requirement, the HUD policy statement
14
suggests that a fee paid by a Lender should be inferred to be a referral fee. The value of services
15
provided must be measured in specific dollar amounts for each good, service, or facility provided. A
16
reasonable value cannot include a percentage of the loan amount and the $6,500.00 paid outside of
17
closing is exactly a percentage of the $650,000.00 loan principal.
18
If the Lender paid portion of the total compensation is calculated as a percentage, regardless
19
of the amount the Plaintiff paid in fees, no reasonable relationship would be sustained that is related
20
to the goods, services, or facilities that were actually provided. If several mortgage loans are
21
evaluated involving the same Broker and Lender and the same service is provided in each
22
transaction but the total compensation for each mortgage loan is a different dollar amount, then the
23
compensation received by the Broker could not be related to the reasonable value of goods, services,
24
or facilities that were actually provided. See 64 Fed. Reg. at 10084 (“[H]igher interest rates alone
25
cannot justify higher total fees to mortgage brokers”). If the Plaintiffs implied agreement was for
26
services already paid upfront, as noted in the Eleventh Circuit Court of Appeals, Culpepper v. Inland
27
Mortgage Corp., 132 F.3d 692 (11th Cir 1998), held that a jury could find that the “front-end” broker
28
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1
fee was for the “services,” while the “back-end” fee or yield spread premium was “for” the referral,
2
and therefore illegal under RESPA. The Defendants failure to disclose that a Yield Spread Premium
3
was included in the Finance Charge and in the alternative, increases the actual loan principal, all
4
material to the Transaction and material to the disclosure calculated on the Truth in lending
5
Disclosure Statement, Plaintiffs claim must be determined judicially. [Emphasis added] A Yield
6
Spread Premium is considered a cost of credit by Reg. Z § 226.4(a), and must be included in the
7
finance charge disclosure because it is a charge imposed directly or indirectly by the creditor and is
8
incident to, or a condition of, the extension of credit. Reg. Z § 226.4(a); and Reg. Z 226.4(a)(1)
9
states that the lenders who impose other fees passed on to third parties directly or indirectly (if it is
10
the Defendants who require the services) must disclose such fees. As such, by failing to disclose to
11
Plaintiffs that borrowers (such as Plaintiffs) could pay the Yield Spread Premium in the up front
12
Broker Fee to reduce the loan principal, this failure must constitute an undisclosed charge that
13
materially affects TILA disclosures in violation of 15 U.S.C. § 1602(u), and would statutorily extend
14
rescission. Plaintiffs paid this fee or would have paid this fee over the life of this Transaction.
15
H. Plaintiffs Claims Apply to All Defendants Under California’s Unfair Competition Law
16
These actions by Defendants and their agents implicate TILA, Reg. Z. and RESPA
17
violations, common law fraud, deceit, and various claims under the California Business and
18
Professions Code § 17200 et seq. (“UCL”). These violations contrary to public policy, affect trade
19
and commerce within the scope of the UCL, and play an integral role in Plaintiffs UCL claims. As
20
such, they may be incorporated with Plaintiffs California State Unfair Competition claims. Any
21
failure to effectively comply with the “clear and conspicuous” standard under federal statute
22
constitutes a violation under California UCL and does not preempt Plaintiffs private rights of action
23
under state law. For example, in Wash. Mut. Bank v. Super., Ct. 89 Cal. Rptr. 2d 560 (Ct. App.) the
24
California Appeals Court stated:
25
“Our review of the law demonstrates, and we now hold, that RESPA and Regulation X do
26 not expressly preempt private rights of action under state laws for violations of their
provisions. We find that private state causes of action are not inconsistent with the federal
27 disclosure requirements, but rather are complementary to the federal requirements and in fact
will promote compliance with the disclosure law enacted by Congress. We do not believe
28 that allowing borrowers to sue for unlawful disclosures or omissions will interfere in any way
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1 with the operation of the federal law, and we find no conflict between RESPA and private
state law causes of action. We thus uphold the decision of the trial court to overrule the
2 demurrer to the extent it alleged that plaintiff’s state law claims were preempted by RESPA
and Regulation X.” (citing Wash. Mut. Bank v. Super., supra)
3
Accordingly, even these violations of RESPA which do not carry a “private right” cause of
4
action are important and significant as they relate to Plaintiffs UCL claims and further demonstrate a
5
pattern or practice by these Defendants. Furthermore, if these Defendants disputed a valid rescission
6
notice from the Plaintiff, their duty was to seek judicial guidance. One court in the Ninth Circuit
7
was troubled by the prospect of a unilateral act of rescinding by a consumer based upon a groundless
8
right to rescind and the consumer’s inability to tender, see Yamamoto v. Bank of New York, 329 F.3d
9
1167 (9th 2003). Nevertheless, the statute and Regulation Z offer a clear answer to this concern: if
10
the creditor disputes the consumer’s right to rescind, it should file a declaratory judgment action
11
within twenty-days (20) after receiving the rescission notice, before its deadline to return the
12
consumer’s money or property and record termination of its security interest, see 15 U.S.C. §
13
1635(b). [Emphasis mine]
14
The instant matter clearly reveals the Defendants failure to comply with the strict statutory
15
construction. Truth in Lending provisions are to be being liberally construed in favor of the
16
Plaintiffs, see e.g., Acquino v. Public Fin. Consumer Discount Co., 606 F. Supp. 504 (E.D. Pa.
17
1985); In re Whitley, Inc., 177 B.R. 142 (Bankr. D. Mass. 1995). Each of the foregoing acts by these
18
Defendants, are recalcitrant, incompetent, and so permeates the type of conduct in the mortgage
19
industry and their standard unlawful business practices. Plaintiffs’ claims properly state facts
20
supported by Exhibits and Notices that clearly demonstrate prohibited conduct contrary to the UCL
21
and Consumer Credit Protection statutes.
22
Conclusion
23
Because Plaintiffs factual allegations support a claim upon which relief can be granted, the
24
Court should deny Defendants motion to dismiss, require these Defendants to answer the Plaintiffs
25
cause of action, and retain the case on the court’s docket. In the alternative, if the court determines
26
Plaintiffs have failed to sufficiently state a claim, Plaintiffs ask the Court to grant leave to amend the
27
complaint in a manner that corrects all such defects or elements
28
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2 Dated: April 16, 2007 THE LAW OFFICES OF TIMOTHY G.

MCFARLIN, PLC
3
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By: _________________________________
5 Timothy G. McFarlin
Attorney(s) for Plaintiffs Damon K. Lyman and
6 Claudia M. Lyman
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Reply To GMAC 12 (B) 6

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1 Timothy G. McFarlin (CBN: 223378)

6 Attorney(s) for Plaintiffs Damon K. Lyman and

8 UNITED STATES DISTRICT COURT

11 DAMON K. LYMAN and Case No.: SACV06 – 1174 CJC (ANx)

7 Dated: April 16, 2007 THE LAW OFFICES OF TIMOTHY G.

4 Plaintiffs Damon K. Lyman and Claudia M. Lyman (hereinafter the “Plaintiffs” or

5 “Plaintiff”) sued Defendants LOAN CORRESPONDENTS INC., dba CAPITAL FUNDING

6 GROUP, a California Corporation, GMAC MORTGAGE CORP., a Pennsylvania Corporation,

23 AZ 2003) 279 F.Supp.2d 1096, 1101 (citing text).

15 ambiguity or doubt in favor of Plaintiffs.

23 July 15, 2004 and was conducted by an alleged notary.

8 approved by Capital Funding was:

9 • an adjustable rate mortgage,

24 expressed in the statutory language.

7 D. Plaintiffs TILA Claims Are Not Time Barred

1 rescission under section 125.”

14 G. Illegality of RESPA Referral Fees

26 the Plaintiffs or the alleged Lender in the instant matter.

2 Dated: April 16, 2007 THE LAW OFFICES OF TIMOTHY G.

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