Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-1

Page: 1 of 3

(1 of 34)

No. 10-16487

IN THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT ___________________________

KATHRYN MCOMIE-GRAY, Plaintiff-Appellant v. BANK OF AMERICA HOME LOANS, Defendant-Appellee

_____________ ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF CALIFORNIA NO. 2:09-cv-02442

MOTION FOR LEAVE TO FILE BRIEF AMICUS CURIAE IN SUPPORT OF APPELLANT SEEKING REVERSAL

Movant, the National Consumer Law Center (NCLC) hereby seeks leave to file the attached brief as amicus curiae in support of the Appellees pursuant to Rule 29(b) of the Federal Rules of Appellate Procedure. Movant has sought consent to file its amicus brief from Bank of America Home Loans, who neither affirmatively consented nor opposed this motion. In support of this Motion, Movant states that NCLC is a public interest, non-profit law office established in 1969 and incorporated in 1971, with its main office in Boston,

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-1

Page: 2 of 3

(2 of 34)

MA and a separate office in Washington DC. It is a national research and advocacy organization focusing specifically on the legal needs of low income, financially distressed and elderly consumers. NCLC works to defend the rights of consumers, concentrating on advocating for fairness in financial services, wealth building and financial health, a stop to predatory lending and consumer fraud, and protection of basic energy and utility services for low income families. NCLC devotes special attention to vulnerable populations including immigrants, elders, homeowners, former welfare recipients, victims of domestic violence, military personnel and others, on issues from access to justice, auto fraud, bankruptcy, credit cards, debt collection abuse, predatory lending, mortgage and payday lending, refund anticipation loans, Social Security, and more. On behalf of its low-income clients, NCLC has conferred with the staff and the governors of the Federal Reserve Board, as well as filed comprehensive comments on almost all proposed regulations promulgated since the Truth in Lending Act was first passed in 1968. NCLC has authored the primary treatise Truth in Lending (6th Ed. 2007) and the yearly supplements. As an organization that is representative of consumers throughout the entire United States, Amicus is vitally interested in the resolution of this issue and believes it can be of assistance in illuminating the legal and policy issues before the Court. In particular, in their brief Amicus address the policy considerations behind the extended right of rescission in the Truth in Lending Act, 15 U.S.C. 1635 (TILA), and the essential place the extended right of rescission has in balancing the uneven bargaining positions between creditors and individual homeowners in the mortgage marketplace. The potentially significant remedy provided by the right of rescission is the only way that creditors can be motivated to comply with the disclosure requirements of TILA, and thus the only meaningful method of ensuring that homeowners are provided with truthful disclosures of the terms and cost of the credit secured by their homes.

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-1

Page: 3 of 3

(3 of 34)

WHEREFORE, the Movant requests that this Motion for Leave to File a Biref Amicus Curiae be granted. Respectfully submitted, _s/Tara Twomey___________ TARA TWOMEY, ESQ. NATIONAL CONSUMER LAW CENTER 7 Winthrop Square Boston, MA 02110 (831) 229-0256 tara.twomey@comcast.net

Case: 10-16487

11/04/2010

9th Circuit Case Number(s)

10-16487

ID: 7535062

DktEntry: 10-2

Page: 1 of 1

(4 of 34)

NOTE: To secure your input, you should print the filled-in form to PDF (File > Print > PDF Printer/Creator).

*********************************************************************************

CERTIFICATE OF SERVICE When All Case Participants are Registered for the Appellate CM/ECF System
I hereby certify that I electronically filed the foregoing with the Clerk of the Court for the United States Court of Appeals for the Ninth Circuit by using the appellate CM/ECF system on (date) . 11/04/10 I certify that all participants in the case are registered CM/ECF users and that service will be accomplished by the appellate CM/ECF system. Signature (use "s/" format) s/ Tara Twomey

*********************************************************************************

CERTIFICATE OF SERVICE When Not All Case Participants are Registered for the Appellate CM/ECF System
I hereby certify that I electronically filed the foregoing with the Clerk of the Court for the United States Court of Appeals for the Ninth Circuit by using the appellate CM/ECF system on (date) . Participants in the case who are registered CM/ECF users will be served by the appellate CM/ECF system. I further certify that some of the participants in the case are not registered CM/ECF users. I have mailed the foregoing document by First-Class Mail, postage prepaid, or have dispatched it to a third party commercial carrier for delivery within 3 calendar days to the following non-CM/ECF participants:

Signature (use "s/" format)

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 1 of 29

(5 of 34)

No. 10-16487

IN THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT ___________________________

KATHRYN MCOMIE-GRAY, Plaintiff-Appellant v. BANK OF AMERICA HOME LOANS, Defendant-Appellee

_____________ ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF CALIFORNIA NO. 2:09-cv-02442

BRIEF OF AMICUS CURIAE THE NATIONAL CONSUMER LAW CENTER AND THE NATIONAL ASSOCIATION OF CONSUMER ADVOCATES IN SUPPORT OF PLAINTIFF MCOMIE-GRAY SEEKING REVERSAL

TARA TWOMEY, ESQ. PRINCIPAL ATTORNEY FOR AMICUS CURIAE NATIONAL CONSUMER LAW CENTER 7 Winthrop Square Boston, MA 02110-1245 (831) 229-0256

November 4, 2010

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 2 of 29

(6 of 34)

RULE 26.1 CORPORATE DISCLOSURE STATEMENT McOmie-Gray v. Bank of America Home Loans, No. 10-16487. Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure Amicus Curiae the National Association of Consumer Bankruptcy Attorneys makes the following disclosure: 1) For non-governmental corporate parties please list all parent corporations. NONE. 2) For non-governmental corporate parties please list all publicly held companies that hold 10% or more of the partys stock. NONE. 3) If there is a publicly held corporation which is not a party to the proceeding before this Court but which has a financial interest in the outcome of the proceeding, please identify all such parties and specify the nature of the financial interest or interests. NONE. 4) In all bankruptcy appeals counsel for the debtor or trustee of the bankruptcy estate must list: 1) the debtor, if not identified in the case caption; 2) the members of the creditors committee or the top 20 unsecured creditors; and, 3) any entity not named in the caption which is an active participant in the bankruptcy proceedings. If the debtor or trustee is not participating in the appeal, this information must be provided by appellant. NOT APPLICABLE. Dated: November 4, 2010 /s/ Tara Towmey Tara Twomey, Esq. Attorney for the National Consumer Law Center

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 3 of 29

(7 of 34)

TABLE OF CONTENTS

STATEMENT OF INTERST OF AMICUS CURIAE ........................................1 SUMMARY OF ARGUMENT ...........................................................................3 STATUTORY FRAMEWORK ...........................................................................5 ARGUMENT .......................................................................................................6 I. The plain meaning of TILA, section 1635(a), only requires homeowners to provide notice that they are exercising their right to rescind the transaction................................................................................6 The creditors failure to comply with its obligations after the homeowner has rescinded her mortgage loan creates a cause of action with a one-year statute of limitation. .........................................................8 Miguel v. Country Loan Funding, 309 F.3d 1161 (9th Cir. 2002), does not support the District Courts opinion.. ................................................10 TILAs disclosure requirements and rescission rights are critical consumer protections that serve as the bulwark against deception and fraud in the mortgage industry..........................................12 A. TILAs critical role of consumer protection in the mortgage markets...........................................................................................12 Rescission rights are a critical means of ending mortgage fraud.. .............................................................................................18

II.

III.

IV.

B.

CONCLUSION ..................................................................................................19

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 4 of 29

(8 of 34)

TABLE OF AUTHORITIES FEDERAL CASES Andrews v. Chevy Chase, 240 F.R.D. 612 (E.D. Wis.2007), rev'd and remanded on other grounds, 545 F.3d 570 (7th Cir. 2008).........................................................................15 Basnight v. Diamond Developers, Inc., 146 F. Supp. 2d 754 (M.D.N.C. 2001)..........................................................18 Bragg v. Bill Heard Chevrolet, Inc., 374 F.3d 1060 (11th Cir. 2004).....................................................................19 Buick v. World Sav. Bank, 637 F. Supp. 2d 765 (E.D. Cal. 2008).............................................................9 Falcocchia v. Saxon Mortgage, Inc., 2010 WL 582059 (E.D. Cal. Feb. 12, 2010) .................................................12 Frazile v. EMC Mortgage Corp., 2010 WL 2331429 (11th Cir. June 11, 2010) .................................................9 Hartford Underwriters Insurance Co. v. Union Planters Bank, N.A., 530 U.S. 1 (2000)............................................................................................6 Hernandez v. Hilltop Finance Mortgage, 622 F. Supp. 2d 842 (N.D. Cal. 2007) ............................................................9 Inge v. Rock Finance Corp., 281 F.3d 613 (6th Cir. 2002).........................................................................19 Jozinovich v. JP Morgan Chase Bank, 2010 WL 234895 (N.D. Cal. Jan. 14, 2010) ...................................................9 King v. California, 784 F.2d 910 (9th Cir. 1986)...................................................................12, 19 Lamie v. U.S. Trustee, 540 U.S. 526, 124 S. Ct. 1023 (2004) .............................................................6
ii

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 5 of 29

(9 of 34)

Maganallez v. Hilltop Lending Corp., 505 F. Supp. 2d 594 (N.D. Cal. 2007) ..........................................................15 Mayfield v. Vanguard Sav. & Loan Association, 710 F. Supp. 143 (E.D. Pa. 1989) .................................................................10 McCarthy v. Long Beach Mortgage Loan Trust, 451 F. Supp. 2d 16 (D.D.C. 2006) ................................................................10 Miguel v. Country Loan Funding, 309 F.3d 1161 (9th Cir. 2002).......................................................3, 10, 11, 12 Percival v. America Home Mortgage Corp., 469 F. Supp. 2d 409 (N.D. Tex. Jan. 16, 2007) ............................................10 In re Philadelphia Newspapers, 599 F.3d 298, Section 1635(a) ........................................................................7 Public Citizen v. Department of Justice, 491 U.S. 440, 109 S. Ct. 2558, 105 L. Ed. 2d 377 (1989) ..............................7 Ralls v. Bank of New York (In re Ralls), 230 B.R. 508 (Bankr. E.D. Pa. 1999)............................................................10 Rand Corp. v. Yer Song Moua, 559 F.3d 842 (8th Cir. 2009).........................................................................17 Santos v. Countrywide Home Loans, 2009 WL 2500710 (E.D. Cal. Aug. 14, 2009) ................................................8 Semar v. Platte Valley Federal Sav. & Loan Association, 791 F.2d 699 (9th Cir. 1986).........................................................................17 In re Spradlin, 231 B.R. 254 (Bankr. E.D. Mich. 1999) .........................................................7 Williams v. Saxon Mortgage Services, 2007 WL 2828752 (S.D. Ala. Sept. 27, 2007)................................................8

iii

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 6 of 29

(10 of 34)

FEDERAL STATUES United States Code 11 U.S.C. 1601-1666 ..................................................................................................5 15 U.S.C. 1635.....................................................................................................passim 1635(a) ...............................................................................................6, 7, 18 1635(b) .............................................................................................3, 6, 8, 9 1635(f)............................................................................................3, 7, 8, 11 1635(g) .........................................................................................................4 1640............................................................................................................11 1640(e) .......................................................................................................11 16 U.S.C. 1602(u) .......................................................................................................16 1635(i)........................................................................................................16 Code of Federal Regulations 12 C.F.R. 226.2(a)(6...................................................................................................19 226.23(b)(1) .............................................................................................5, 7 226.23(b)(2) .................................................................................................5 226.23(b)(6) .................................................................................................6

DOCKETED CASES Fed. Trade Commn v. Chase Fin. Funding, Inc., U.S. District Court Central District of California Case No. SACV04-549 .................................................................................15 OTHER AUTHORITIES Kristopher Gerardi, Lorenz Goette, & Stephan Meier, Financial Literacy and Subprime Mortgage Delinquency: Evidence from a Survey Matched to Administrative Data 15 .......................12

iv

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 7 of 29

(11 of 34)

Govt Accountability Office, GAO No. 06-1021, Alternative Mortgage Products: Impact on Defaults Remains Unclear, but Disclosure of Risks to Borrowers Could Be Improved 3 (2006), available at www.gao.gov/new.items/d061021.pdf.........................................................14, 15 Joint Ctr. for Hous. Studies, State of the Nations Housing 2007......................14 Roberto Quercia, et al. The Impact of Predatory Loan Terms on Subprime Foreclosures: The Special Case of Prepayment Penalties and Balloon Payments 2829 (Jan. 2005), available at www.kenanflagler.unc.edu/assets/documents/foreclosurepaper.pdf..................15 Ellen Schloemer, Wei Li, Keith Ernst & Kathleen Keest, Ctr. for Responsible Lending, Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners 21 (Dec. 2006), available at www.responsiblelending.org/pdfs/foreclosure-paper-report-2-17.pdf...............15 U.S. Rep. No. 368, 96th Cong., 2d Sess. 28, reprinted in 1980, U.S.C.C.A.N. 236, 264 ..........................................................................3, 5

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 8 of 29

(12 of 34)

STATEMENT OF INTEREST OF AMICUS CURIAE The National Consumer Law Center (NCLC) is a public interest, nonprofit law office established in 1969 and incorporated in 1971, with its main office in Boston, MA and a separate office in Washington DC. It is a national research and advocacy organization focusing specifically on the legal needs of low income, financially distressed and elderly consumers. NCLC works to defend the rights of consumers, concentrating on advocating for fairness in financial services, wealth building and financial health, a stop to predatory lending and consumer fraud, and protection of basic energy and utility services for low income families. NCLC devotes special attention to vulnerable populations including immigrants, elders, homeowners, former welfare recipients, victims of domestic violence, military personnel and others, on issues from access to justice, auto fraud, bankruptcy, credit cards, debt collection abuse, predatory lending, mortgage and payday lending, refund anticipation loans, Social Security, and more. On behalf of its low-income clients, NCLC has conferred with the staff and the governors of the Federal Reserve Board, as well as filed comprehensive comments on almost all proposed regulations promulgated since the Truth in Lending Act was first passed in 1968. NCLC has authored the primary treatise Truth in Lending (6th Ed. 2007) and the yearly supplements. As an organization that is representative of consumers throughout the entire United States, Amicus is vitally interested in the resolution of this issue and believes it can be of assistance in illuminating the legal and policy issues before the Court. In particular, in their brief Amicus address the policy considerations behind the extended right of rescission in the Truth in Lending Act, 15 U.S.C. 1635 (TILA), and the essential place the
1

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 9 of 29

(13 of 34)

extended right of rescission has in balancing the uneven bargaining positions between creditors and individual homeowners in the mortgage marketplace. The potentially significant remedy provided by the right of rescission is the only way that creditors can be motivated to comply with the disclosure requirements of TILA, and thus the only meaningful method of ensuring that homeowners are provided with truthful disclosures of the terms and cost of the credit secured by their homes.

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 10 of 29

(14 of 34)

SUMMARY OF ARGUMENT Recognizing the importance of the home in American life, Congress created the special statutory right of rescission whenever a homeowner enters into a home-secured consumer credit transaction to give the consumer the opportunity to reconsider any transaction which would have the serious consequence of encumbering the title to his home. U.S. Rep. No. 368, 96th Cong., 2d Sess. 28, reprinted in 1980 U.S.C.C.A.N. 236, 264. Homeowners are provided a three-day period following the loan closing in which to review the loan terms Congress deemed material to understanding the transaction, to reconsider the wisdom of that transaction, and to cancel for any reason or no reason at all. Where a creditor fails to make any of the material disclosures of loan terms, TILA extends this rescission right for up to three years. 15 U.S.C. 1635(f). TILA requires rescission to occur within three years of consummation, so a consumer who wishes to rescind must so notify the creditor within that three-year period. If the creditor fails to comply with its duties upon receipt of the consumers rescission notice, the consumer has a cause of action under the Truth in Lending Act against the creditor, and has one year to bring that suit. In this case, the district court misinterpreted the Act and this Courts decision in Miguel v. Country Funding Corp., 309 F.3d 1161 (9th Cir. 2002), when it held that the consumer must both rescind and file suit within the three-year period. The statute and the regulations specify a strict order of events to occur upon the consumers exercise of the right to rescind. Specifically, the creditor has 20 days within which to cancel the security interest in the consumers house. 15 U.S.C. 1635(b). If the creditor fails to take this action, then the creditor has violated TILA by not
3

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 11 of 29

(15 of 34)

complying with the homeowners rescission demand. 15 U.S.C. 1635(g). This separate violation of the statute the creditors failure to follow the requirements of the rescission rules is the subject of the action in the court. The three-year limitation expressly imposed by Congress in 1995 applies to the exercise of the right of rescission, not to the filing of the lawsuit to enforce that right. This rescission right, while triggered by the creditors failure to comply with the strict disclosure requirements of the TILA, is a significant means of deterring mortgage fraud and predatory lending. In the uneven mortgage marketplace of the 21st century, truthful disclosures of the costs and the terms of credit are the only means by which homeowners can protect themselves from unfair, abusive, fraudulent or predatory loans. These disclosures are also the only way that homeowners can ascertain that the loan secured by their home is as promised.

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 12 of 29

(16 of 34)

STATUTORY FRAMEWORK TILA is primarily a disclosure statute. See 11 U.S.C. 1601-1666j. It compels creditors extending credit to consumers to disclose the cost of credit using a standardized format and terminology defined by the Act and the Federal Reserve Board. Accurate information on the cost of credit must be given to the consumer prior to consummation of the transaction. Although TILA emphasizes disclosure of credit terms rather than direct regulation of credit, TILA does provide special protection to refinance transactions in which the creditor took a security interest in the consumers home. Consumers are given the right to cancel (i.e. rescind) for three business days after the transaction or until proper disclosures were made. The TILA rescission provisions reflect Congress desire to keep homeowners from placing their homes in jeopardy without a clear understanding of the risks and benefits of the transaction. U.S. Rep. No. 368, 96th Cong. 2d Sess. 28, reprinted in 1980 U.S.C.C.A.N. 236, 264 (this provision was enacted to give the consumer the opportunity to reconsider any transaction which would have the serious consequence of encumbering title to his home). Each person entitled to rescind must be given two copies of a rescission notice and the material disclosures. Reg. Z, 12 C.F.R. 226.23(b)(1); Official Staff Commentary on Regulation Z (OSC) 226.23(b)(1). The rescission notice must be provided on a model form, or substantially similar notice, and must include the information outlined in section 226.23(b)(1) including (v) The date the rescission period expires. Reg. Z, 12 C.F.R. 226.23(b)(2); Appx. H. The rescission period does not

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 13 of 29

(17 of 34)

begin to run until the required notice has been provided. Official Staff Commentary on Regulation Z (OSC) 226.23(b)(4). However, the right to rescind expires three years after the date of consummation. 15 U.S.C. 1635(f). Section 1635(a) states that the homeowner shall have the right to rescind the transaction by notifying the creditor of his intention to do so. After exercising his right to rescind, the creditor has 20 days after the receipt of the notice of rescission to return any money or property given to the homeowner and terminate the security interest in the property. 15 U.S.C. 1635(b). If the creditor violates section 1635(b) by failing to timely take the required steps to rescind the loan the homeowner may bring an action within one year from the date of the occurrence of the violations. The question presented in this case is whether a homeowner, who timely notified her creditor of her intent to rescind the home mortgage loan, must file a lawsuit for declaratory relief to enforce the rescission within three years of the transactions consummation. ARGUMENT I. The plain meaning of TILA, section 1635(a), only requires homeowners to provide notice that they are exercising their right to rescind the transaction. The starting point for the courts inquiry should be the statutory language of 15 U.S.C. 1635(a). See Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 1030 (2004). It is well established that when the statutes language is plain, the sole function of the court, at least where the disposition required by the text is not absurd, is to enforce it according to its terms. Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000) (internal quotations omitted). A result will be deemed
6

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 14 of 29

(18 of 34)

absurd only if it is unthinkable, bizarre or demonstrably at odds with the intentions of its drafters. See In re Spradlin, 231 B.R. 254, 260 (Bankr. E.D. Mich. 1999) (citing Public Citizen v. Dept of Justice, 491 U.S. 440, 109 S. Ct. 2558, 105 L.Ed.2d. 377 (1989)); see also In re Philadelphia Newspapers, 599 F.3d 298, 304 (3d Cir. 2010) (When the words of a statute are unambiguous, then this first canon is also the last; judicial inquiry is complete) (citations omitted). Section 1635(a) provides in plain terms that a homeowner shall have a right to rescind a home-secured loan by providing notice to the creditor. Specifically, 15 U.S.C. 1635(a) provides: [t]he obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section together with a statement containing the materials disclosures required under this subchapter, whichever is later, by notifying the creditor, in accordance with regulations of the Board, of his intention to do so. Similarly, 12 C.F.R. 226.23, promulgated by the Federal Reserve Board states that: (2) To exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram or other means of written communication. Notice is considered given when mailed, when filed for telegraphic transmission or, if sent by other means, when delivered to the creditors designated place of business. Blacks Law Dictionary defines notify as 1. To inform (a person or group) in writing or by any method that is understood. Black Law Dictionary (9th ed. 2010).

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 15 of 29

(19 of 34)

Section 1635(f) sets forth a maximum time period under federal law in which the homeowner may exercise her right of rescission: An obligors right of rescission shall expire three years after the date of consummation of the transactionnotwithstanding the fact that the information and forms required under this section have not been delivered to the obligor. Nothing in the plain language of 15 U.S.C. 1625(a), (b) or (f) or Regulation Z requires homeowners to file a lawsuit in order to exercise their right of rescission. The statute is clear that the homeowner need only notify the creditor of their intent to rescind within three years of consummation of the transaction to invoke the creditors obligations to return monies and terminate the security interest. II. The creditors failure to comply with its obligations after the homeowner has rescinded her mortgage loan creates a cause of action with a one-year statute of limitation. Section 1635(b) sets forth the obligations of the parties after the homeowner has provided a timely notice of her intent to rescind. Within 20 days of receipt of the homeowners notice of rescission the creditor must return money and property given and terminate the security interest created by the transaction. 15 U.S.C. 1635(b). Upon performance of the creditors obligations, the homeowner must tender the property or the propertys value to the creditor. Id. The creditors failure to comply with its obligations under 15 U.S.C. 1635(b) is a violation of section 1635. Importantly, the sending a notice rescinding a loan transaction does not, in and of itself, give the homeowner grounds to file lawsuit. Only if the creditor does not timely and properly respond to the homeowners notice of rescission does a cause of action arise.

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 16 of 29

(20 of 34)

A statute of limitation that expires one year from the date of the occurrence of the violation. Properly analyzed the one-year statute of limitation attaches to the creditors failure to respond, as required, to the rescission notice (presumably on the twenty-first day after the notice of rescission). Applying this analysis, many courts have held that the one-year period for bringing a claim to enforce the creditors obligations under section 1635(b) begins to run only when the creditor rejects or fails to act upon the consumers rescission notice. See, e.g., Frazile v. EMC Mortgage Corp., 2010 WL 2331429, at *4 (11th Cir. June 11, 2010) (the one-year limitations period for violation of 1635(b) runs from twenty days after a plaintiff gives notice of rescission; plaintiff sought both rescission and damages for rescission violations, and decision does not differentiate between them); Jozinovich v. JP Morgan Chase Bank, 2010 WL 234895 (N.D. Cal. Jan. 14, 2010) (rescission claim timely if loan closed on May 10, 2006, where consumer mailed rescission letter on Feb. 23, 2009, even though he filed suit only on June 1, 2009); Herzog v. Countrywide Home Loans (In re Hunter), 400 B.R. 651, 659 (Bankr. N.D. Ill. 2009) (TILA does not preclude suit to enforce rescission after passing of three-year period, as long as consumer timely exercised right to rescind within three years); Buick v. World Sav. Bank, 637 F. Supp. 2d 765 (E.D. Cal. 2008) (rescission claim was timely where it was filed within a year after request for rescission); Williams v. Saxon Mortgage Servs., 2007 WL 2828752, at *3 n.6 (S.D. Ala. Sept. 27, 2007) (one-year period to file rescission case runs from 20 days after consumer gives rescission notice); Hernandez v. Hilltop Fin. Mortgage, 622 F. Supp. 2d 842 (N.D. Cal. 2007) (one-year period to file suit runs from 20th day after rescission notice, not later date when creditor faxed letter denying
9

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 17 of 29

(21 of 34)

rescission, but equitable tolling makes suit timely); Percival v. Am. Home Mortgage Corp., 469 F. Supp. 2d 409, 412 (N.D. Tex. Jan. 16, 2007) (limitations period for rescission is one year from end of creditors twentyday period to respond to rescission letter); McCarthy v. Long Beach Mortgage Loan Trust, 451 F. Supp. 2d 16, 39-41 (D.D.C. 2006) (action seeking rescission must be filed within one year after date creditor refuses to effectuate rescission, or twenty days from its receipt of rescission notice, whichever is earlier; finding rescission complaint timely where rescission notice was sent March 26, 2004 on loan that closed April 2, 2001, and consumer filed suit on March 30, 2005); Ralls v. Bank of New York (In re Ralls), 230 B.R. 508 (Bankr. E.D. Pa. 1999) (rescission claim allowed where notice of rescission sent within three years and suit filed less than one year later, even though suit was filed outside three-year period); Mayfield v. Vanguard Sav. & Loan Assn, 710 F. Supp. 143 (E.D. Pa. 1989) (violation of failing to honor the consumers exercise of the right to rescind occurs on the 21st day after creditors receipt of the notice). Thus, it is permissible to file a lawsuit to enforce rescission rights outside of the three-year rescission period so long as the homeowners notice of rescission was timely sent. III. Miguel v. Country Loan Funding, 309 F.3d 1161 (9th Cir. 2002), does not support the District Courts opinion. The District Court erroneously relies on Miguel v. Country Funding Corp., 309 F.3d 1161 (9th Cir. 2002), to support its conclusion that a lawsuit seeking to enforce a homeowners rescission rights must be filed within three years of the consummation of the transaction. In fact, Miguel supports the opposite view. In Miguel, the consumer sent a rescission notice to the banks agent within the three-year period but did not send a rescission notice
10

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 18 of 29

(22 of 34)

to the bank. Nor did the consumer serve the bank with the lawsuit seeking rescission, which could have served as notice of rescission, within that period. While some early language in the opinion refers in passing to claims filed more than three years after consummation, the section of the opinion that addresses the heart of the question makes it crystal clear that the consumer has one year after sending the rescission notice to file suit, even if that means that suit is filed more than three years after consummation: Miguel argues that she should have been allotted an additional year in which to file suit after the expiration of the three-year period afforded by the statute. While Miguel is correct that 15 U.S.C. 1640(e) provides the borrower one year from the refusal of cancellation to file suit, that is not the issue before us. Rather, the issue is whether her cancellation was effective even though it was not received by the Bank-the creditor-within the three-year statute of repose. Nor do the facts that the Banks servicing agent, Countrywide, was served within the extended three-year rescission period and that the Bank was added as a defendant well in advance of the expiration of 1640's one-year statute of limitations for suing on a 1635 failure-to-effect-rescission claim alter the jurisdictional landscape. The Bank was not required to cancel the loan because Miguel did not notify the Bank of cancellation within the limited three-year period. Because cancellation was not effected during the three-year period, the additional year statute of limitations provided by 1640 is irrelevant; it relates to the time for filing suit once cancellation has been wrongly refused. 15 U.S.C. 1635(f). In this case, Miguel did not provide the Bank with notice of cancellation within the threeyear statutory period, so the Bank could not have wrongly refused Miguel's request to cancel. Therefore, 1640 does not apply. 309 F.3d 1161, 1165 (9th Cir. 2002) (emphasis added). Contrary to at least one district courts interpretation, there is nothing in the Miguel opinion that

11

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 19 of 29

(23 of 34)

suggests that this rule applies only to claims seeking damages for rescission violations, as opposed to claims for rescission itself. See Falcocchia v. Saxon Mortgage, Inc., 2010 WL 582059, at *6 (E.D. Cal. Feb. 12, 2010). The language of Miguel quoted above refers to the 1635 failure-to-effect rescission claim, and the Courts opinion never even mentions a TILA damages claim. A second decision of this Court, King v. California, 784 F.2d 910 (9th Cir. 1986), is consistent with the view that the consumer must rescind within the three-year period, and has one year after that to file suit if the creditor refuses to perform its rescission obligations. In a brief passage, the decision states that Kings claim for rescission of one of her loans was barred by the three-year limitation because the period applicable to King began in June 1979 and expired in June 1982, more than a year before she filed suit. Id. at 913 (emphasis added). While the opinion does not analyze the interplay between the three-year period and the one-year period in any detail, it explains that the consumer could have filed suit up to, but not more than, a year after rescinding. IV. TILAs disclosure requirements and rescission rights are critical consumer protections that serve as the bulwark against deception and fraud in the mortgage industry. A. TILAs critical role of consumer protection in the mortgage markets.

As the result of deregulation and preemption of state laws applicable to major players, the mortgage marketplace of the 21st century provides few substantive protections for homeowners against creditor overreaching, abuses, and even fraud. In times of complex mortgage financing terms, disclosures required by TILA and their concomitant enforcement right, have

12

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 20 of 29

(24 of 34)

been the only tool available to protect borrowers from fraud, deception and abuse. These disclosureswhile often inadequate1have nevertheless been the only legal protection applicable to the complex and risky mortgages that have dominated mortgage lending in the past decade. These complicated products typically share in common a variable rate component as part of the systematic shifting of risk from lenders to borrowers. By 2006 adjustable-rate mortgages (ARMs) accounted for 80% of all subprime mortgage originations.2 The interest rate on most of these ARMs never drops below their initial rate. The most common ARMs referred to as the 2-28s or 3-27shave a fixed interest rate for two or three years and then adjust for the remaining years with reference to an index.
1

William C. Apgar & Christopher E. Herbert, U.S. Dept of Hous. & Urban Dev., Subprime Lending and Alternative Financial Service Providers: A Literature Review and Empirical Analysis 2.2.3, at 1-15 (2006) (Unfortunately, given the bewildering array of mortgage products available, even the most sophisticated borrower will find it difficult to evaluate the details of a mortgage.); James M. Lacko & Janis K. Pappalardo, Fed. Trade Commn, Improving Consumer Mortgage Disclosure: An Empirical Assessment of Current and Prototype Disclosure Forms, at ES-11 (2007), available at www.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf (prime borrowers have difficulty answering questions about their loans; difficulty increases as loan becomes more complex); Wiliam C. Apgar, Allegra Calder, & Gary Fauth, Jt. Ctr. for Housing Studies, Harvard University, Credit, Capital and Communities: The Implications of the Changing Mortgage Banking Industry for Community Based Organizations 40, 5051 (Mar. 2004), available at www.jchs.harvard.edu/publications/communitydevelopment/ccc04-1.pdf (discussing inability of even sophisticated consumers to understand mortgage products). 2 Deborah N. Goldstein & Jamie Z. Goodson, Comments of the Center for Responsible Lending on Proposed Interagency Guidance 2 (Mar. 29, 2006), available at www.ots.treas.gov/docs/9/962469.pdf.
13

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 21 of 29

(25 of 34)

Other ARMs are interest-only ARMs or payment option ARMs. The Government Accountability Office estimated that these alternative mortgage products accounted for 30% of mortgage originations in 2005.3 For both interest-only and payment option ARMs, there is often a period of time in which the payment is fixed but the interest rate varies, leading to negative amortization and considerable growth in the mortgage principal. Brokers and lenders have used the complex nature of these products and the chasms in the existing disclosure requirements to mislead consumers

Govt Accountability Office, GAO No. 06-1021, Alternative Mortgage Products: Impact on Defaults Remains Unclear, but Disclosure of Risks to Borrowers Could Be Improved 3 (2006), available at www.gao.gov/new.items/d061021.pdf. See also Joint Ctr. for Hous. Studies, State of the Nations Housing 2007, at 17 (payment option ARMs accounted for 12% of all mortgage originations in 2006).

14

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 22 of 29

(26 of 34)

and make patently unaffordable and abusive mortgages.4 As a result, these complex loans foreclose at far higher rates than fixed-rate mortgages.5
4

See, e.g., Andrews v. Chevy Chase, 240 F.R.D. 612 (E.D. Wis.2007) (describing payment option ARM sold as fixed rate when interest only fixed for one month, although payments fixed for a year), revd and remanded on other grounds, 545 F.3d 570 (7th Cir. 2008); Maganallez v. Hilltop Lending Corp., 505 F. Supp. 2d 594 (N.D. Cal. 2007) (interest increased every month for the first year of a loan from 6.722% to 8.132% that refinanced a fixed-rate mortgage of $320,000 at 5.125% and a line of credit of $30,000 at 7.25%); Fed. Trade Commn v. Chase Fin. Funding, Inc., No. SACV04-549, Complaint at 4 (C.D. Cal. May 12, 2004), available at www.ftc.gov/os/caselist/0223287/040602comp0223287.pdf (describing payment option ARM); Govt Accountability Office, GAO No. 06-1021, Alternative Mortgage Products: Impact on Defaults Remains Unclear, but Disclosure of Risks to Borrowers Could Be Improved 22 (2006) (describing advertisement for payment option ARM that promised 45% reduction in monthly mortgage payments and interest rate of 1.25%, interest rate of 1.25% only applied for first month, and this fact disclosed in much smaller print on second page), available at www.gao.gov/new.items/d061021.pdf. 5 See, e.g., Ellen Schloemer, Wei Li, Keith Ernst & Kathleen Keest, Ctr. for Responsible Lending, Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners 21 (Dec. 2006), available at www.responsiblelending.org/pdfs/foreclosure-paper-report-2-17.pdf; Roberto Quercia, et al. The Impact of Predatory Loan Terms on Subprime Foreclosures: The Special Case of Prepayment Penalties and Balloon Payments 2829 (Jan. 2005), available at www.kenanflagler.unc.edu/assets/documents/foreclosurepaper.pdf (subprime refinance ARMs are 50% more likely than fixed-rate subprime refinance loans to result in foreclosure). Cf. Keith Ernst, Ctr. For Responsible Lending, Case Study in Subprime Hybrid ARM Refinance Outcomes (Feb. 21, 2007) (less than three years out, 8.5% of 106 hybrid subprime ARMS made by Option One in 2004 had been foreclosed on), available at www.responsiblelending.org/issues/mortgage/briefs/page.jsp?itemID=31730 766. Cf. Subprime and Predatory Mortgage Lending: New Regulatory Guidance, Current Market Conditions and Effects on Regulated Financial Institutions: Hearing Before the Subcomm. on Financial Institutions and Consumer Credit of the H. Comm. On Financial Services, 110th Cong., 1st
15

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 23 of 29

(27 of 34)

As TILA disclosures are all that consumers have to protect themselves from complex, dangerouseven abusivemortgage products; creditors are required to comply strictly with these disclosure requirements. TILAs right of rescission is the most effective means to enforce the disclosures required to be provided to homeowners before they borrow against their house. Indeed, Congress has reiterated the importance of the extended right of rescission at least three separate times since the original enactment of TILA in 1968.6

Sess. (2007), available at http://financialservices.house.gov/hearing110/htpollock032707.pdf (testimony of Alex J. Pollock, Resident Fellow, American Enterprise Institute) (Subprime ARMs have 50% higher serious delinquencies than subprime fixed-rate loans (9% vs. 6%). Subprime ARMs have six times the serious delinquencies of prime ARMs (9% vs. 1.45%). Prime ARMs have twice the serious delinquencies of prime fixed-rate loans (1.45% vs. 0.7%).). 6 In 1980, when Truth in Lending Simplification was passed, it reinforced the right of consumers to both exercise the extended right rescission and bring actions for statutory damages for the same violations. S. Rep. No. 368, 96th Congress, 2d Sess. 28 at 29 reprinted in 1980 U.S.C.C.A.N. 236, 265 (the bill explicitly provides that a consumer who exercises his right to rescind may also bring suit under the act for other violations not relating to rescission). When the HOEPA provisions were passed in 1994, Congress deliberately made the violations of HOEPAs restrictions material disclosures under the statute, thus automatically making those grounds for the extended right of rescission. See the last clause in 16 U.S.C. 1602(u). Again in 1995 when changes to the right of rescission were negotiated and the time limitation for exercising the right of rescission was rewritten in section 1635(f), Congress made sure to provide special protections for rescissions in the face of foreclosure by establishing a much lower tolerance for those situations. See 16 U.S.C 1635(i).
16

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 24 of 29

(28 of 34)

B.

Rescission rights are a critical means of ending mortgage fraud.

TILAs rescission provisions are critical protection against fraud and bait-and-switch tactics in the mortgage market. When the rescission right operates properly, consumers have three days after closing to carefully evaluate the transaction away from the pressure of the closing. They can determine whether the loan terms in fact match those promised, and whether the loan is affordable. If the loan does not match what was promised, or on reflection does not appear to be a wise decision, they can cancel it without cost. See Semar v. Platte Valley Fed. Sav. & Loan Assn, 791 F.2d 699 (9th Cir. 1986). The fact that consumers can rescind the transaction has the potential to deter lenders from offering unaffordable loans, or from baiting the consumer with one set of terms but delivering a loan on different terms. If lenders know that consumers will have the opportunity to cancel the transaction, they will be more likely to make sure that the loan actually meets the consumers needs. The potential of the rescission right to prevent irresponsible loans from being made also, however, gives lenders an incentive to downplay and undermine the rescission right. One way to do that is to misstate or fail to state the deadline for rescissionas alleged in this case. First Amended Complaint (FAC), 17. See Semar v. Platte Valley Fed. Sav. & Loan Assn, 791 F.2d 699 (9th Cir. 1986) (allowing rescission on this ground). Other ways to make the rescission right ineffective are to give the rescission notice to the consumer only after the deadline has passed, or have the consumer sign a statement at closing declining to rescind. See, e.g., Rand
17

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 25 of 29

(29 of 34)

Corp. v. Yer Song Moua, 559 F.3d 842 (8th Cir. 2009) (rescission period extended where, at closing, lender had borrowers sign a copy of the notice of right to cancel that included a statement that the three-day period had passed and that they were not exercising right to rescind); Basnight v. Diamond Developers, Inc., 146 F. Supp. 2d 754 (M.D.N.C. 2001) (rescission period extended where consumer entered into contract on Aug. 24 and notice of right to cancel was given on Sept. 8 but disclosed that rescission period expired on Sept. 4). Another way to undermine the right to rescind is to disclose the loan terms inaccuratelyif the consumer thinks that the loan terms are more favorable than they actually are, he or she is unlikely to rescind. For all of these reasons, TILA extends the usual three-day rescission period to as long as three years if the consumer has not been given notice of the right to rescind in accord with the Federal Reserve Boards regulations, or has been given inaccurate information, within certain tolerances, about certain material loan terms. 15 U.S.C. 1635(a). The interplay between the three-year period for rescission and the one-year period for filing suit is the issue before the Court in this appeal. Starting the deadline for cancellation is a critical part of notice of the rescission right. The Federal Reserve Board recently conducted an extensive program of consumer testing to determine whether consumers were able to understand the rescission notice. This testing revealed that consumers were consistently unable to determine the deadline for rescission when it was not stated on the notice. 7 Part of the difficulty relates to the Federal Reserve
7

ICF Macro, Design and Testing of Truth in Lending Disclosures for Rescission Notices (July 2010), pp. v, 8, 13-14, 18, available at http://www.federalreserve.gov/newsevents/press/bcreg/20100816e.htm.
18

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 26 of 29

(30 of 34)

Boards exceedingly complex definition of business day, which, for purposes of rescission, includes Saturdays even if the creditors offices are not open, and includes only certain listed federal holidays even if businesses are closed on other holidays. See Regulation Z, 12 C.F.R. 226.2(a)(6); Official Staff Commentary to Regulation Z 226.2(a)(6)-2. The importance of the rescission right and other deterrents against irresponsible lending has never been clearer than in the current mortgage crisis. Given the requirement that TILA be liberally construed in favor of the consumer, the rescission right should be strictly enforced as a means of deterring irresponsible lending. See King v. California, 784 F.2d 910, 915 (9th Cir. 1986); accord Bragg v. Bill Heard Chevrolet, Inc., 374 F.3d 1060, 1065 (11th Cir. 2004); Inge v. Rock Fin. Corp., 281 F.3d 613, 621 (6th Cir. 2002).

CONCLUSION For the foregoing reasons, the decision of the District Court should be reversed. Date: November 4, 2010 Respectfully submitted: _________________________ Tara Twomey, Esq. National Consumer Law Center 7 Winthrop St. Boston, MA 02110 (831) 229-0256

19

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 27 of 29

(31 of 34)

Addendum 15 U.S.C. 1635(a) (a) Disclosure of obligors right to rescind Except as otherwise provided in this section, in the case of any consumer credit transaction (including opening or increasing the credit limit for an open end credit plan) in which a security interest, including any such interest arising by operation of law, is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section together with a statement containing the material disclosures required under this subchapter, whichever is later, by notifying the creditor, in accordance with regulations of the Board, of his intention to do so. The creditor shall clearly and conspicuously disclose, in accordance with regulations of the Board, to any obligor in a transaction subject to this section the rights of the obligor under this section. The creditor shall also provide, in accordance with regulations of the Board, appropriate forms for the obligor to exercise his right to rescind any transaction subject to this section. (b) Return of money or property following rescission When an obligor exercises his right to rescind under subsection (a) of this section, he is not liable for any finance or other charge, and any security interest given by the obligor, including any such interest arising by operation of law, becomes void upon such a rescission. Within 20 days after receipt of a notice of rescission, the creditor shall return to the boligor any money or property given as earnest money, downpayment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction. If the creditor has delivered any property to the
1

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 28 of 29

(32 of 34)

obligor, the obligor may retain possession of it. Upon the performance of the creditors obligations under this section, the obligor shall tender the property to the creditor, except that if return of the property in kind would be impracticable or inequitable, the obligor shall tender its reasonable value. Tender shall be made at the location of the property or at the residence of the obligor, at the option of the obligor. If the creditor does not take possession of the property within 20 days after tender by the obligor, ownership of the property vests in the obligor without obligation on his part to pay for it. The procedures prescribed by this subsection shall apply except when otherwise ordered by a court. (f) Time limit for exercise of right An obligors right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first, notwithstanding the fact that the information and forms required under this section or any other disclosures required under this part have not been delivered to the obligor, except that if (1) any agency empowered to enforce the provisions of this subchapter institutes a proceeding to enforce the provisions of this section within three years after the date of consummation of the transaction, (2) such agency finds a violation of this section, and (3) the obligors right to rescind is based in whole or in part on any matter involved in such proceeding, then the obligors right of rescission shall expire three years after the date of consummation of the transaction or upon the earlier sale of the property, or upon the expiration of one year following the conclusion of the proceeding, or any judicial review or period for judicial review thereof, whichever is later. 1640 (f) Good faith compliance with rule, regulation, or interpretation of Board or with interpretation or approval of
2

Case: 10-16487

11/04/2010

ID: 7535062

DktEntry: 10-3

Page: 29 of 29

(33 of 34)

duly authorized official or employee of Federal Reserve System No provision of this section, section 1607(b) of this title, section 1607(c) of this title, section 1607(e) of this title, or section 1611 of this title imposing any liability shall apply to any act done or omitted in good faith in conformity with any rule, regulation, or interpretation thereof by the Board or in conformity with any interpretation or approval by an official or employee of the Federal Reserve System duly authorized by the Board to issue such interpretations or approvals under such procedures as the Board may prescribe therefor, notwithstanding that after such act or omission has occurred, such rule, regulation, interpretation, or approval is amended, rescinded, or determined by judicial or other authority to be invalid for any reason.

Case: 10-16487

11/04/2010 ID: 7535062 DktEntry: 10-4 Office of the Clerk

Page: 1 of 1

(34 of 34)

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT P.O. Box 193939 San Francisco, California 94119-3939 Molly C. Dwyer
Clerk of Court

(415) 355-8000

NOTICE OF APPEARANCE OF COUNSEL or RE-ASSIGNMENT OF COUNSEL WITHIN THE SAME OFFICE

NOTE: To secure your input, you should print the filled-in form to PDF (File > Print > PDF Printer/Creator). 10-16487 9th Circuit Case Number(s)

Case Name:

Kathryn McOmie-Gray

v. Bank of America Home Loans

The National Consumer Law Center The Clerk will enter my appearance as counsel on behalf of: Appellant Appellee Petitioner Respondent Amicus Curiae Intervenor Appellant/Cross-Appellee Appellee/Cross-Appellant

Check if you are lead counsel. Lead counsel must be designated if a party is represented by more than one attorney or law firm. Re-Assignment. (Optional) This case has been re-assigned to me from another attorney in my office (for ex., the Federal Public Defenders Office, OIL, or a law firm). Enter name of counsel you are replacing below. I am replacing (name of counsel):
Signature (use "s/" format) /s Tara Twomey

Date 11/03/10

Name

Tara Twomey

National Consumer Law Center

Address 7 Winthrop Square

City State Zip Code

Boston

MA

02110-1245

Phone Number (including area code)