Court: District Court, D. Connecticut; January 28, 2016; Federal District Court
Allyson Smith filed a legal action against Wells Fargo, N.A. concerning a mortgage refinancing agreement, asserting her right to rescind under the Truth in Lending Act (TILA) and alleging violations under the Connecticut Unfair Trade Practices Act (CUTPA). Smith claims she is entitled to rescind the transaction and seek damages due to Wells Fargo's failure to honor her rescission request. Wells Fargo's motion to dismiss contends that Smith received proper notice of her right to rescind and did not act within the three-day period allowed. It also argues that Smith’s CUTPA claims lack sufficient allegations of deceptive practices and that any additional disclosure requirements under CUTPA are preempted by TILA, the National Banking Act (NBA), and the Real Estate Settlement Procedures Act (RESPA).
The court granted Wells Fargo's motion to dismiss, finding that Smith did not plead facts indicating she exercised her right to rescind before it expired and failed to allege any deceptive acts necessary for a CUTPA claim. The court further noted that CUTPA claims requiring disclosures beyond those mandated by TILA, NBA, and RESPA would be preempted as well.
Smith's complaint included details of her refinancing discussions with Wells Fargo beginning in February 2012, the subsequent issuance of a Mortgage Kit with relevant documents, and specific disclosures related to her rights and the terms of the refinancing agreement, including a Notice of Right to Cancel which stipulated a rescission deadline of March 29, 2012.
Smith executed the Mortgage Kit documents on March 13, 2012, and returned them to Wells Fargo. On March 30, 2012, Wells Fargo approved her loan application, allowing her to skip the April 1, 2012, interest payment on the Raveis Loan, which had a principal balance of $125,957.92. Wells Fargo financed $126,648.85, including an additional $690.93 for a recording fee and the April interest payment. Smith stated the escrow balance on the Raveis Loan was $2,118.35, while the escrow balance on the refinanced loan was $2,613.90. On October 21, 2014, she sought to rescind the refinanced loan, but Wells Fargo denied her request. Subsequently, Smith initiated legal action.
In the legal standards, a motion to dismiss under Rule 12(b)(6) assesses the complaint's legal feasibility without weighing evidence. The court must accept the facts as true and determine if a plausible claim exists, following precedents from Ryder Energy Distribution Corp. and others. The complaint must provide factual support for the claims, moving beyond mere labels or conclusions.
Smith’s claims against Wells Fargo include: Count I, seeking enforcement of her rescission notice, arguing that her rescission period extended to three years due to inadequate notice under TILA (15 U.S.C. § 1635). Count II seeks damages for Wells Fargo’s refusal to honor her rescission request, which is uncontested if she was indeed entitled to rescind.
Count III asserts that Wells Fargo violated the Connecticut Unfair Trade Practices Act (CUTPA) by advertising "no closing costs or hidden fees" while actually including non-itemized costs. Additionally, Smith claims that Wells Fargo misrepresented the required escrow amount in her refinancing agreement.
Regarding the enforcement of rescission, the Truth in Lending Act (TILA) mandates clear disclosure of credit terms to protect consumers from unfair practices. TILA allows borrowers three business days to rescind a loan secured by their principal dwelling and requires lenders to provide conspicuous notice of this right. A failure to do so extends the rescission period to three years. In this case, Wells Fargo provided notice that Smith could rescind until March 29, 2012; however, Smith argues this notice was inadequate due to an incorrect expiration date. The ruling concludes that Smith's right to rescind ended on March 29, 2012, affirming that she received proper notice under TILA.
The three-day rescission period begins from the latest of three events: the transaction date, receipt of TILA disclosures, or receipt of the rescission notice. While TILA does not define "transaction consummation," it is generally understood as when the borrower becomes contractually obligated on the loan. Under Connecticut law, consummation occurs when both parties sign the contract. Thus, Connecticut law determines the timing and expiration of the rescission right in this case.
Smith signed the loan documents on March 13, 2012, thereby binding herself to the refinancing agreement. Upon signing, she had three days, until March 29, 2012, to rescind the agreement, and Wells Fargo provided her with approximately ten business days to do so, complying with the Truth in Lending Act (TILA). Smith argued that the loan was not consummated until March 30, 2012, when she received a call from Wells Fargo about loan approval; however, the court determined that the contract was formed when Smith signed and returned the documents, regardless of the approval process. The court noted that Wells Fargo’s mailing of the Mortgage Kit constituted an offer that was accepted upon Smith’s signing. Although Wells Fargo retained some rights to cancel the transaction, this did not invalidate the contract since a lender may be liable for damages if they refuse to disburse the loan after the contract is formed. Smith did not provide facts to suggest that Wells Fargo’s approval process was entirely within its control, indicating that the contract was not based on an illusory promise. The timing of acceptance—whether at signing or upon return of the documents—was not resolved, but it was agreed that Smith was notified of her rescission rights. Since she signed and returned the documents before March 26, 2012, she received proper notice, and her right to rescind expired on March 29, 2012. Consequently, her notice of rescission on October 21, 2014, was untimely, leading to the dismissal of her claim for enforcement of that right. Additionally, because Smith failed to adequately allege a right to rescind on that date, her claim for damages related to Wells Fargo’s refusal to honor her rescission request was also dismissed.
Count II is dependent on the outcome of Count I and fails due to Smith’s inability to state a claim in Count I. Count III alleges a violation of the Connecticut Unfair Trade Practices Act (CUTPA) by Wells Fargo for including non-itemized fees despite claiming “no closing costs or hidden fees.” Smith identifies two hidden fees: a $690.93 discrepancy between the original and refinanced loan balances, and a $495.55 difference in escrow balances. She argues that failing to disclose these amounts constitutes a deceptive act under Conn. Gen. Stat. § 42-110(b).
Wells Fargo counters that Smith does not sufficiently allege a CUTPA violation for two reasons: first, she fails to provide facts indicating any deceptive conduct by Wells Fargo; second, any potential CUTPA claim is preempted by federal laws including TILA, RESPA, and the NBA. To establish a CUTPA claim, a plaintiff must demonstrate (1) an ascertainable loss, (2) causation, and (3) an unfair or deceptive act in trade or commerce, as outlined in Edwards v. N. Am. Power. A CUTPA claim may be based on acts deemed unfair, deceptive, or both.
The interpretation of CUTPA is guided by the Federal Trade Commission Act, and the Connecticut Supreme Court has adopted the “cigarette rule,” which includes three criteria to determine whether a practice is unfair: (1) it offends public policy or is unlawful, (2) it is immoral, unethical, oppressive, or unscrupulous, and (3) it causes substantial consumer injury. Smith's claims regarding Wells Fargo’s promise of “no closing costs or hidden fees” do not satisfy these criteria. Specifically, she cannot demonstrate that the representation is unlawful or offensive to public policy, nor can she establish that the claim was immoral or unethical. Additionally, she fails to show any substantial injury resulting from the alleged deceptive practice.
Smith contends she was overcharged by $690.93. However, supporting documents reveal that her full principal balance of $126,648.85 was disclosed, and $637.93 was applied to her interest payment due on April 1, 2012. It is unclear how she experienced "substantial injury" from Wells Fargo settling this payment. Although she claims lack of precise information regarding a $53 recording fee, the existence of this fee was mentioned in the “Frequently Asked Questions” document included in the Mortgage Kit, and the amount was reasonable. Therefore, being charged a disclosed and reasonable fee does not constitute substantial injury. Regarding discrepancies in escrow balances, while they differ by $495.55, the escrow amount owed on the refinanced loan was clearly stated in the documents she submitted. Smith has not provided sufficient facts to demonstrate substantial harm from Wells Fargo’s actions, which were disclosed and ultimately beneficial to her. Although her failure to allege an “unfair practice” does not bar her from claiming a violation under the Connecticut Unfair Trade Practices Act (CUTPA), a deceptive trade practice claim must establish three elements: a misleading representation or omission by the defendant, a reasonable interpretation of the message by the plaintiff, and a likelihood that the misleading act affected the plaintiff's decisions. CUTPA does not necessitate proof of intent to induce reliance. Whether a misrepresentation occurred typically falls to the fact-finder, but a court can resolve this as a matter of law if no reasonable person would be misled. Additionally, a court may determine if the plaintiff has adequately alleged reliance on the misrepresentation, as a CUTPA claim requires that the defendant’s actions caused the plaintiff's injury, though specific monetary damages are not mandatory.
Smith's allegations under the Connecticut Unfair Trade Practices Act (CUTPA) focus on claims of deception by Wells Fargo regarding closing costs and hidden fees associated with her loan refinance. Smith contends that Wells Fargo falsely stated there were no hidden fees, as she was required to pay a principal balance greater than the original loan amount due. Specifically, the original Raveis Loan balance was $125,957.92, while the refinanced balance was $126,648.85, resulting in a perceived “hidden fee” of $690.93.
Wells Fargo counters that this amount includes a $53 recording fee and a $637.93 interest charge, both of which were disclosed and therefore not hidden. The recording fee was mentioned in the Mortgage Kit FAQ, and the interest charge was an obligation Smith was aware of and was deferred to the refinanced loan balance. Smith argues she should have had the option to pay the interest upfront rather than capitalizing it into the loan, but she does not claim Wells Fargo restricted her from doing so.
The court finds that without evidence of misrepresentation or that the charges were hidden fees, Smith cannot establish a CUTPA violation. Furthermore, even if a misrepresentation existed, Smith fails to demonstrate that it influenced her decision to refinance the loan, thus lacking the necessary causation for her claim.
Smith’s claim under the Connecticut Unfair Trade Practices Act (CUTPA) regarding the recording fee and interest payment fails due to insufficient pleading of a deceptive act or its causation of injury. Concerning the escrow balance, Smith alleges that Wells Fargo misrepresented her original escrow balance of $2,118.35 as $2,613.90, resulting in a monthly increase of $36.86 on her refinanced loan. Wells Fargo counters that the higher amount represents her current escrow obligation on the new loan, not a misrepresentation. They argue that Smith acknowledged this in the Mortgage Kit, which stated that the original escrow balance would be applied as a credit to her new escrow account, and any deficiency could be paid over 12 months or in full. Wells Fargo maintains that this disclosure negates any claims of deceptive practices regarding the escrow balance.
Additionally, Smith does not present any facts to indicate a refinanced loan cannot increase the required escrow balance, nor does she claim that the difference between the amounts constitutes a CUTPA violation. Furthermore, any reliance on the HUD-1 settlement statement is invalid as it is a post-transaction document and not relied upon during the transaction. Finally, even if Smith's claim could be based on an omission, it would be preempted by the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), and the National Bank Act (NBA), which supersede state law where inconsistent with their disclosure requirements. Smith does not contest this preemption effectively, only asserting that the NBA does not override consumer protection laws like CUTPA.
The Supremacy Clause of the U.S. Constitution establishes federal preemption of state laws, which can occur explicitly when Congress intends to occupy a field, or implicitly when federal interests are so dominant that state action is inhibited, or when state laws conflict with federal laws. Explicit preemption requires a "clear and manifest" intent from Congress, especially in areas traditionally regulated by states, such as consumer protection law, where compelling evidence of preemption is necessary. In contrast, preemption does not apply to laws that conflict with the National Bank Act (NBA).
In the case discussed, it is acknowledged that the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) preempt state law claims under the Connecticut Unfair Trade Practices Act (CUTPA) if those state claims require disclosures inconsistent with TILA and RESPA. Wells Fargo successfully argues that Smith's claims, which involve the itemization of costs on loan documents, are preempted because she does not claim Wells Fargo failed to meet TILA or RESPA disclosure requirements. Specific allegations regarding the itemization of costs like the Raveis Loan Escrow Balance and accrued interest are deemed preempted, as these requirements are not mandated by TILA or RESPA. While Smith concedes that TILA and RESPA preempt her claims, she asserts that the NBA does not.
Case law indicates that the National Bank Act (NBA) does not preempt generally applicable laws, including those related to consumer protection. The NBA empowers national banks to exercise all incidental powers necessary for banking operations, as affirmed in *Martinez v. Wells Fargo Home Mortgage, Inc.*, 598 F.3d 549 (9th Cir. 2010). The Office of the Comptroller of the Currency (OCC) can issue regulations defining these incidental powers, which have the same preemptive effect as federal statutes, per *Fidelity Federal Savings & Loan Association v. de la Cuesta*, 458 U.S. 141 (1982).
One OCC regulation, 12 C.F.R. 34.4, allows national banks to make real estate loans without adhering to state law limitations on disclosures and advertising. Courts have ruled that state requirements for specific disclosures are preempted by federal banking regulations, as seen in *Gutierrez v. Wells Fargo Bank, NA*, 704 F.3d 712 (9th Cir. 2012). The Ninth Circuit confirmed that 12 C.F.R. 34.4(a)(9) preempts state disclosure requirements in real estate transactions, although state claims unrelated to disclosure requirements may avoid preemption.
Smith's claim regarding itemized billing under the Connecticut Unfair Trade Practices Act (CUTPA) fails because it seeks disclosures that are preempted by the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), and the NBA, which collectively regulate national banks' interactions with consumers in real estate transactions. The conclusion is that requiring more disclosures than those mandated by these federal statutes contradicts legislative intent. Consequently, Wells Fargo’s motion to dismiss Smith's claims has been granted, with judgment entered in favor of the defendant. There's consensus that both parties are covered by TILA, and deceptive practices under CUTPA are considered unfair practices.
