Larry L. Jones Janet Jones v. Etrade Mortgage Corporation Etrade Bank

Citations: 397 F.3d 810; 2005 U.S. App. LEXIS 2239Docket: 03-55575

Court: Court of Appeals for the Ninth Circuit; February 11, 2005; Federal Appellate Court

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Larry and Janet Jones appeal a district court's dismissal of their Truth In Lending Act (TILA) complaint against E*Trade Mortgage Corporation and E*Trade Bank. The Ninth Circuit Court of Appeals, led by Circuit Judge Noonan, found that the Joneses had a valid claim and reversed the dismissal.

The Joneses allege that in September 2001, they began refinancing their mortgage with E*Trade, receiving a "40-Day Lock-in Disclosure and Agreement" which detailed a loan of $201,000 at an interest rate of 7.25%. The Agreement stipulated conditions for a "Rate Lock Fee," including the non-refundability of the fee if the loan failed to close for any reason, including the applicant's decision to cancel.

After E*Trade approved the loan, the Joneses received a "Notice of Right to Cancel," informing them of their right under TILA to cancel the loan within three business days and the requirement for E*Trade to refund any fees upon cancellation. On September 25, 2001, Jones sought to repricing the loan due to lower advertised rates but was told by a mortgage manager that cancellation would result in forfeiting the lock-in fee. The Joneses ultimately proceeded with the loan at the higher interest rate, with closing occurring on October 8, 2001, when the average rate was significantly lower.

Following their concerns, the Joneses filed a complaint with the Comptroller of the Currency, leading to a response from E*Trade, which clarified their policy on refunding the lock-in deposit only if the applicant did not qualify for the loan. The Ninth Circuit's decision to reverse the dismissal indicates recognition of potential violations of TILA regarding the notice of cancellation and refund policies.

On March 6, 2002, the Joneses initiated a class action lawsuit against E*Trade in the Northern District of Illinois, later transferred to the Southern District of California. They filed an amended complaint on August 15, 2002, alleging E*Trade's failure to provide the required "clear and conspicuous" disclosure of rescission rights under the Truth In Lending Act (TILA) and related California law. E*Trade's motion to dismiss was granted by the district court on March 14, 2003, which ruled that the Lock-in Agreement only addressed the refund of a $400 fee and did not conflict with the rescission rights detailed in the Notice of Right to Cancel. The TILA claim was dismissed with prejudice, while the California claim was dismissed without prejudice. The Joneses appealed.

The analysis outlined the purpose of TILA, emphasizing the need for clear disclosure of borrowers' rescission rights. Regulation Z mandates that creditors inform borrowers of the effects of rescission, including the obligation to return any money or property. The commentary specifies that consumers cannot be required to pay any amount as part of the credit transaction and must be refunded for any amounts paid, including finance charges and fees.

The Lock-in Disclosure and Agreement was deemed a part of the loan application process rather than a separate transaction, meaning E*Trade could not circumvent the rescission right, which includes the return of all funds and property. E*Trade's argument regarding the loan closing was found irrelevant, as the loan had indeed closed and the rescission right was not adequately communicated to the Joneses due to misleading representations by E*Trade staff.

The court concluded that the viability of the TILA claim also supported the corresponding state law claim. Consequently, the district court's judgment was reversed, and the case was remanded for further proceedings. An appendix noted that failure to return requested documents within three days would result in changes to the rate and ineligibility for the refund of the lock deposit.

The TrueLockTM program secures an interest rate and Value Price for a loan but does not guarantee loan closing. Preliminary approval is based on initial information, and the lender must verify property value, conditions, and other criteria before closing. If all requested documentation is provided within three calendar days and the loan is not approved due to credit or income issues, the lock-in fee will be refunded. However, if the loan fails to close for any other reason, including cancellation by the borrower, the fee is non-refundable. The lender is not obligated to extend the lock-in period if the loan does not close within that timeframe, and any delays do not affect this obligation. Upon expiration of the lock-in period, a new interest rate must be locked based on current market conditions or the original rate, whichever is higher.

Borrowers have a legal right to cancel the mortgage transaction within three business days following specific events, including the transaction date or receipt of disclosures. If canceled, the mortgage is void, and the lender must return any funds or property within 20 calendar days of receiving the cancellation notice. Borrowers can retain any funds received until the lender acts, and if the lender does not take possession of the funds within the timeframe, they may keep them without further obligation. To cancel, borrowers must notify the lender in writing by a specified deadline. All borrowers have the right to cancel, and one borrower's cancellation is effective for all. Additional notes indicate a discrepancy in the charged amount for the locked-in rate, which the Joneses attribute to a typographical error.