Court: District Court, E.D. New York; August 8, 2012; Federal District Court
Plaintiffs Servet and Fatma Kahraman have filed a lawsuit against their mortgage lender, Countrywide Home Loans, Inc., alleging failure to provide necessary disclosures and misrepresentation of income during the refinancing process of their mortgage. They seek rescission of the refinanced loan, along with statutory and actual damages, and attorney fees. Countrywide has moved for summary judgment on the federal claims, while the Kahramans have requested to amend their complaint.
The court granted Countrywide's motion for summary judgment, dismissing all federal claims with prejudice. As a result, the state and common-law claims were also dismissed due to the court's decision to decline supplemental jurisdiction, rendering the Kahramans' amendment request moot.
Factually, in July 2006, the Kahramans refinanced a mortgage originally for $424,000, with a payoff figure of $341,682.44. They allege that Countrywide misrepresented Servet Kahraman's income as $8,000 on the loan application signed at closing, claiming that this figure was added without their consent from an earlier application which did not include it. They also assert that they only received one copy of the "Notice of Right to Cancel" instead of the two copies they were entitled to. Following a decrease in income and subsequent default on the loan in 2008, the Kahramans attempted a loan modification but were unsuccessful. They sent a notice of rescission to Countrywide on July 8, 2009, shortly before the three-year anniversary of the loan closing.
The Kahramans initiated legal action on July 10, 2009, seeking rescission under the federal Truth in Lending Act (TILA) based on the alleged failure to receive two copies of the Notice of Right to Cancel. They later amended their complaint to include additional claims under TILA and the Credit Repair Organizations Act.
A claim has been made under New York's Deceptive Practices Act and for common law fraud by the Kahramans against Countrywide, which has filed a motion for summary judgment on all claims. The Kahramans oppose this motion and seek permission to amend their complaint again. Countrywide has responded supporting its motion and opposing the amendment request.
The standard for summary judgment requires that the evidence presented—such as pleadings and affidavits—shows no genuine issues of material fact, allowing one party to be entitled to judgment as a matter of law. A genuine issue exists if reasonable evidence could lead a jury to favor the nonmoving party. In evaluating a summary judgment motion, courts must interpret evidence favorably for the nonmoving party, avoiding credibility assessments. If the moving party shows no genuine issue exists, the nonmoving party must provide specific facts indicating a genuine trial issue. General doubts are insufficient; concrete evidence is necessary to create a factual dispute affecting the lawsuit's outcome.
Regarding the Truth in Lending Act (TILA), it was enacted to ensure meaningful disclosure of credit terms to consumers. The Federal Reserve Board is the primary authority for TILA interpretation. TILA grants consumers the right to rescind certain credit transactions involving their primary dwelling until three business days after the transaction, receipt of rescission notice, or delivery of required disclosures, whichever is latest.
A borrower who does not receive specific disclosures regarding their transaction has the right to rescind for three years, as stipulated under the Truth in Lending Act (TILA). This right is activated when a creditor fails to provide clear and conspicuous disclosures about the security interest in the borrower's dwelling, the rescission right, procedures for exercising rescission, and the effects and expiration of rescission. The creditor is also required to make all material disclosures, including the annual percentage rate and total payment amounts.
In the case of the Kahramans, their complaint seeks broader rescission rights than TILA permits. They aim to rescind a $121,000 mortgage from Countrywide Home Loans, Inc., relating to a refinancing transaction from July 15, 2006. However, their allegations pertain only to this refinancing and not their original loan, which had a remaining balance of $341,682.44 at the time of refinancing.
TILA stipulates that the right to rescind does not apply to refinancing by the same creditor, except for amounts exceeding the original loan's unpaid principal balance, earned unpaid finance charges, and refinancing costs. Hence, the Kahramans were only entitled to rescind the portion of the new loan that exceeded the prior loan balance. The plaintiffs' assertion that Countrywide's Right to Cancel Notice implied they could cancel the entire loan is deemed erroneous, as TILA Section 226.23(f)(2) governs their rights. Consequently, their rescission claim is limited to the amount that exceeds the original loan's balance and related costs.
The Court finds the Kahramans' Truth in Lending Act (TILA) claim untimely, specifically regarding their rescission claim. The Kahramans filed their suit well beyond the three-day rescission period outlined in 15 U.S.C. § 1635(a). They contend they are entitled to an extended rescission period of three years due to two alleged errors by Countrywide during closing: (1) the failure to provide two copies of the Notice of Right to Rescind (NRR), and (2) using an incorrect form that did not clearly inform them of their rescission rights.
Despite their claims, the Court concludes that neither error justifies an extension of the rescission period. Regarding the first allegation, the Kahramans signed a statement at closing acknowledging receipt of two copies of the NRR and one copy of the Federal Truth in Lending Disclosure Statement. Although they assert they received only one copy, their signatures create a presumption of full delivery, which the Court does not need to contest. The Second Circuit has indicated that "perfect disclosure" is not mandatory under TILA, emphasizing the requirement for "meaningful disclosure" instead.
Additionally, case law supports the notion that receiving one copy of the NRR, rather than two, does not extend the rescission period. Courts have consistently ruled that minor technical failures, such as not providing multiple copies, do not excuse a borrower from their obligations under TILA. Thus, the Kahramans' TILA rescission claim is deemed untimely.
The Kahramans are not entitled to an extended rescission period as they received adequate disclosure regarding their rights under the Truth in Lending Act (TILA), including their right to rescind. Despite their attempt to challenge their written acknowledgment of receiving multiple copies of the Notice of Right to Rescind (NRR), it is undisputed that they received at least one NRR that accurately conveyed their rights. The Kahramans failed to demonstrate that receiving only one copy negatively impacted their rights. Additionally, Servet Kahraman indicated a lack of desire to cancel the loan, suggesting their intent was to leverage the threat of rescission for loan modification purposes.
As an alternative argument for extending the rescission period, the Kahramans claimed that Countrywide used the incorrect form to notify them of their rescission rights, asserting that a form based on Model Form H-9 should have been used instead of H-8. However, TILA does not mandate a specific form for rescission rights disclosure; it allows the use of an appropriate written notice. Using a form modeled after H-8 does not inherently invalidate the rescission rights, provided it clearly informs the mortgagors of their rights and the consequences of rescission. The H-8 form must adequately explain that the transaction results in a mortgage, that the mortgagors can rescind within three days without cost, and that rescinding also cancels the mortgage. The court concluded that Countrywide's disclosure met TILA's requirements.
The use of a refinancing form that meets specific requirements does not trigger the three-year extended rescission period under TILA, as established in Stallman v. Countrywide Home Loans. In this case, Countrywide's H-8 form provided necessary information. Plaintiffs claim the form is ambiguous since "this transaction" could imply a right to rescind the entire $424,000 loan, while only the amount exceeding the original mortgage can be rescinded. However, the Santos-Rodriguez court found that the H-8 form clearly indicated rescission applied only to the refinance transaction, rejecting the plaintiffs' interpretation. The court concluded that a reasonable refinancing borrower would understand that rescission pertains only to the current transaction, not previous mortgages. As such, the H-8 form adequately informed the Kahramans of their rescission rights, affirming that their claim was untimely and granting Countrywide summary judgment on this issue.
Additionally, the Kahramans asserted a violation of the Credit Repair Organizations Act (CROA) against Countrywide, alleging manipulation of Servet Kahraman’s income on their loan application. Even if true, the Kahramans would not be entitled to relief under CROA, which aims to ensure informed decision-making for consumers and protect against misleading statements regarding creditworthiness. Under CROA, it is prohibited to make untrue or misleading statements about a consumer's credit capacity in the context of applying for credit.
A plaintiff can claim damages under the Credit Repair Organizations Act (CROA) for any actual damages sustained or any amounts paid to a credit repair organization, along with potential punitive damages under specific conditions. There is a split among federal district courts regarding whether Section 1679b applies to traditional lending institutions like Countrywide. Some cases, such as Hayrioglu and Enriquez, have determined that Countrywide is not considered a credit repair organization under CROA. The Kahramans did not allege that Countrywide provided credit repair services, which is essential for claiming relief.
Even if Section 1679b applied, the Kahramans' claim against Countrywide for misrepresenting income would not hold, as overstating income during the internal loan approval process does not constitute a violation. The court affirms that such misrepresentation lacks a sensible interpretation of the statutory language. Furthermore, the Kahramans did not demonstrate that Countrywide's misrepresentation caused their injury; rather, it improved their credit access. They signed a disclosure statement acknowledging their loan obligations, which indicated they undertook a credit obligation they recognized would be challenging to manage. Their financial struggles and subsequent injuries, including economic loss and mental anguish, occurred two years later, lacking sufficient evidence to link those harms directly to Countrywide's actions in facilitating the loan.
Countrywide’s motion for summary judgment regarding the Kahramans’ claim under the Consumer Credit Protection Act (CROA) is granted. The Kahramans’ remaining claims allege violations of New York’s Deceptive Practices Act and fraudulent inducement to refinance their home. The court, following precedent, declines to exercise supplemental jurisdiction over these state law claims, having dismissed all claims over which it had original jurisdiction. The court emphasizes that retaining jurisdiction over state claims is inappropriate when there is no supplemental jurisdiction basis. As a result, the federal law claims are dismissed with prejudice, while the state law claims are dismissed without prejudice. Additionally, Countrywide’s motion is granted concerning the Kahramans’ request for statutory damages under the Truth in Lending Act (TILA), as this claim was filed beyond TILA's one-year statute of limitations. The court notes that this situation differs from past cases where courts denied summary judgment due to contested receipt of TILA disclosures, but it declines to adopt a strict liability standard in this instance. The Clerk is instructed to close the case file upon entry of judgment.
Under the Truth in Lending Act (TILA), even minor or technical violations can lead to rescission liability for creditors. Various courts have ruled that the rescission period can extend to three years if two copies of the Notice of Right to Rescind (NRR) are not provided. However, some courts have debated whether TILA allows for an extended rescission period based on specific violations, particularly focusing on the singular use of the term "notice" by the Federal Reserve Board, which suggests that delivering one copy does not trigger an extension.
While strict liability interpretations of TILA may support an extended rescission period in cases of technical errors, other circuits have held that technical inaccuracies unlikely to mislead consumers do not warrant statutory damages. TILA's standards are generally less stringent than requiring perfect notice, reflecting Congress's intent to allow for honest mistakes in disclosure obligations. Even assuming a borrower could demonstrate valid grounds for an extended rescission period, equitable considerations may prevent the enforcement of that right, as rescission remains an equitable remedy subject to common law principles, which include concerns about fairness and potential inequity to lenders. Courts may deny enforcement if it would unjustly harm the lender's rights or lead to significant inequities.
The Kahramans did not claim any damages from Countrywide’s minor oversights or assert that they were not notified of their right to rescind the transaction. Weighing Countrywide's interest in enforcing the contract against the Kahramans' intent to exploit technical violations under the Truth in Lending Act (TILA) for contract modification, rescission is deemed an inequitable remedy. Previous cases support this view, indicating that rescission is inappropriate when plaintiffs do not demonstrate harm or lack of notification regarding their right to rescind. The Kahramans’ signed loan application reflects a significant reduction in their monthly housing expenses, suggesting that Countrywide’s actions may have prevented foreclosure. Consequently, the plaintiffs' motion to file a Second Amended Complaint to enhance their state law claims is considered moot.
