Class Action Requirements of FRCP Rule 23 Satisfied in Class Action Complaint Allegation Violations of federal Truth in Lending Act (TILA), Bank’s TILA-Mandated Disclosure Statements Failed Adequately to Inform Borrowers of Loan Payment Schedule and Interest Rate, and Class Action Plaintiffs may seek Rescission and Attorney Fees, but not Statutory Damages, Wisconsin Federal Court Holds
Plaintiffs filed a putative class action against Chevy Chase Bank for violations of the federal Truth in Lending Act (TILA), 15 U.S.C. 1601 et seq., in that the Bank allegedly failed to make the requisite disclosures in connection with adjustable rate mortgage loans. Andrews v. Chevy Chase Bank, FSB, 240 F.R.D. 612, 614 (E.D. Wis. 2007). Defense and plaintiffs’ counsel filed cross-motions for summary judgment, and plaintiffs moved the court to certify the litigation as a class action; the district court granted in part and denied in part each of the summary judgment motions, and granted class action status to the TILA complaint.
Plaintiffs secured a loan from Chevy Chase bank in June 2004 to refinance their Wisconsin home. Andrews, at 614. The Bank’s initial disclosures included a handbook on adjustable rate mortgages (ARMs), an ARM disclosure and a preliminary disclosure statement as required by TILA, id., at 615. Additional disclosures were provided at closing, including an Adjustable Rate Note (ARN), a Truth in Lending Disclosure Statement (TILDS) and an Adjustable Rate Rider (ARR), id. The class action complaint alleged that plaintiffs’ believed the interest rate and payments “were fixed for five years and became variable thereafter”; in fact, the payment was fixed but the interest rate was not. Id. As the district court explained at page 615, “The loan carried a discounted or ‘teaser’ interest rate of 1.950 percent, but that rate applied only to the first monthly payment, after which the interest rate increased every month according to a formula. As the interest rate increased, an ever increasing portion of the minimum monthly payment of $701.21 was needed to cover interest, and the minimum payment itself soon became insufficient to cover accrued interest.” The class action complaint alleged that the Bank’s disclosures failed to comply with TILA.
Preliminary to considering the cross motions for summary judgment, the district court noted that the purpose of TILA is “to assure meaningful disclosure of credit terms to enable consumers to become informed about the cost of loans and to compare the credit options available to them.” Andrews, at 615. TILA disclosures must be “clear and conspicuous”: “‘If a disclosure is capable of more than one plausible interpretation, it is not clear.’” Id., at 616 (citation omitted). If the interest rate is not fixed, then the Truth in Lending Disclosure Statement must inform the borrower of the variable rate feature of the loan, id. The disclosure must be understandable by an ordinary consumer, but its adequacy is measured objectively, id. Additionally, the First and Fifth Circuits have held that “a misleading disclosure is as much a violation of TILA as a failure to disclose at all.” Smith v. Chapman, 614 F.2d 968, 977 (5th Cir. 1980); Barnes v. Fleet Nat’l Bank, 370 F.3d 164, 174 (1st Cir. 2004) (quoting Smith v. Chapman).
As to the cross-motions for summary judgment, the district court first addressed plaintiffs’ claim that the loan payment schedule was not disclosed adequately. Andrews, at 616. TILA requires disclosure of “the number, amount and due dates or period of payments scheduled to repay the total of payments,” and if the loan involves a variable rate and/or variations in monthly payments, then the lender should “disclose the amount of any scheduled initial payments followed by an adjusted level of payments based on the initial interest rate.” Id. The court agreed with defense attorneys that the Bank properly disclosed 60 payments of $701.21 followed by 300 payments of $983.49, id., at 616-17, and “also properly based the adjusted level of payments on the initial interest rate,” id., at 617. However, the district court concluded that the Bank failed to disclose adequately the payment period – that is, that payments were due monthly, id. The court rejected defense arguments that TILA was satisfied because the disclosure statement provides “[t]his loan program allows you to select the type of payment you may make each month, in accordance with disclosures provided to you earlier,” and because other documents provided to the borrower indicated that payments were to be made monthly. Id.
(The author notes that the court’s conclusion seems inconsistent with its acknowledged obligation to view consider the disclosure objectively from the viewpoint of an ordinary consumer; it is difficult to imagine that anyone seeking a 30-year loan for a home purchase or refinance is not aware that mortgage payments are due monthly, and there is no other reasonable construction of the 360 payments conspicuously disclosed by the Bank. Certainly the borrower would not believe those payments were required on a daily, weekly or yearly basis.)
The district court also concluded that the Bank failed to disclose adequately “the cost of the loan as an annual percentage rate…and the loan’s variable interest rate feature,” Andrews, at 617-18. With respect to the Bank’s disclosure of the cost of the loan as an annual percentage rate, the court found “confusing” that the disclosure statement identified the APR as 4.047% but that “other information in [the] TILDS and other disclosures…strongly implied that the cost of the loan expressed as a yearly rate was 1.950 percent.” Id., at 618. The court’s conclusion was based on the fact that several statements by the Bank suggested that the interest rate on the loan was the 1.95% “teaser” rate, “which applied only to the first monthly payment.” Id., at 618-19. Accordingly, it found “defendant’s disclosure of the cost of the loan as an annual percentage rate was unclear.” Id., at 619.
Plaintiffs also alleged that the Bank did not clearly disclose that the loan had a variable interest rate feature, arguing that the Disclosure Statement could be read to “misleadingly imply” that the variable interest rate feature “did not take effect until after the first five years of the loan.” Andrews, at 619. The district court agreed, explaining that the Disclosure Statement described the loan as “5-year fixed” and immediately above this language stated that the interest rate was 1.95%, suggesting that the “teaser” rate was fixed for 5 years, with a variable interest rate thereafter. Id. Accordingly, the district court held that in this respect, too, the Bank violated TILA, id. In fact, the court found that the disclosure of the 1.95% interest rate itself violated TILA because it was not “directly related” to the information required to be disclosed, id., at 619-20. The court reasoned that TILA does not require disclosure of a loan’s interest rate, and that “the 1.950 percent figure had virtually no relation to any information required to be disclosed on the TILDS, much less a direct relation.” Id., at 620. To the contrary, the disclosure “would not be useful to an ordinary borrower because it would cause the loan to appear more attractive than it actually was and serve no useful purpose,” id.
The federal court agreed with defense attorneys that the Bank adequately disclosed “the consequences of negative amortization” because it “inform[ed] borrowers as to what would occur if they made only the minimum monthly payments.” Andrews, at 620.
The district court next addressed whether the remedies sought by the class action complaint – statutory damages, rescission, and attorneys fees – were available. The court first held that statutory damages were not available because TILA allows such damages only for violations of § 1635, but the district court’s conclusions were that the Bank violated § 1632 and § 1638(b). Andrews, at 620-21. The district court permitted plaintiffs to seek rescission, which in turn supported the prayer for attorney fees, id., at 621, but the author notes that the court’s analysis is brief and superficial, and fails to address any of the cases that hold rescission to be unavailable on a class-wide basis. See, e.g., McKenna v. First Horizon Home Loan Corp., 475 F.3d 418, 423 (1st Cir. 2007) (holding that “as a matter of law, class certification is not available for rescission claims, direct or declaratory, under the TILA”). A summary of McKenna may be found here.
Turning to plaintiff’s motion to certify a class action, the district court began with the defense argument that the class action complaint prays for rescission but “a TILA plaintiff seeking a declaratory judgment that she is entitled to rescission may not utilize the class action mechanism.” Andrews, at 621. The court recognized case authority that precludes rescission as a class-action remedy but refused to follow it, holding that “a TILA plaintiff seeking a declaration that she may rescind a loan may represent a class,” id., reasoning in part that “[d]enial of class action status would reward defendants who may have committed wrongs and leave victims who may have been wronged uncompensated,” id., at 621-22.
Turning to the requirements of Rule 23, the federal court found that Rule 23(a)(1)’s numerosity requirement was met because the lawsuit involved 7,000 loans, Andrews, at 622, and that Rule 23(a)(2)’s commonality test was satisfied because “whether defendant’s disclosures of the payment schedule, the cost of the loan as an annual percentage rate and the variable interest rate feature of the loan violated TILA is a question common to the class,” id. Plaintiffs’ class action claims were typical of the absent class members’ claims because they “arise out of the same documents and are based on the same legal theory,” id., at 623, thus satisfying the requirements of Rule 23(a)(3). And the adequacy of representation test in Rule 23(a)(4) was met because plaintiffs averred their “commitment to the class” and class counsel had experience in similar cases, id.
With respect to whether plaintiffs could establish a Rule 23(b)(2) or (b)(3) class, the district court recognized the “significant distinctions” between class action certified under these subsections, Andrews, at 623, and that “actions that qualify for class certification under subdivision (b)(2) should not generally be certified under subdivision (b)(3),” id. (citations omitted). The court concluded that defense arguments on the merits of the TILA claim “would be largely the same with respect to each class member” and thus the Bank “refused to act on grounds generally applicable to the class,” satisfying the requirements of Rule 23(b)(2). Id. The district court further held that declaratory relief would be an appropriate remedy for the class, id., at 623-24. Accordingly, the court granted plaintiffs’ motion for class certification, id., at 624.
NOTE: In considering the proper definition of the class, the district court explained at page 624 that “[t]he definition of a class must be precise enough to enable the court to determine whether at any given time a particular individual is or is not a member of the class” and that “[a] court must be able to resolve the question of an individual’s membership by reference to objective criteria.” (Citations omitted.)