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IN RE: COMMUNITY BANK OF NORTHERN VIRGINIA MORTGAGE
LENDING PRACTICES LITIGATION; THIS DOCUMENT RELATES TO
ALL ACTIONS
MDL No. 1674, Case No. 02-cv-01201
UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF
PENNSYLVANIA, PITTSBURGH DIVISION
2002 U.S. Dist. Ct. Briefs 714286; 2006 U.S. Dist. Ct. Briefs LEXIS 2628
February 15, 2006
Trial Court Brief
VIEW OTHER AVAILABLE CONTENT RELATED TO THIS DOCUMENT: U.S. District Court:
Pleading(s)
Other: Miscellaneous Expert Witness Filing(s)
COUNSEL: [**1] J. Michael Vaughan - Lead Counsel.
R. Frederick Walters.
David M. Skeens.
Garrett M. Hodes.
WALTERS BENDER STROHBEHN & VAUGHAN, P.C., 2500 City Center Square, 12th & Baltimore,
P.O. Box 26188, Kansas City, MO 64196, (816) 421-6620, (816) 421-4747 (Facsimile).
Franklin R. Nix, Esq., LAW OFFICES OF FRANKLIN NIX, 1020 Foxcroft Road, N.W., Atlanta, GA
30327-2624, (404) 261-9759, (404) 261-1458.
Scott C. Borison, Esq., LEGG LAW FIRM, LLC, 5500 Buckeystown Pike, Frederick, MD 21703, (301)
620-1016, (301) 620-1018.
Michael Cartee, Esq., John Lloyd, Esq., CARTEE & LLOYD, 2210 Eighth Street, Tuscaloosa, AL 35401,
(205) 759-1554, (205) 758-9477.
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Knox McLaney, Esq., MCLANEY & ASSOCIATES, P.C., P. O. Box 4276, Montgomery, AL 36104, (334)
265-1282, (334) 265-2319.
John W. Sharbrough, Esq., THE SHARBROUGH LAW FIRM, 156 St. Anthony Street, P.O. Box 996, Mobile AL 36601-0996, (251) 432-6620, (251) 432-5297.
Andrew Hutton, Esq., 550 West C Street, Suite 1600, San Diego, CA 92101, (619) 274-2500, (619)
839-3489.
ATTORNEYS FOR MISSOURI AND ILLINOIS OBJECTORS.
JUDGES: Hon. Gary L. Lancaster
TITLE: OBJECTORS' BRIEF ADDRESSING THE VIABILITY OF THEIR CLAIMS UNDER THE
TRUTH IN LENDING ACT AND THE HOME OWNERSHIP AND EQUITY PROTECTION ACT
TEXT: The Objectors to the now vacated class action settlement in the matter captioned "In re Community
Bank of Northern Virginia and Guaranty National Bank of Tallahassee Second Mortgage Loan Litigation,"
Case No. 03-0425 ("Kessler"), hereby submit their brief which establishes the "viability" of their claims under the Truth in Lending Act ("TILA") and the Home Ownership and Equity Protection Act ("HOEPA"). n1
While the table of contents provides a detailed view of the structure of this brief, the introduction from pages
1 through 10 provide an overall summary of how these banks pervasively [**6] violated TILA and
HOEPA; Section II running from pages 11 to 39 provides a detailed review of TILA and HOEPA liability
and damages; and Section III, set forth on pages 39 to 58 details factually these two banks' multiple and class
wide violations of TILA and HOEPA and the substantial resulting damages.
n1 The "Objectors" consist of both objectors in the Kessler matter and borrowers that opted out of that
now-vacated nationwide class action settlement but which, for ease of reference, are simply referred to
herein as "Objectors." The viability of the TILA and HOEPA claims relates not only to this specific
matter but to all of the other matters concerning the lending practices of Community Bank of Northern
Virginia and Guaranty National Bank of Tallahassee consolidated before this Court. This brief addresses only the viability of the TILA and HOEPA claims and does not address the other claims asserted by the Objectors against the Banks such as claims under the Real Estate Settlement Procedures
Act ("RESPA") or the Racketeer Influenced and Corrupt Organizations Act ("RICO"), which claims
the Third Circuit also directed this Court to consider. In re Community Bank of Northern Virginia, 418
F.3d 277, 309-310 (3rd Cir. 2005) ("On remand, the District Court should pay particular attention to
the prevalence of colorable TILA, HOEPA and other claims that the individual class members may
have which were not asserted by class counsel in the consolidated complaint (or presumably in settlement negotiations.")) (emphasis added).
[**7]
I. INTRODUCTION
A. OVERVIEW
TILA and HOEPA are remedial consumer protection statutes. TILA applies to all consumer credit transactions, subject to limited exceptions which do not apply in this matter. 15 U.S.C. § 1603. HOEPA, which is
a part of TILA, applies only to certain high cost home mortgage loans. Nearly all the loans at issue in the
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consolidated actions (some 50,000 loans) are [*2] HOEPA loans. At its most fundamental level, TILA
requires lenders to provide accurate and timely disclosures to prospective borrowers of the true cost of a
loan. "The Truth in Lending Act was necessary exactly because borrowers could not force creditors to provide voluntarily a system of credit within which consumers could function intelligently." Parker v. De Kalb
Chrysler Plymouth, 673 F.2d 1178, 1181 (5th Cir. 1982)(citing H.R. 1040, 90th Cong., 2d Sess. (1968), reprinted in 1968 U.S.C.C.A.N. 1962, 1965-70).
This cost is described under the commonly recognized statutory terms "Amount Financed", "Finance
Charge" and the "Annual Percentage Rate ("APR")". Community Bank of Northern Virginia ("CBNV") and
Guaranty National Bank of Tallahassee [**8] ("GNBT") (collectively the "Banks") were predatory and
abusive second mortgage loan lenders that universally violated TILA and HOEPA by misstating these terms.
Importantly, for the purpose of HOEPA, the Banks misrepresented the cost of credit by materially understating the APR on nearly every loan they made.
The APR is calculated through a mathematical formula that is derived from the Amount Financed (funds
actually available to the borrower) and Finance Charge (interest, fees and costs - what the money will cost
the borrower over the life of the loan). These two numbers are mutually exclusive; that is, a settlement
charge is allocated to either one or the other but not to both. The higher the finance charges, the higher the
APR. Generally, all fees and costs charged in connection with making the loan are, logically, part of the finance charge. With respect to real estate loans, however, certain charges may be excluded from the finance
charge such as fees related to specified title work, such as fees for the preparation of abstracts or title, and for
[*3] performing title examinations, but only if those fees are bona fide and reasonable. 12 C.F.R. §
226.4(c)(7); see also [**9] Saunders Affidavit at PP 40-42 (Exhibit 1).
Not content with the huge origination fees and other fees and interest exacted, the Banks engaged in
"loan padding" that violated TILA and HOEPA by excluding from the finance charge, as their standard practice, fees for title examinations (HUD-1 Line 1103) that were neither bona fide nor reasonable because no
title examinations were provided. See Dodson Affidavit at PP 9(B); 9(D) (Exhibit 2); Coghlan Affidavit at P
7 (Exhibit 3). Additionally, the title abstract charge (HUD-1 Line 1102) was a charge to obtain a rudimentary property report which is far from a true title abstract. Dodson Affidavit at PP 9(A); 9(C); Coghlan Affidavit at P 6. This charge was then illegally marked up and passed on to the borrower. Such a mark up is not
reasonable (and is in fact a separate violation of, among other things, RESPA). Santiago v. GMAC Mortgage
Group, Inc., 417 F.3d 384, 389 (3rd Cir. 2005). Thus, at a minimum, the amount of the mark up was improperly excluded from the finance charge. The result from the failure to include the entire title exam fee and
the mark up portion of the abstract fee in the finance charge [**10] is that the APR was materially understated in violation of TILA and HOEPA as to the loans of the Objectors and other borrowers within the consolidated actions. Saunders Affidavit at PP 43-45; Haynes Affidavit and Accompanying Spreadsheets (Exhibit 4 and 4D-F). n2
n2 Exhibit 4 and its attached Exhibits 4D, 4E, 4F and 4G are the spreadsheets and accompanying affidavit prepared for Objectors by Hasbrouck Haynes, CPA and it reflects an analysis of some 436
loans from Missouri, Illinois, Maryland, Georgia, California and Florida. Objectors had suggested to
counsel for RFC that it produce a randomly selected sampling of loan files for this viability exercise.
RFC refused the request but it did produce the loan files for Objectors (the Missouri, Illinois and Maryland files, as well as a few files for borrowers in California and Florida). Objectors additionally had
access to partial loan files for certain Georgia borrowers that were provided by those borrowers. The
Spreadsheet contains calculations to confirm that the loans are in fact HOEPA loans (all but 11 out of
436 are HOEPA loans), calculations that reveal a materially misstated APR calculation on 431 of the
436 loans and calculations to show approximate TILA and HOEPA damages for the borrowers. Additionally, based on the number of loans analyzed, which were roughly one-half CBNV loans and
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one-half GNBT, Objectors were able to make a number of projections about the 44,535 loans that are
held by RFC and were at issue in this lawsuit. Thus, Objectors will cite to these loan spreadsheets and
Mr. Haynes' Affidavit throughout this brief. Finally, while the discussion herein focuses on the 44,535
loans held by RFC that were part of the vacated settlement, certainly the findings demonstrated including the overall viability of the TILA and HOEPA claims translates to the other cases consolidated
before this Court which are estimated to concern some 5,000 additional loans.
[**11]
[*4] In addition to the disclosures mandated by TILA, HOEPA requires the Lender to warn prospective borrowers about the high cost of their loans through an advance notice - the "HOEPA Notice" - of the
loan's monthly payment amount and its certain cost information including a specific and separate disclosure
of the APR at least three (3) business days prior to closing. 15 U.S.C. §§ 1639(a), (b)(1). The HOEPA Notice gives the consumer the opportunity to reject the loan offer before being rushed to sign numerous papers
at a closing. The Banks committed an additional disclosure violation of HOEPA by failing to ensure the borrowers' actual receipt of this HOEPA disclosure at least three (3) business days prior to closing. The written
policy of the Banks was not crafted to ensure compliance with this requirement as their Operations Manuals
(which have identical language for both Banks) requires only that these advance HOEPA disclosures be only
mailed 3 business days prior to closing. Plainly, if not mailed until three days before closing, the HOEPA
Notices could not have been received by the borrower, as the law requires, three business days in advance
[**12] of the closing. Other evidence of this 3 business day HOEPA Notice violation are loan file documents that show the borrower's acknowledgement signature on the disclosure (that was to come at least 3
business days before closing) bearing the same date as the closing.
Finally, Objectors have noted that as to many loans, there also exists yet another HOEPA violation in
that despite clear a clear statutory prohibition under HOEPA for prepayment penalties except in some very
particular circumstances, see 15 U.S.C. § 1639(c); 12 C.F.R. § 226.32(d)(6)-(7), the Banks often violated this
prohibition.
[*5] HOEPA's place in this discussion is extremely relevant in at least one other way in that HOEPA's
assignee liability provisions make the ultimate purchasers of these loans liable for any and all claims the
borrowers might have against the originating lenders. 15 U.S.C. § 1641(d). Thus, assignees like GMAC-RFC
are strictly liable to the borrowers for all damages available to them under TILA and HOEPA, and under any
other statutory or common law claim like those claims asserted under RESPA or RICO.
The use of the terms "strictly [**13] liable" in the preceding sentence was purposeful. As with all remedial consumer protection statutes designed to address the inherently unequal bargaining position between
the consumer and lender, any violation of TILA and HOEPA makes the wrongdoer (or assignee) strictly liable for the statutorily mandated TILA and HOEPA damages. In re Community Bank, 418 F.3d 277, 305 (3rd
Cir. 2005) ("strict liability is imposed on the lenders and on their assignees if the APR is materially misstated
in the TILA disclosure forms").
The resulting "strict liability" damages for the noted violations are substantial. The misstatement of the
APR under TILA allows each aggrieved borrower to recover their actual damages and a statutory penalty
under 12 U.S.C. 1640(a)(1)-(2). Because this same improper APR disclosure violates HOEPA (§ 1639(a)(2);
12 C.F.R. § 226.32(c)), each borrower is entitled to the additional HOEPA damage of a return of "the sum of
all finance charges and fees" paid by them on the loan. 15 U.S.C. § 1640(a)(4). Additional violations of
HOEPA like the failure to provide the HOEPA Notice 3 business days in advance [**14] of the closing or
the violation of the prepayment prohibitions allow a borrower an additional multiples of HOEPA's enhanced
damages (again, the "sum of all finance charges and fees"). Further, these TILA and HOEPA violations give
the borrower a right of recession under 15 U.S.C. § 1635.
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[*6] As demonstrated in detail in this brief, these are viable claims that can be established on a class
wide basis. The individual and collective class damages that arise as a matter of strict liability from these
plain and provable violations is staggering as the following quick example and discussion illustrates.
Loan of Illinois Objector Sonia Gestes
Ms. Gestes took out a $ 31,300 second mortgage loan from GNBT on November 21, 2001 at 11.99% interest. Her APR was materially misstated and pursuant to the standard practice of GNBT she did not timely
receive her HOEPA APR notice and their loan contained a prohibited prepayment penalty. As explained in
detail below, her TILA/HOEPA damages are as follows:
TILA Actual Damages
Statutory Damages
HOEPA Damages
($ 20,038.33 x 3 total violations)
Monetary Value of Rescission Damage
Subtotal
Tender Obligation
Total Recovery from Defendants
$ 475.00
$ 23.00
$ 60,114.99
$ 20,038.33
$ 80,651.32
- $ 27,257.83
$ 53,393.49 n3
[**15]
n3 This number does not include attorneys' fees or costs which are also a measure of damages each
aggrieved borrower is entitled to under TILA and HOEPA. 15 U.S.C. § 1640(a)(3).
The spread sheet of some 436 loans compiled by Objectors' accounting expert shows that the total average damages for the 431 loans with violations is $ 52,565.43. Extrapolating that percentage of loans with
violations over the entire class yields (98.9% * 44,535) a total of 44,045 loans with violations. That number
of loans multiplied by the average damages provides a potential class wide recovery of a staggering $
2,315,250,409.00. Exhibit 4, at P 15. Class Counsel, however, sought to settle and forever release these
claims were being released by class counsel for between $ 250 and $ 925 under the vacated settlement.
[*7] The Brief and accompanying spreadsheet, affidavits and other evidence, which are the only evidence ever presented to the Court, readily demonstrate the viability of the Objectors' [**16] claims. In addition to the cited statutory and precedential authority, the viability is established by the Objectors' own loan
documents, the Defendants' business records, the testimony of insiders to the lending scheme, and expert testimony. The expert testimony comes in the form of affidavits submitted by HOEPA and TILA (and overall
consumer rights) expert, Margot Saunders, Esq., of Counsel to the National Consumer Law Center, whose
affidavit appears at Exhibit 1 and by title experts William H. Dodson, II Esq., and John T. Coghlan, Esq.,
whose affidavits appear, respectively, at Exhibit 2 and Exhibit 3, as well as the summary chart prepared by
Hasbrouck Haynes, Jr. C.P.A. and his accompanying affidavit, which appear at Exhibit 4.
B. RELEVANT PROCEDURAL HISTORY
The illegal lending practices of these Banks, as orchestrated behind the scenes by the unlicensed Shumway-Bapst mortgage operation resulted in a number of class action and individual lawsuits being filed
against the Banks around the Nation. Most if not all of these suits involved the assignees that had purchased
these loans from the Banks. Most notable among the assignees is GMAC-RFC Residential [**17] Funding
Corporation ("RFC") because it bought more than 44,000 of the estimated 50,000 second mortgage loans
ostensibly originated by the Banks.
In early 2003, RFC and counsel for several of the pending class actions attempted to settle their liability
for some 44,535 second mortgage loans originated by the Banks and purchased by RFC through a consolidated class action settlement in Case No. 03-0425 that was presented to this Court. The "Objectors," mem-
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bers of that settlement class, took issue with the terms of the settlement and either objected or opted out of
the settlement class. The objections [*8] were presented to this Court in what is now a well-documented
series of hearings and rulings, the ultimate result of which was the Court's rejection of the Objectors' arguments and request for intervention and the Court's approval of the class action settlement. Prime among the
Objectors' complaints was that the class action settlement released for little to no consideration valuable
claims and defenses to foreclosure under TILA and HOEPA.
Following the approval of the Settlement, the Objectors filed a number of appeals to the Third Circuit
contending, among other things, that [**18] the settlement class was never properly certified due to this
Court's failure to address the viability of the TILA and HOEPA claims and that the settlement was unfair,
inadequate and unreasonable due to the release of the TILA and HOEPA claims for no consideration.
While that appeal was pending, a number of the Opt-Outs from the nationwide settlement as well as borrowers aggrieved by the predatory lending scheme but who were not part of the class action settlement (because RFC had not purchased their loans) filed an action captioned as Hobson v. Irwin Union Bank and Trust
Company, et al., in the United States District Court for the Northern District of Alabama. The Hobson action
was then transferred to this Court as part of a multidistrict proceeding, MDL No. 1674, along with two lawsuits filed by individual borrowers in Maryland, along with the re-opened Davis action, now apparently
called Kossler. The Davis/Kossler suit is a putative class action filed in this Court that, like Hobson, included
borrowers that were not within the settlement class because their loans had not been purchased by RFC.
In August, 2005, the Third Circuit reversed this Court's approval [**19] of the settlement and remanded
Case No. 03-0425 back to this Court for further proceedings. In doing so, the Third Circuit questioned at
length the (in)adequacy of representation by Kessler class counsel in light [*9] of their failure to prosecute
or consider in the settlement amount the value of the class members' TILA and HOEPA claims. In remanding
the matter to the District Court, the Third Circuit, among other things, directed that the District Court address
conduct the instant "viability analysis" of the borrowers' TILA and HOEPA claims.
C. STANDARD OF REVIEW
Following the instruction and terminology of the Third Circuit, the Court has solicited briefing to examine the "viability" of the Objectors' TILA and HOEPA claims. What legal standard equates to the term "viable" was not articulated by the Third Circuit. Black's Law Dictionary states that something is viable if it is
"[c]apable of independent existence or standing - "a viable lawsuit." Black's Law Dictionary (8th ed. 2004).
According to Webster's Dictionary something is viable if it has "a reasonable chance of succeeding." See
Merriam-Webster's Online Dictionary (www.m-w.com/dictionary/viable). [**20]
In terms of a legal standard, Objectors submit that the appropriate standard of review to determine "viability" of a claim is the motion to dismiss under Fed.R.Civ.P. 12(b)(6) which this Court recently articulated:
When the court considers a Rule 12(b)(6) motion to dismiss, the issue is not whether plaintiff
will prevail in the end or whether recovery appears to be unlikely or even remote. The issue is
limited to whether, when viewed in the light most favorable to plaintiff, and with all
well-pleaded factual allegations taken as true, the complaint states any valid claim for relief.
See ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 859 (3rd Cir.1994). In this regard, the court will not
dismiss a claim merely because plaintiff's factual allegations do not support the particular legal
theory he advances. Rather, the court is under a duty to examine independently the complaint to
determine if the factual allegations set forth could provide relief under any viable legal theory.
5A Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure § 1357 n. 40 (2d
ed.1990). See also Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 2 L.Ed.2d 80 (1957).
[**21]
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AMG Industries Corp. v. Lyon, 2005 WL 3070922, at *2 (W.D. Pa. Nov. 16, 2005)(Lancaster, J.) (emphasis
added); see also Vallies v. Sky Bank, 432 F.3d 493, 494 (3rd Cir. 2006)("A motion [*10] to dismiss pursuant to Federal Rule 12(b)(6) should be granted only if, 'accepting as true the facts alleged and all reasonable inferences that can be drawn therefrom' there is no reasonable reading upon which the plaintiff may be
entitled to relief.").
Significant to this discussion is the additional recognition that TILA is a remedial statute that is to be
"construed liberally in favor of the consumer." Household Credit Services, Inc. v. Pfennig, 541 U.S. 232, 235
(2004); Rossman v. Fleet Bank (R.I.) N.A., 280 F.3d 384, 390 (3rd Cir. 2002); see also Bragg v. Bill Heard
Chevrolet, Inc.; 374 F.3d 1060, 1065 (11th Cir. 2004)(courts are to "evaluate TILA transactions from the
consumer's viewpoint"); Lifanda v. Elmhurst Dodge, Inc., 237 F.3d 803, 806 (7th Cir. 2001)(cautioning the
courts not to deem an ordinary consumer to have the business and legal knowledge of "a Federal Reserve
Board [**22] member, federal judge, or English professor").
As established herein, Objectors more than meet a Rule 12(b)(6) standard. The Objectors' outline of the
legal basis of their claims under TILA and HOEPA demonstrates that if their factual allegations are taken as
true, then viable claims have been stated. Beyond this, Objectors provide factual and expert testimony support for their allegations. The result is that Objectors have plainly demonstrated that the TILA and HOEPA
claims present a very viable legal theory upon which relief to tens of thousands of borrowers could and
should be provided.
[*11] II. TILA AND HOEPA: AN OVERVIEW
A. STATUTORY PURPOSES AND SCHEMES
1. The Truth in Lending Act
a. The Purpose of TILA: "The Informed Use of Credit"
The Truth in Lending Act, first enacted in 1968, is a consumer protection statute. The underlying purpose of TILA is to promote the "informed use of credit" by requiring all creditors to tell consumers in terms
and with forms universal to all types of consumer lending what the true cost of the credit is to the borrower.
The Congress finds that economic stabilization would be enhanced and the competition [**23]
among the various financial institutions and other firms engaged in the extension of consumer
credit would be strengthened by the informed use of credit. The informed use of credit results
from an awareness of the cost thereof by consumers. It is the purpose of this subchapter to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more
readily the various credit terms available to him and avoid the uninformed use of credit, and to
protect the consumer against inaccurate and unfair credit billing and credit card practices.
15 U.S.C. § 1601(a); see also 12 C.F.R. § 226.1(b)("The purpose of this regulation is to promote the informed use of credit by requiring disclosures about its terms and cost. The regulation also gives consumers
the right to cancel certain credit transactions that involve a lien on the consumer's principal dwelling...."); see
also Thomka v. A.Z. Chevrolet, Inc., 619 F.2d 246, 248 (3rd Cir. 1980) ("The Truth-in-Lending Act was
passed primarily to aid the unsophisticated consumer so that he would not be easily misled as to the total
costs of financing"). n4 Making lenders tell [**24] borrowers in universal terminology the true cost of the
loan enables the consumers' ability to understand that cost and comparison shop. Parker, 673 F.2d at 1181;
Mason v. Gen. Fin. Corp., 542 F.2d 1226 (4th Cir. 1976); Curtis v. Secor Bank, 896 F. Supp. 1115, 1118
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(M.D. [*12] Ala. 1995)("The TILA regulates primarily by providing uniform disclosure requirements and
standard definitions of credit terms."); Saunders Affidavit, at PP 31-35.
n4 TILA does not, however, govern or limit the charges that may be imposed in a credit transaction.
See 12 C.F.R. § 226.1(b). Such regulation is left to other federal law, such as RESPA, 12 U.S.C. §§
2601, et seq., and state law.
b. The Organization of TILA
TILA is found at Title 15, Chapter 41, Subchapter I of the United States Code, or, beginning at 15 U.S.C.
§ 1601. Part A of TILA (§§ 1601-1615) sets forth General Provisions of TILA and defines terms, including
[**25] the Finance Charge. Part B of TILA (§§ 1631-1649) sets forth rules for Credit Transactions, and the
rules sometimes differ for closed-end credit transactions, open-ended transactions and variable rate transactions. Part C of TILA (§§ 1661-1665b) deals with Credit Advertising. Part D of TILA (§§ 1666-1666j) deals
with Credit Billing and Part E (§§ 1667-1667f) deals with Consumer Leases. The second mortgage loans at
issue are closed end credit transactions governed by Parts A and B.
TILA also incorporates regulations issued by the Federal Reserve Board as part of its requirements, such
that "any reference to any requirement imposed under this subchapter or any provision thereof includes reference to the regulations of the Board." See 15 U.S.C. §§ 1602(y); see also 15 U.S.C. § 1604(a)(delegation
of authority to Federal Reserve Board to enact regulations to effectuate TILA's disclosure purposes); Household Credit Services, Inc. v. Pfenning, 541 U.S. 234, 235-36 (2004)("Congress delegated expansive authority
to the Federal Reserve Board (Board) to enact appropriate regulations to advance this purpose. § 1604(a).
[**26] "); Jumbo v. Nester Motors, Inc., 428 F. Supp. 1085, 1086 (D. Az. 1974)("any reference to the requirements imposed by the Act is also a reference to the relevant regulations"); see also Saunders Affidavit at
P 15. Those regulations are found at 12 C.F.R. Part 226, and are generally and commonly referred to as
"Regulation Z." Thus, any discussion of TILA necessarily requires an analysis of both the federal statutes
and the federal regulations.
[*13] The class loans at issue are generally governed by the following parts of Regulation Z. Subpart
A of 12 C.F.R. Part 226 (12 C.F.R. §§ 226.1-.4) sets forth General Regulations for TILA, and defines terms,
including the Finance Charge at § 226.4. Subpart C (§§ 226.17-.24) sets forth regulations for Closed-End
Credit and includes a regulation on the determination of the Annual Percentage Rate. Subpart E (§§
226.31-.35) sets forth special regulations for certain types of mortgages, such as HOEPA mortgages, which
are defined at 15 U.S.C. § 1602(aa) and at 12 C.F.R. § 226.32 and are sometimes referred to as "Section 32"
mortgages as a result of Regulation Z's definition. Finally, following [**27] Part 226 are a number of Appendixes that deal with unique issues under Regulation Z, including the determination of the Annual Percentage Rate in Closed-End Transactions at Appendix J.
In addition, "Congress has specifically designated the [Federal Reserve Board] and staff as the primary
source for interpretation and application of truth-in-lending law." Household Credit Services, Inc., 541 U.S.
at 238. These interpretations of TILA are found in Supplement I to Part 226 (following the Appendixes) and
are commonly referred to as the "Official Staff Interpretations" or "Official Staff Commentary" to Regulation
Z.
2. The Home Ownership and Equity Protection Act
In 1994, Congress recognized the need to take further action to curb predatory lending. Congress found
that several high-rate lenders were using non-purchase money mortgages to take advantage of unsophisticated and low income homeowners in a "predatory" fashion. See S. Rep. 103-169, 1994 U.S.C.C.A.N. 1881,
1907. A fundamental problem of these high cost loans secured by any remaining equity in a borrowers' home
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is that it exposed borrowers to a heightened risk of foreclosure and the bleeding or stripping [**28] of the
equity out of what, in most cases, is an individuals biggest financial investment. See generally Saunders affidavit at PP 8-14.
[*14] In response, Congress overwhelmingly passed the Home Ownership and Equity Protection Act,
codified at 15 U.S.C. 1639 ("HOEPA") to the Truth in Lending Act, 15 U.S.C. Sec. 1601, et seq. It provides
extraordinary and additional protections and rights to borrowers obtaining a special type of loan - a "high
cost/high interest" loan defined at 15 U.S.C. § 1602(aa) and at 12 C.F.R. 226.32. A "HOEPA loan" is defined
as a mortgage loan "secured by the consumer's principal dwelling," other than a loan made to finance the
dwelling's original construction or acquisition, in which (1) the loan's annual percentage rate of interest exceeds ten percent of "the yield on Treasury securities having comparable periods of maturity on the fifteenth
day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor;" or (2) the "total points and fees" payable by the consumer at or before the closing
exceeds the greater of eight [**29] percent of the "total loan amount" or $ 400. See 15 U.S.C. §
1602(aa)(1)(A) & (B); 12 C.F.R. § 226.32.
In establishing the triggers to determine whether a loan was predatory, and therefore subject to HOEPA
and its special disclosure requirements, enhanced damages and assignee liability, Congress made specific
findings. It determined that loans made by any lender who charged over 8% in fees and points would be subject to HOEPA. In setting the 8% bright line test Congress found that the 8% level for points and fees was
well above the industry average. The 8% trigger was to "prevent unscrupulous creditors from using grossly
inflated fees and charges to take advantage of unwitting consumers." S. Rep. 103-169, 1994 U.S.S.C.A.N.
1881, 1908.
In this case, nearly all of the loans at issue in this lawsuit are HOEPA loans. This is established not only
by the Defendants' own documents, like the HOEPA notice to assignees appearing in the loan files, but also
by the independent review of Objectors' Experts. All of the [*15] loan files reviewed by Ms. Saunders are
HOEPA loans. Saunders Affidavit at P 20. Moreover, of the 436 loans that make up the Objectors' Spreadsheet, [**30] Mr. Haynes confirmed that all but 11 or some 97.5% are HOEPA loans. See Exhibit 4, at P
8.
a. Additional HOEPA Disclosure Requirements
HOEPA requires additional disclosures that supplement and are "in addition to" the TILA disclosure requirements. 15 U.S.C. § 1639(a); 12 C.F.R. § 226.31(a). Specifically, creditors making HOEPA loans are
required to make a "Miranda-like" warning of the consequences of entering into the loan to HOEPA borrowers at least three business days before the consummation, or closing, of the loan. 15 U.S.C. § 1639; 12 C.F.R.
§§ 226.31(c); 226.32(c). This disclosure must also include the APR on the loan and identify the regular
monthly loan payments to be made on the loan. In addition, these disclosures must be made in a clear and
conspicuous type size and each borrower must receive a copy of the HOEPA Disclosure in a form that they
can keep. 15 U.S.C. § 1639(a); 12 C.F.R. §§ 226.31(b)(1); 226.32(c) & (e).
Importantly, because HOEPA has a specific requirement for the disclosure of the APR, when a lender
inaccurately calculates the Finance Charge or the Amount Financed, [**31] the APR will also be inaccurately calculated, thereby violating both TILA and HOEPA if the tolerances for error are exceeded as
demonstrated in Objectors' spreadsheet. 15 U.S.C. § 1606(a); 12 C.F.R. §§ 226.31-.32; see also Appendix J
to 12 C.F.R. Part 226 ("Annual Percentage Rate Computations for Closed-End Credit Transactions"). Arguably then, the advanced notice and APR disclosure are the most important features of the TILA and HOEPA
disclosure.
Tb. HOEPA Prohibitions on Certain Abusive Loan Terms and Creditor Practices
A creditor making HOEPA loans is prohibited from including certain terms in the loans. 15 U.S.C. §
1639(c)-(e). These prohibited terms include prepayment penalties (unless an [*16] exception applies); in-
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terest rate increases on default, balloon payments, negative amortization, prepaid loan payments, and
due-on-demand or acceleration clauses. Id.; see also Saunders Affidavit at P 18. As explained below,
HOEPA's restrictions on prepayment penalties were also violated as to a significant number of the borrowers.
A HOEPA creditor is also prohibited from engaging in certain practices such as extending credit [**32]
to HOEPA borrowers without regard to their ability to repay the loan, engaging in "loan flipping" (refinancings by the same lender within a one-year period) and paying the proceeds of HOEPA loans to home
improvement contractors. See 12 C.F.R. § 226.34(a)(1), (3)-(4).
c. Assignee Liability
Purchasers and assignees of HOEPA loans are liable for all claims and defenses that the borrowers could
assert against their creditor, including, but not limited to, all TILA and HOEPA violations. 15 U.S.C. §
1641(d) ("Any person who purchases or is otherwise assigned a mortgage referred to in section 1602(aa) of
this title shall be subject to all claims and defenses with respect to that mortgage that the consumer could assert against the creditor of the mortgage..."). The reason for imposing assignee liability is to directly address
the determination of Congress that borrowers obtaining HOEPA loans were most susceptible or vulnerable to
predatory lending practices. See McIntosh v. Irwin Union Bank and Trust, Co., 215 F.R.D. 26, 29 (D. Mass.
2003)("HOEPA, an amendment to TILA, was enacted 'to ensure that consumers understand the terms of such
loans [**33] and are protected from high pressure sales tactics ... [it] prohibits High Cost Mortgages from
including certain terms such as prepayment penalties and balloon payments that have proven particularly
problematic.'"); Saunders Affidavit at P 18. By making assignees liable for the sins of the originating lender,
"Congress intended to force the [*17] "High Cost Mortgage" market to police itself." Bryant v. Mortgage
Capital Resource Corporation, 197 F. Supp.2d 1357, 1364 (N.D. Ga. 2002); see also Saunders Affidavit at P
18.
Pursuant to the imposition of assignee liability, the originating lender is required to provide a notice to
the assignee that the loan they are acquiring is a HOEPA loan. 15 U.S.C. § 1641(d)(4); 12 C.F.R. §
226.34(a)(2). There is no dispute that the assignees in this matter and the other consolidated actions, RFC,
Irwin Union and others, received such notices and knew they were buying HOEPA loans.
It is anticipated that RFC and other assignee defendants will argue that all § 1641(d) does is get rid of the
holder in due course defense such that it is not available to them should a borrower try to use any illegal
[**34] acts by the lender bank to thwart a foreclosure action by the assignee. That is, that § 1641(d) does
not allow the assertion against the assignees of a borrowers' affirmative claims. Any such argument must fail
as it is contrary to the plain language of § 1641(d).
The statutory language is clear. The statute "eliminates holder-in-due-course protections for assignees of
certain high cost mortgages [as defined by 15 U.S.C. §1602(aa)] and renders them subject to all claims and
defenses that the borrower could assert against the original lender." Vandenbroeck v. Contimortgage Corp.,
53 F.Supp.2d 965, 968 (W.D. Mich. 1999)(emphasis added); Bryant, 197 F.Supp.2d at 1364-65. The operation and effect of § 1641(d) is unmistakable.
15 U.S.C. § 1641(d) in part provides:
(1) ... Any person who purchases or is otherwise assigned a mortgage referred to in [15 U.S.C.
§ 1602(aa)] shall be subject to all claims and defenses with respect to the mortgage that the
consumer could assert against the creditor of the mortgage, unless the purchaser or assignee
demonstrates, [**35] by a preponderance of the evidence, that a reasonable person exercising ordinary due diligence, could not determine, based on the documentation required by this
[title]... that the [*18] mortgage was a mortgage referred to in [15 U.S.C. § 1602 (aa)] ...
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(Emphasis added.)
Section 1641(d)(1) provides in clear and unambiguous terms that assignees like the RFC are subject to
all claims and defenses under any law that a borrower could have asserted against the original lender. Vandenbroeck, 53 F.Supp.2d at 968. Hence, it does not matter that the RFC Defendants may not have initially
charged the excessive fees and closing costs on which these claims are based. And certainly since acquiring
the loans, the assignees have collected and received (and continue to collect and receive) interest on the
loans.
Holding assignees liable for these Banks' "tainted" loans effectuates the intention of Congress with regard to the consumer real estate loans at issue as is made clear by the legislative history of § 1641(d). In describing its enactment, Congress stated as follows:
9. Assignee Liability
The bill eliminates "holder-in-due-course" [**36] protections for assignees of High Cost
Mortgages. Assignees of High Cost Mortgages are subject to all claims and defenses, whether
under Truth in Lending or other law, that could be raised against the original lender...
By imposing assignee liability, the Committee seeks to ensure that the High Cost Mortgage
market polices itself. Unscrupulous lenders were limited in the past by their own capital resources. Today, however, with loans sold on a regular basis, an unscrupulous player can create
havoc in a community by selling loans as fast as they are originated. Providing assignee liability will halt the flow of capital to such lenders.
S.Rep. No. 169, 103d Cong., 2d Sess. 5 (1994) reprinted in 1994 U.S.C.C.A.N. 1881, 1912 (emphasis added).
For these reasons, the Court should waste little time in rejecting any contention that the assignee liability
imposed by § 1641(d) does not subject an assignee to liability as to affirmative claims of a borrower as asserted in this and the other related and consolidated matter.
[*19] B. THE CORE DISCLOSURES: AMOUNT FINANCED, FINANCE CHARGE AND
ANNUAL PERCENTAGE RATE
1. These Interrelated Disclosures [**37]
Are At The Core of TILA.
The "material disclosures" required by TILA are defined as:
the disclosure, as required by this subchapter, of the annual percentage rate, the method of determining the finance charge and the balance upon which a finance charge will be imposed, the
amount of the finance charge, the amount to be financed, the total of payments, the number and
amount of payments, the due dates or periods of payments scheduled to repay the indebtedness,
and the disclosures required by section 1639 (a) [HOEPA] of this title.
15 U.S.C. § 1602(u)(emphasis added); see also 12 U.S.C. § 226.23(a), at n.48 (defining "material disclosures" for purposes of rescission to include those required by 12 C.F.R. § 226.32(c) and (d)). These terms
reflect Congress' desire to avoid "informational overload" by focusing on the terms "most relevant to a consumer's initial credit decision." Household Credit Services, Inc. v. Pfennig, 541 U.S. 232, 243 (2004); 12
C.F.R. § 226.17(a)(1).
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The purpose of having an accurate price tag, using a standardized definition and calculation
method, is [**38] two-fold. First, it enables consumers to make informed decisions about using credit. Seeing the cold, hard figures helps consumer determine whether to use credit or not.
When credit costs are high, it encourages consumer restraint: some consumers will decide that
paying cash, deferring debt entirely, or scaling back are preferable to paying high interest rates.
In this respect, Truth in Lending serves a public purpose in addition to a private one: the macroeconomic purpose of enhancing economic stabilization. Second, it provides consumers with
the information necessary to comparison shop for the best terms. In this respect, it serves the
interests of both consumers and legitimate lenders. Consumers are given information necessary
to make an informed choice and are protected from "fraudulent, deceitful or grossly misleading
information." "Ethical and efficient" credit providers are protected from deceitful competitors,
thus competition is invigorated. Accordingly, the comparison shopping role has both a public
and private purpose, as well, it is designed to curb practices that impede the effective operation
of market forces.
National Consumer Law Center, Truth in Lending, [**39] at § 3.1.1, at p.55 (5th ed. 2003)(citing authorities); see also Mourning v. Family Publications Service, 411 U.S. 356, 377 (1972)("the Truth in Lending Act
reflects a transition in Congressional policy from a philosophy of 'let the [*20] buyer beware' to one of 'let
the seller disclose.'"); Williams v. Chartwell Financial Services, Ltd., 204 F.3d 748, 751 (7th Cir.
2000)("Congress enacted TILA to ensure that consumers receive accurate information from creditors in a
precise and uniform manner that allows them to compare the cost of credit."); Saunders Affidavit at PP
30-38.
Simply stated, the Finance Charge and Annual Percentage Rate provide a consistent and "all-inclusive"
calculation of the true cost of a loan that takes into account not only the terms of a loan, such as the interest
rate and number of payments, but those additional fees and charges imposed on a loan that are not reflected
in the interest rate. See Truth in Lending, supra, at §§ 3.2.1-.2.
a. Finance Charge and Amount Financed
The term "Finance Charge" is defined at 15 U.S.C. § 1605 and 12 C.F.R. § 226.4. It represents "the cost
of consumer [**40] credit as a dollar amount." 12 C.F.R. § 226.4(a). TILA defines the Finance Charge "as
the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit." 15 U.S.C. § 1605(a); 12
C.F.R. § 226.4(a). In other words, it's all the charges and costs the borrower pays for the use of the lent funds
including all interest paid. By its plain language, TILA presumes that all settlement charges are included in
the Finance Charge. Certain specified charges, however, can be excluded such as bona fide and reasonable
title charges. 12 C.F.R. § 226.4(c)(7). It is the Banks' improper exclusion of title charges from the finance
charge and resulting misstatements of the APR disclosure, all in violation of TILA and HOEPA, which are at
issue.
Directly related and mutually exclusive to the Finance Charge is the "Amount Financed" on a loan. The
"amount financed" is "the amount of credit of which the consumer has actual [*21] use." 15 U.S.C. §
1638(a)(2)(A). The Amount Financed is calculated by adding the charges that are not [**41] finance
charges but that are financed by the creditor and then subtracting the "prepaid finance charges," which are the
charges that are included in the finance charge and the borrower pays for them by withholding them from the
proceeds of their loan. 15 U.S.C. § 1638(a)(2)(A); 12 C.F.R. § 226.18(b); Truth in Lending, at § 4.6.2.5. This
term tells the borrower "those legitimate components of the obligation which are advanced by the lender or
paid to others on the borrower's behalf." Truth in Lending, at § 3.2.2. Because a borrower does not have "ac-
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tual use" of bogus or required third party charges, such charges cannot be part of the "amount financed" under TILA. Gibson v. LTD, Inc., 434 F.3d 275, 283-85 (4th Cir. 2006)("If a lender has no basis for including a
charge ... as part of the purchaser's amount financed, the disclosure of the amount financed' is erroneous, and
the error gives rise to TILA liability."); 15 U.S.C. §§ 1605(a), 1638(a)(2)(A); 12 C.F.R. §§ 226.4(a)(2),
226.18(b). n5
n5 TILA also has special rules that are used to determine whether charges by third parties are excluded from or included within the Finance Charge. 15 U.S.C. § 1605(a); 12 C.F.R. § 226.4(a)(1)-(2). In
general, the rules state:
[i]f the creditor requires the use of a closing agent, fees charged by the closing agent are
included in the finance charge only if the creditor requires the particular service, requires
the imposition of the charge, or retains a portion of the charge.
Official Staff Commentary to § 226.4, at P (4)(a)(2). Such "required" fees are included in the Finance
Charge because they are more relevant to determining the "true cost of credit" than other fees. See
Household Credit Services, Inc. v. Pfennig, 541 U.S. 232, 243 (2004). Moreover, these "required"
charges must be included in the Finance Charge because a fundamental purpose of TILA is to promote
competition among lenders. 15 U.S.C. § 1601(a). If a lender requires its borrower to incur certain third
party charges, then the only true means to promote competition amongst lenders is to include those
charges in the disclosures which inform the borrowers of the true cost of their loans. In this case, because the fees for the title examinations and the title abstracts were required by the banks, they should
be included in the Finance Charge under this interpretation of TILA. Mourning v. Family Publications
Service, Inc., 411 U.S. 356, 364 (1972)("The Truth in Lending Act was designed to remedy the problems which had developed. The House Committee on Banking and Currency reported, in regard to the
then proposed legislation: '(B)y requiring all creditors to disclose credit information in a uniform
manner, and by requiring all additional mandatory charges imposed by the creditor as an incident to
credit be included in the computation of the applicable percentage rate, the American consumer will
be given the information he needs to compare the cost of credit and to make the best informed decision on the use of credit.'")(emphasis added); Anderson Bros. Ford v. Valencia, 452 U.S. 205, 220
n.17 (1981)(same). While not focused on in this brief, this is arguably another basis for finding TILA
and HOEPA violations against the Banks. This basis of liability can be further explored through discovery of the relationship between the Banks and what appear to be their captive title companies like
USA Title and Title America including what percentage, if any, of the title company charges the
Banks retained.
[**42]
[*22] b. Annual Percentage Rate (APR)
The APR is "the measure of the cost of credit, expressed as a yearly rate, that relates the amount and
timing of value received by the consumer to the amount and timing of payments made." 12 C.F.R. §
226.22(e); see also 226.18(e)("the costs of your credit at a yearly rate"). Because the APR is affected by the
calculations of the Finance Charge and Amount Financed, it can only be calculated after those calculations
are made. 15 U.S.C. § 1606(a); 12 C.F.R. § 226.22(a); Appendix J to 12 C.F.R. Part 226. The finance charge
and APR are interrelated in that an inaccurate finance charge necessarily makes the APR disclosure inaccurate. Id.
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2. Determining the Finance Charge, Amount Financed and the APR
a. Finance Charge and Amount Financed
As noted above, its is presumed that all closing costs (plus all interest) make up the Finance Charge.
Certain charges may, however, be excluded from the Finance Charge if the creditor can show they meet an
exception to this presumption. See 15 U.S.C. § 1605; 12 CF.R. § 226.4 (a)-(c). "[A]ny exclusions from the
definition of the [**43] finance charge should be narrowly construed in order to protect the consumer and
encourage robust disclosure. See Bizier v. Globe Financial Servs., Inc., 654 F.2d 1, 3 (1st Cir. 1981); Hickey
v. Great W. Mortgage Corp. 1995 U.S. Dist. LEXIS 405, 30-31 (D. Ill. 1995); Buford v. American Finance
Co., 333 F. Supp. 1243, 1247 (N.D. Ga. 1971);; Equity Plus Consumer Finance & Mortgage v. Howes 861
P.2d 214 (N.M. 1993). The burden to prove compliance with the TILA rests on the creditor. Brannam v.
Huntington Mortgage, 287 F.3d 601 (6th Cir. 2002); see also Wright v. Tower Loan of Mississippi, Inc. 679
F.2d 436, 444 (5th Cir. 1982). Those fees that the creditor demonstrates meet the exclusion are then included
as part of the Amount Financed. 15 U.S.C. § 1638(a)(2)(A); 12 C.F.R. § 226.18(b). Thus, determining
whether a listed closing cost is part of [*23] the Finance Charge or the Amount Financed involves analysis
of the exclusionary rules of the Finance Charge.
This analysis entails making certain the charge is a listed exclusionary charge and that the charge [**44]
is bona fide and reasonable. Brannam, 287 F.3d at 606 ("To be excluded from the finance charge, the fees
must not only be the right types, but they must also be bona fide and reasonable in amount.'"); 15 U.S.C.
§1605(e); 12 C.F.R. § 226.4(c)(7); see also Official Staff Commentary to § 226.4, at P (4)(c)(7)("in all cases,
charges excluded under §226.4(c)(7) must be bona fide and reasonable."); see also Saunders Affidavit at PP
41-42. In this regard, it has long been held that exclusions from the Finance Charge are strictly construed:
As already noted, the design of the Act was to remove from the individual creditors the right to
determine the "finance charge" and to establish by statute and regulation a uniform method for
such determination so that consumers could "comparison shop" by looking at a single "price
tag"-the "annual percentage rate." Given the purpose of the Act and the thrust of its provisions,
the court concludes that only those charges specifically exempted from inclusion in the "finance charge" by statute or regulation may be excluded from it. The notary fees involved in
these cases are not specifically [**45] exempted, therefore defendants were required to include them in the "finance charge." Although the fee was only $ 1.00, its amount is immaterial
as far as the disclosure requirements of the Act are concerned.
Buford v. American Finance Co., 333 F.Supp. 1243, 1247 (N.D. Ga. 1971).
In a transaction secured by real estate, as in this case, the first question in the analysis asks whether the
charge at issue is specifically set forth in 15 U.S.C. § 1605(e) or 12 C.F.R. §226.4(c)(7) as an exclusion from
the Finance Charge. These excludible charges include:
(i) Fees for title examination, abstract of title, title insurance, property survey, and similar purposes.
(ii) Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or
settlement documents.
(iii) Notary and credit report fees.
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[*24] (iv) Property appraisal fees or fees for inspections to assess the value or condition of
the property if the service is performed prior to closing, including fees related to pest infestation or flood hazard determinations.
(v) Amounts required to be paid into escrow or trustee accounts [**46] if the amounts would
not otherwise be included in the finance charge.
12 C.F.R. § 226.4(c)(7).
If the charge at issue is listed in 15 U.S.C. § 1605(e) and/or 12 C.F.R. § 226.4(c)(7), then the second
question in the analysis asks whether the charges for the fees were "bona fide" and "reasonable." 12 C.F.R. §
226.4(c)(7). This analysis as to the HUD-1 Line 1102 (title abstract) and Line 1103 (title exam) charges are
the crux issue as to the Objectors' TILA and HOEPA claims. n6
n6 If the charge at issue is not listed, then there is a third question as to whether the fee considered for
exclusion is a fee identified in other provisions of 15 U.S.C. § 1605(d) and (e) and/or 12 C.F.R. §
226.4(c), (d) or (e). These provisions provide another set of exceptions to inclusion in the Finance
Charge. Objectors note that the Banks routinely excluded from the Finance Charge "application fees"
that are made to all applicants for credit (12 C.F.R. § 226.4(c)(1)) and "taxes and fees prescribed by
law that actually are or will be paid to public officials for determining the existence of or for perfecting, releasing, or satisfying a security interest." 15 U.S.C. § 1605(d)(1); 12 C.F.R. § 226.4(e)(1)). Although there is much evidence to suggest that the latter charges were often marked up on the borrowers' loans and, therefore, making some or all of the charge not bona fide or not reasonable, these closing costs and fees are not at included in the analysis at this point.
The Objectors further note that the Banks also routinely charged fees for "document reviews" performed by the title companies in Line 1112 of the HUD-1 Settlement Statements that were improperly
excluded from the Finance Charge calculation. Regardless of the legitimacy or reasonableness of such
fees, they cannot be excluded from the Finance Charge under 12 C.F.R. § 226.4(c)(7) because they are
not listed as excludable fees. The Objectors do not at this time include these fees in the TILA and
HOEPA viability analysis because in most, if not all instances, the APR is materially misstated as to
all borrowers using the Line 1103 title examination charge and the Line 1102 markup only. As to
those few borrowers who may be on the fence with only the Line 1102 markup and the Line 1103
charge, inclusion of the remainder of Line 1102 and/or the entirety of Line 1112 (if excluded) in the
Finance Charge would be more than sufficient to establish a APR violation in every loan of the class.
[**47]
b. Annual Percentage Rate (APR)
Regulation Z permits lenders to calculate the APR by two methods: (1) the "actuarial" method and (2)
the "U.S. Method". 12 C.F.R. § 226.22(a). While these methods of calculations are different, they will invariably yield the same APR on closed-end mortgage loans "when payment intervals are equal." See Official
Staff Commentary, § 226.22(a)(1)-1; Truth in Lending, at § 4.6.4.3. Performing the calculation by hand is
difficult, see, e.g., 12 C.F.R. Part [*25] 226, Appendix J, and virtually all lenders use computer programs
or APR calculators to ensure the accuracy of their calculations. Truth in Lending, at § 4.6.4.3. The programs
used by the Objectors and Ms. Saunders to calculate the APRs on the Objectors' loans are called Consumer
Law Math, Version 2.2.0, which is a program created by Custom Legal Software and used by the National
Consumer Law Center, and APRWIN, Version 5.0.0, which is the APR calculator used by the Office of the
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Comptroller of the Currency. Both are standard and commonly used programs used for this purpose. See
Saunders Affidavit, at P 62, n.42; Hodes Affidavit (Exhibit 5), at P 17.
In this matter, [**48] Objectors do not contend that the banks' method of calculating the APR was erroneous. Rather (and to repeat), the Objectors claim that Finance Charge is inaccurate under the provisions of
TILA. The inaccuracy necessarily results in an inaccurate APR and, accordingly, the misstatement of the
APR violates HOEPA.
3. Tolerances for Accuracy
TILA and HOEPA set forth specific rules which set forth allowable "tolerances" for inaccurate disclosures. The lender may raise these tolerances as affirmative defenses to the borrowers' claims that a disclosure
was inaccurate. See Inge v. Rock Financial Corp., 281 F.3d 613, 621-22 (6th Cir. 2002)("The overriding
policy behind the TILA, however, remains focused on consumer protection; the responsibility to allege the
minimal nature of the disclosure, and therefore the absence of a violation, should rest with the lender.");
Saunders Affidavit at PP 50-53. As explained below, the Banks' inaccurate disclosures exceed the allowable
tolerances.
[*26] a. Finance Charge and Amount Financed
As a general rule, the Finance Charge is "treated as accurate" if the lender establishes that the Disclosed
Finance Charge does [**49] not vary from the Actual Finance Charge by more than $ 100 or that the Finance Charge was overstated. 15 U.S.C. § 1605(f); 12 C.F.R. § 226.18(d)(1). Since the Amount Financed is
mutually exclusive to the Finance Charge, the Disclosed Amount Financed will be deemed accurate if the
Disclosed Finance Charge is deemed accurate. Id.
b. APR
As a general rule, the APR is considered as accurate if the Disclosed APR is within 1/8% more or less of
the actual APR. 15 U.S.C. § 1606(c); 12 C.F.R. § 226.22(a)(3). The APR is also considered accurate if an
APR disclosure error is caused by an error calculating the Finance Charge or in certain circumstances where
the Finance Charge is within the tolerance level but the APR is not. See 12 C.F.R. §§ 226.22(a)(4) and (5).
This unique rule is not at issue here because the Finance Charge was materially understated and inaccurate in
all instances.
c. Rescission
i. General Rule
For non-HOEPA loans, the borrower may only rescind their loan under the provisions of 15 U.S.C. §
1635 (discussed below) if the Finance Charge is understated by one-half of one [**50] percent (1/2%) the
face amount of the promissory note. 15 U.S.C. § 1605(f)(2); 12 C.F.R. § 226.23(g)(1).
ii. HOEPA Loans
For HOEPA loans, however, the borrower may rescind their loan if the APR is understated by 1/8%.
Accuracy of annual percentage rate. For purposes of § 226.32, the annual percentage rate shall
be considered accurate, and may be used in determining [*27] whether a transaction is covered by § 226.32, if it is accurate according to the requirements and within the tolerances under
§ 226.22. The finance charge tolerances for rescission under § 226.23(g) or (h) shall not apply
for this purpose.
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12 C.F.R. § 226.31(g). Because §226.23(g) and (h) set forth the one half of one percent tolerance for
non-HOEPA loans, the general rule allowing rescission for disclosures that are inaccurate by more than 1/8%
in § 226.22(a)(2) applies by the plain language of the regulation. This is confirmed by a reading of §
226.22(a)(4), which only incorporates the 1/2% tolerance through a reference to § 226.23(g) and (h). Saunders Affidavit at PP 50-53. This reduced tolerance serves to effectuate HOEPA's protections by providing
[**51] HOEPA borrowers with an expanded rescission right.
The APR is also considered accurate for purposes of rescission of a HOEPA loan if an APR disclosure
error is caused by an error calculating the Finance Charge or in certain circumstances (not applicable here)
where the Finance Charge is within the tolerance level but the APR is not. See 12 C.F.R. §§ 226.22(a)(4) and
(5); 12 C.F.R. § 226.31(g)(1).
d. Foreclosure
If the lender has initiated foreclosure, the tolerance is only $ 35.00 for an under disclosure of the Finance
Charge. 15 U.S.C. § 1635(i)(2); 12 C.F.R. § 226.23(h)(2)(i). There is no tolerance in this situation if the
lender failed to include a mortgage broker fee in the finance charge calculation. Id.
4. Timing of Disclosures
a. TILA
TILA requires that the material disclosures set forth at 15 U.S.C. § 1638 and 12 C.F.R. § 226.18 are to be
made "before the credit is extended." 15 U.S.C. § 1638(b)(1). Regulation Z states that the lender must make
these disclosures "before consummation of the transaction." 12 [*28] C.F.R. § 226.17(b). "Consummation" is the "time that [**52] a consumer becomes contractually obligated on a credit transaction." 12
C.F.R. § 226.2 (a)(13).
b. HOEPA
Creditors making HOEPA loans are, however, required to make the HOEPA disclosures to borrowers at
least three business days before the consummation, or closing, of the loan. See 15 U.S.C. § 1639; 12 C.F.R.
§§ 226.31(c); 226.32(c). These disclosures include the three-sentence "Miranda" warning concerning the
significance of having a mortgage on one's home, the APR, and the amount of the regular monthly payment
on the loan. 15 U.S.C. § 1639(a); 12 C.F.R. § 226.32(c).
C. OTHER REQUIREMENTS OF HOEPA
1. Prohibition on Prepayment Penalties
If a loan is covered by HOEPA, it may not contain a prepayment penalty unless a strict exception to
HOEPA is established. 15 U.S.C. § 1639(c); 12 C.F.R. § 226.32(d)(6)-(7). One such exception (i.e. one circumstance where a prepayment penalty can be a term of the note) is when the refinancing occurs with a
lender that is not the original lender or an affiliate of that lender. See 15 U.S.C. § 1639(c)(2)(B); 12 C.F.
[**53] R. § 226.32(d)(7)(ii). McIntosh v. Irwin Union Bank and Trust, Co., 215 F.R.D. 26, 30 (D. Mass.
2003); In re Rodrigues, 278 B.R. 683, 690 (D.R.I. 2003). This prohibition is designed to address the fact that
fear of a prepayment penalty keeps borrowers from refinancing and getting out from under the burden of an
expensive HOEPA loan. Saunders Affidavit at P 85. Many of the Note forms utilized by the Banks contain
provisions providing for prepayment penalties but which do not disclose the HOEPA restriction that a prepayment penalty may be collected "only to a prepayment made with amounts obtained by the [*29] consumer by means other than a refinancing by the creditor under the mortgage, or an affiliate of that creditor."
15 U.S.C. § 1639(c)(2)(B).
Under HOEPA, the inclusion of a prohibited term in the mortgage, such as a prepayment penalty, "shall
be deemed a failure to deliver the material disclosures required under this subchapter, for the purpose of section 1635 of this title." 15 U.S.C. § 1639(j). Thus, those borrowers whose loans contain illegal prepayment
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penalties are, regardless of [**54] the inaccuracy of the disclosures or the timing of the disclosures, entitled
to damages under 15 U.S.C. § 1640(a)(4) and may rescind their loans under 15 U.S.C. § 1635.
D. CONSUMER REMEDIES FOR VIOLATIONS OF TILA AND HOEPA
1. Strict Liability
As the Third Circuit recently noted in this very case, violations of TILA give rise to strict liability. In re
Community Bank of Northern Virginia, 418 F.3d 277, 305-06 (3rd Cir. 2005)("TILA achieves its remedial
goals by a system of strict liability."). The Third Circuit has previously held that:
TILA achieves its remedial goals by a system of strict liability in favor of the consumers when
mandated disclosures have not been made. A creditor who fails to comply with TILA in any
respect is liable to the consumer under the statute regardless of the nature of the violation or the
creditor's intent. "[O]nce the court finds a violation, no matter how technical, it has no discretion with respect to liability."
In re Porter, 961 F.2d 1066, 1078 (3rd Cir. 1992) (emphasis added) (quoting Smith v. Fidelity Consumer
Discount Co., 898 F.2d 896, 898 (3rd Cir. 1990)); [**55] Smith v. Cash Store Mgmt., 195 F.3d 325, 328
(7th Cir. 1999); Purtle v. Eldridge Auto Sales, Inc., 91 F.3d 797, 801 (6th Cir. 1996); Grant v. Imperial Motors, 539 F.2d 506, 510 (5th Cir. 1976); see also Mars v. Spartanburg Chrysler Plymouth, Inc., 713 F.2d 65,
67 (4th Cir. 1983). ("To insure that the consumer is protected, as Congress envisioned, requires that the provisions of the Act be absolutely complied [*30] with and strictly enforced"); In re Ramirez, 329 B.R. 727,
731-32 (D. Kan. 2005)("To encourage lender compliance, TILA violations are measured by a strict liability
standard, so even minor or technical violations impose liability upon the creditor. The consumer-borrower
can prevail in a TILA suit without showing that he or she suffered any actual damage as a result of the creditor's violation."). Thus, it is unnecessary to explore any actual damages or reliance as to a borrower who received inaccurate disclosures or who did not timely receive the required HOEPA disclosures.
"First, the alleged technical deficiencies of the document bear no relationship to the achievement of the [**56] Congressional purposes of the Truth in Lending Act." Dzadovsky v. Lyons
Ford Sales, Inc., 452 F.Supp. 606, 611 (W.D.Pa.1978). This conclusion was based on appellant's failure to claim that she was actually deceived by the alleged inaccuracies or that they related to her inability to repay her debt. Id. at 607, 608.
We are unable to accept this rationale because it suggests the requirement of financial loss before a borrower may bring an action. It is clear, however, that such injury need not be alleged.
One of the legislative purposes of the Act is to enable consumers to compare various available
credit terms. Any proven violation of the disclosure requirements of the Act is presumed to injure a borrower by frustrating that purpose.
Dzadovsky v. Lyons Ford Sales, Inc., 593 F.2d 538, 539 (3rd Cir. 1979)(emphasis added).
2. Statutory Damage Remedies
A creditor's failure to make the "material disclosures" required by TILA and HOEPA, or to make those
disclosures at the time required by HOEPA, gives rise to substantial damages as set forth in 15 U.S.C. § 1640
which include actual and [**57] statutory damages. 15 U.S.C. § 1640(a); see also Koons Buick Pontiac
GMC, Inc. v. Nigh, 543 U.S. 50, 54 (2004). These same violations also provide the aggrieved borrower (here,
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each class member) with a statutory right to rescind their loan as well as providing for injunctive and declaratory relief. 15 U.S.C. § 1635; 12 C.F.R. § 226.23.
[*31] Section 1640(a) provides as follows:
Individual or class action for damages; amount of award; factors determining amount of award
Except as otherwise provided in this section, any creditor who fails to comply with any requirement imposed under this part, including any requirement under section 1635 of this title,
or part D or E of this subchapter with respect to any person is liable to such person in an
amount equal to the sum of-
(1) any actual damage sustained by such person as a result of the failure;
(2)
(A)
(i) in the case of an individual action twice the amount of any finance charge in
connection with the transaction,
(ii) in the case of an individual action relating to a consumer lease under part E of
this subchapter, 25 per [**58] centum of the total amount of monthly payments
under the lease, except that the liability under this subparagraph shall not be less
than $ 100 nor greater than $ 1,000, or
(iii) in the case of an individual action relating to a credit transaction not under an
open end credit plan that is secured by real property or a dwelling, not less than $
200 or greater than $ 2,000; or
(B) in the case of a class action, such amount as the court may allow, except that
as to each member of the class no minimum recovery shall be applicable, and the
total recovery under this subparagraph in any class action or series of class actions arising out of the same failure to comply by the same creditor shall not be
more than the lesser of $ 500,000 or 1 per centum of the net worth of the creditor;
(3) in the case of any successful action to enforce the foregoing liability or in any
action in which a person is determined to have a right of rescission under section
1635 of this title, the costs of the action, together with a reasonable attorney's fee
as determined by the court; and
(4) in the case of a failure to comply with any requirement under section 1639 of
this title, an amount equal [**59] to the sum of all finance [*32] charges and
fees paid by the consumer, unless the creditor demonstrates that the failure to
comply is not material.
***
15 U.S.C. § 1640(a).
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The specific damages a borrower is entitled to under § 1640 are as follows:
a. Actual Damages
First, § 1640(a)(1) allows the class members their actual damages. The Truth in Lending manual suggests that a "correction of the error" standard under § 1640(b) applies for actual damages under TILA. Id. at
§ 8.5.5.3. Under this analysis, all bogus, unreasonable and marked up fees should be refunded as restitution
to the borrowers. In re Russell, 72 B.R. 855, 863-64 (E.D. Pa. 1987); Goldman v. First National Bank of
Chicago, 532 F.2d 10, 15 (5th Cir. 1976). The Truth in Lending manual also suggests that creditors should
be held, as a matter of contract, to the understated Finance Charges and APR. Id. at § 8.5.5.5.
b. Statutory Damages
Sections 1640(a)(2), (3) and (4) provide for "statutory" awards of damages for non-HOEPA TILA violations and HOEPA violations. Section 1640(a)(2) is applicable to all violations [**60] and limits the statutory award to the range of $ 200 to $ 2,000 where the borrowers' principal residence secures the loan. In a
class action, the class is limited to a statutory award of $ 500,000 per creditor "for the same failure to comply" with the requirements of TILA and HOEPA. 15 U.S.C. § 1640(a)(2)(B).
Also, prevailing class members are entitled to their costs and attorneys' fees. 15 U.S.C. § 1640(a)(3).
[*33] c. "Enhanced" HOEPA Damages
For violations of HOEPA, in addition to the actual damages under § 1640(a)(1) and the statutory damages under § 1640(a)(2) and (3), each class member is entitled to "an amount equal to the sum of all finance
charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material." n7 15 U.S.C. § 1640(a)(4); see also In re Williams, 291 B.R. 636, 664 (E.D. Pa. 2003) ("The statutory
damage provision contained in § 1640(a) was amended to increase the total award to the consumer in the
case of HOEPA violations") (citing Newton v. United Companies Financial Corp., 24 F.Supp.2d 444, 451
(E.D. Pa. 1998). [**61] Statutory damages in HOEPA class actions are not limited since the limitation on
class actions applies only to the penalty awarded under § 1640(a)(2)(B). There is no cap on the damages under § 1640(a)(4). These HOEPA damages are sometimes called "Enhanced Damages" and will be so referred
to by Objectors.
n7 "Material disclosures" are defined at 15 U.S.C. § 1602(u) to include "the annual percentage rate,...
the amount of the finance charge, the amount to be financed, ... and the [HOEPA] disclosures required
by section 1639(a) of this title." Thus, the failure to provide the borrower an accurate APR is a violation of § 1639 giving rise to these "enhanced" HOEPA damages.
Consequently, if a creditor violates HOEPA's disclosure requirements and/or if that creditor includes
prohibited terms in a HOEPA loan, or engages in abusive practices, then that creditor and its assignees will
not only be subject to civil liability and damages under 15 U.S.C. § 1640(a)(1), [**62] (2) and (3), but
they will also be liable for enhanced damages under § 1640(a)(4) for those additional HOEPA violations.
Accordingly, because the Banks, among other things, understated the APR disclosure given to the borrowers,
the Banks as well as the Assignee Defendants are liable to the class members for "all finance charges and
fees" that were paid by class members in addition to the TILA statutory damages and rescission. 15 U.S.C.
§§ 1635(g); 1640(a)(4), (g).
[*34] 3. TILA and HOEPA Provide For Cumulative Remedies and Multiple Assessments of
HOEPA's "Enhanced Damages"
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Again, the statutory provisions governing a borrowers' damages under TILA and HOEPA are set forth at
15 U.S.C. § 1640(a). The exceptions to § 1640(a) are provided at §§ 1640(d) and (g). Section 1640(d) provides that in the case where there are multiple obligors on a loan the statutory damages allowed under §
1640(a)(2) are limited to one recovery. In § 1640(g), TILA limits recovery for "multiple failures to disclose"
to a single recovery:
The multiple failure to disclose to any person any information required under this part or part D
or E of [**63] this subchapter to be disclosed in connection with a single account under an
open end consumer credit plan, other single consumer credit sale, consumer loan, consumer
lease, or other extension of consumer credit, shall entitle the person to a single recovery under
this section but continued failure to disclose after a recovery has been granted shall give rise to
rights to additional recoveries. This subsection does not bar any remedy permitted by section
1635 of this title.
15 U.S.C. § 1640(g).
What this means is that under TILA's plain language, the single-recovery rule of § 1640(g) applies only
to failures to disclose the information in § 1602(u), and not other violations of TILA or HOEPA, such as
form and timing requirements. See Belmont v. Associates Nat. Bank (Delaware), 219 F.Supp.2d 340, 345-46
(E.D. N.Y. 2002), 219 F.Supp.2d at 345-46; see also Brown v. SCI Funeral Services of Florida, Inc., 212
F.R.D. 602, 606-07 (S.D. Fla. 2003)("the Court is not persuaded that the provision in § 1640 limiting statutory damages for violations of disclosure requirements applies to violations of timing and form requirements,
[**64] such that Plaintiffs are precluded from asserting a class claim for statutory damages based on § 1632
or § 1638(b)."); Lozada v. Dale Baker Oldsmobile, Inc., 145 F.Supp.2d 878, 885-89 (W.D. Mich.2001)("A
requirement that a disclosure be made in a certain manner and at a certain time does not fall within the previously stated definition of a 'disclosure.'"). Accordingly, the failure [*35] of the Banks to provide the
HOEPA Notice three business days before closing or the inclusion of an improper prepayment penalty are
"form and timing" or "substantive" violations of HOEPA giving rise to a second recovery of enhanced
HOEPA damages. n8
n8 This availability of a multiple assessment of enhanced HOEPA damages is additionally demonstrated by a comparison of § 1640(a)(4), which applies to "any requirement under section 1639" with
15 U.S.C. § 1639(b) and (j), which exclude the timing requirements of § 1639(b)(1) from the definition of the disclosures required by § 1639, and § 1602(u), defining material disclosures to include "the
disclosures required by section 1639(a) of this title."
[**65]
4. Rescission
The lender's violations of TILA and HOEPA for the failure to provide the "material disclosures" to their
borrowers also provided each borrower with the right to rescind their loans. 15 U.S.C. §§ 1635, 1639(a), (j);
1640(g); 1641(c); 12 C.F.R. § 226.23; In re Williams, 291 B.R. 636, 649 (E.D. Pa. 2003)(citing authorities:
"A failure to provide the pre-closing HOEPA disclosures constitutes a material violation of TILA entitling
the borrower or obligor to rescission."). The "material disclosures" at issue in this case include inaccurate
disclosure of the Finance Charge and the APR and the failure to timely provide disclosures as required by
HOEPA. See 15 U.S.C. § 1602(u); 12 C.F.R. § 226.23(a)(3) n. 48; 12 C.F.R. § 226.32(c). Either type of vio-
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lation - the "disclosure" violation for inaccurate disclosure of the APR or the "substantive" violations like the
timing error - give rise to the right of rescission. 15 U.S.C. § 1635(a); 12 C.F.R. § 226.23(a).
It is important to understand the general nature of the rescission process in order to understand the Objectors' claims [**66] or "remedy" of rescission. The rescission process begins when the borrowers notify
their lender (here, the Banks) and/or the assignee purchasers of their loans (i.e., RFC or Irwin Union) that
they are rescinding their loan based upon a TILA or HOEPA violation. 15 U.S.C. § 1635(a). In this case, notice of the intent to seek a rescission remedy was provided on behalf of the entire class of borrowers in the
Objectors' Complaints in Intervention [*36] and in each of the Hobson Complaints, beginning with the
first one filed in July 30, 2004. By virtue of class action tolling, this notice of rescission is effective as to
each Bank by the respective filings of the original class action suits on May 1, 2001 in the Davis Action, as
to Community Bank of Northern Virginia, and on September 19, 2002 in the Ulrich action, as to Guaranty
National Bank of Tallahassee. Joseph v. Wiles, 223 F.3d 1155, 1168 (10th Cir. 2000) ("Consequently, we
conclude that American Pipe tolling applies to the statute of repose governing Mr. Joseph's [§ 11 of Securities Act of 1934] action.")
Upon the giving of notice, rescission follows a three-step sequential [**67] process set forth in 15
U.S.C. § 1635(b) and in Regulation Z, at 12 C.F.R. § 226.23; see also Truth in Lending, at § 6.6, p. 390 (5th
ed. 2003)(describing rescission process as having three steps); Saunders Affidavit, at P 109.
STEP 1: Upon receipt of a demand for rescission, the assignee's security interest in the loans they hold
becomes automatically void. See 15 U.S.C. § 1635(b), 12 C.F.R. § 226.23(d)(1).
STEP 2: Within 20 days after receipt of a demand for rescission, the creditor or the assignee is required
to return to the borrower "any amount, including any finance charge" received in the transaction from the
borrower and to reflect the termination of their security interest in the borrowers' home. See 15 U.S.C. §
1635(b); 12 C.F.R. § 226.23(d)(2). This is a significant part of the rescission claim:
Refunds to consumer. The consumer cannot be required to pay any amount in the form of
money or property either to the creditor or to a third party as part of the credit transaction. Any
amounts of this nature already paid by the consumer must be refunded. "Any [**68] amount"
includes finance charges already accrued, as well as other charges, such as broker fees, application and commitment fees, or fees for a title search or appraisal, whether paid to the creditor,
paid directly to a third party, or passed on from the creditor to the third party. It is irrelevant
that these amounts may not represent profit to the creditor.
[*37] Official Staff Commentary to § 226.23(d)-1. In other words, the borrower gets back every cent of
principal, interest and fees and costs that the borrower ever paid on the loan.
STEP 3: Once the creditor and assignee have complied with STEP 2, then the borrower is required to
tender the remaining principal of the loan back to their creditor and assignee. See 15 U.S.C. § 1635(b); 12
C.F.R. §226.23(d)((3). This includes those amounts that the lender paid on behalf of the borrower as pay offs
for these debt consolidation loans. Mayfield v. Vanguard Savings & Loan Assn., 710 F. Supp 143, 148 (E.D.
Pa. 1989).
Because rescission is to restore the parties to their "status quo" before the transaction, it has been held
that STEPS 2 and 3 may be "equitably modified" by [**69] the Court based upon the circumstances of the
case before it. See 15 U.S.C. § 1635(b); 12 C.F.R. § 226.23(d)(4); Yamamoto v. Bank of New York, 329 F.3d
1167, 1173 (9th Cir. 2003). n9 If modification of steps 2 and 3 is ordered, it may include an offset of
amounts each party owes to the other. Aquino v. Public Finance Consumer Discount Co., 606 F. Supp. 504,
509 (E.D. Pa. 1995)("Equity also permits a creditor to offset the amount owed to it by an obligor pursuant to
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§ 1635(b), rather than tendering those sums and awaiting a court's conditioning of rescission upon the return
of property by the obligor.").
n9 In response to the Yamamoto decision, the Federal Reserve Board issued a new rule that clarified
the rescission process under TILA further establishing the right of a court to equitably modify. See 69
FR 16769, 16771-2 (emphasis supplied). This acknowledgement is now specifically recognized in the
applicable Regulations. The revised 12 C.F.R. § 226.23(d)(4) provides as follows:
1. Modifications. The procedures outlined in § 226.23(d)(2) and (3) may be modified by
a court. For example, when a consumer is in bankruptcy proceedings and prohibited
from returning anything to the creditor, or when the equities dictate, a modification
might be made. The sequence of procedures under § 226.23(d)(2) and (3), or a court's
modification of those procedures under § 226.23(d)(4), does not affect a consumer's
substantive right to rescind and to have the loan amount adjusted accordingly. Where the
consumer's right to rescind is contested by the creditor, a court would normally determine whether the consumer has a right to rescind and determine the amounts owed before establishing the procedures for the parties to tender any money or property.
12 C.F.R. § 226.2323(d)(4).
[**70]
[*38] In this case, because these are high-interest, high-cost HOEPA loans that have been or were in
existence for quite some time, equitable modification is likely unnecessary as few, if any, borrowers will
have anything to tender back to their lenders after the lender returns all payments back to their borrowers.
See generally, Exhibits 4D-G; Saunders Affidavit, at P 115. And, as to any set off, those amounts would include the enhanced HOEPA damages as a set off - in essence a second reduction of all finance charges (all
interest and other costs) which most certainly would place a borrower in the position that no tender is owed
but in fact the Banks and/or assignees owe additional damage to the borrower. For this reason, while rescission is not typically a relief amenable to pursuit in a class context, the unique circumstances of the loans at
issue make rescission damages manageable in this matter. To this end, and while the application of damages
to the Banks' wrongdoing is addressed in more detail below, the Objectors do refer the Court to Ms. Saunders' Affidavit, at PP 101, 111-114, and the damage calculations provided in Exhibit 4, at P 14 and most particularly [**71] the column CL showing rescission damages on each spread sheet (Exhibits 4D-F); see also
Exhibit 4G, Summary of HOEPA/TILA rescission Values.
5. Injunctive and Declaratory Relief
"Injunctive and declaratory relief are available under TILA." In re Consolidated Non- Filing Ins. Fee
Litig., 195 F.R.D. 684, 692 (M.D. Ala. 2000); see also 28 U.S.C. §§ 2201, 2202 (Declaratory Judgment Act).
6. Costs and Attorney's Fees
Section 1640(a)(3) provides that in any action to enforce liability under TILA or in "any action in which
a person is determined to have a right of rescission under section 1635" the [*39] borrower shall be entitled to a recovery of "the costs of the action, together with a reasonable attorney's fee as determined by the
court."
III. VIABILITY OF THE BORROWERS' CLAIMS
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Armed with the knowledge of the relevant statutory language, applicable regulations and case law interpreting the same, it is a simple task to apply that knowledge to the class wide second mortgage lending activities of these Banks. That review reveals substantial and uniform violations of TILA and HOEPA, which violations [**72] fall into two categories.
. Disclosure Violations: The Banks made inaccurate APR disclosures in violation of TILA and
HOEPA.
. Substantive Violations: The Banks made untimely HOEPA Disclosures and included unlawful prepayment penalties in the mortgages.
From these violations flow significant strict liability TILA and HOEPA damages which Objectors' analysis
shows to be worth, on average, some $ 52,565.40 per violative loan. Exhibit 4, at P 14; see also Exhibit 4G,
at "HOEPA Enhanced Damages Plus HOEPA/TILA Rescission Values."
A. INACCURATE DISCLOSURES
1. The HUD-1 Section 1103 Title Exam Fee and the "Marked Up" Portion of the Section 1102 Title
Abstract Fee Were Improperly Excluded From the Finance Charge.
As noted, TILA presumes that all settlement charges are part of the Finance Charge. 15 U.S.C. § 1605(a);
12 C.F.R. § 226.4. There are exceptions to this general rule set forth in Reg. Z. Items that can be excluded
from the finance charge include charges for "[f]ees for title examination, abstract of title, title insurance,
property survey, and similar purposes." 12 C.F.R. § 226.4 (c)(7). Such [**73] fees can only be excluded
from the finance charge, however, if they are "bona fide and reasonable in amount." Id. (emphasis added);
see also Inge v. Rock Financial [*40] Corp., 388 F.3d 930, 932 (6th Cir. 2004)(specified fees are excludable only "if the fees are bona fide and reasonable"); Official Staff Commentary to § 226.4m at P 4(c)(7).
In this case, Objectors were all charged a Line 1102 "Title Abstract Fee" and a Line 1103 "Title Examination Fee" and those fees were not included in the finance charge. Exhibit 4, at PP 9-10. As explained below, the exclusion of these fees was not proper as the Line 1103 "Title Examination" fees were not bona fide
in that no title examination was performed. As to the section 1102 title abstract fee, no true abstract was provided but instead the files contain a simple "property report" the fee for which the Banks routinely and improperly marked up and then charged the borrower that marked up amount. The marked up amount is unreasonable and the difference between the actual property report cost and the markup was improperly excluded
from the finance charge. The result is a material misstatement of the [**74] APR in violation of HOEPA
and TILA.
Additionally, as Objectors noted previously, the appropriate standard to determine viability is a motion to
dismiss standard under which all allegations of the petition or complaint are deemed true. Those allegations
here would be the allegations in Objectors' motion to intervene in this, the Kessler matter, or as set forth in
the Hobson suit. Objectors more than establish viability under such a standard. Indeed, that standard is far
exceeded and viability established through the expert witness affidavits, fact witness testimony and documentary evidence Objectors present. And while Objectors do, below, set forth that evidence, it really is not
Objectors burden to prove that the Line 1103 and 1102 charges should have been included within the finance
charge. Rather, because the Banks have a duty to accurately disclose the Finance Charge, it is their burden to
prove that the Finance Charge was accurately disclosed [*41] when they sought to exclude closing from
the finance charge on the grounds that such fees were bona fide and reasonable. See, e.g., Bizier., 654 F.2d at
3; Buford, 333 F. Supp. at 1247. [**75]
a. The Line 1103 Fee Was Not Bona Fide or Reasonable
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Regulation X to the Real Estate Settlement Procedures Act speaks to what and where any particular fee
or cost should appear on a HUD-1 settlement statement. See 24 C.F.R. Part 3500. Appendix A to Regulation
X provides that the section 1100 Lines (1100-1113) of the HUD-1 cover "title charges and charges by attorneys." Id. As to Lines 1102 and 1103, Regulation X states that "[l]ines 1102 and 1103 are used for the abstract or title search and title examination. In some jurisdictions the same person both searches the title (that
is, performs the necessary research in the records) and examines title (that is, makes a determination as to
what matters affect title, and provides a title report or opinion)." Id.
Generally speaking, in a real estate transaction a title company performs two types of services. One is to
determine a risk analysis for a lender in connection with a loan it intends to make secured by real estate. The
second category of services relate to acting as a closing agent to mechanically perform the function of consummating the transaction. The analysis here relates to whether the Line 1103 charge, [**76] a title examination charge, was bona fide or reasonable and to assist in that effort, Objectors retained two title experts,
John Coghlan and William Dodson, II. Mr. Coghlan, a member of the law firm of Lathrop & Gage, L.C., is
an attorney licensed in Missouri and Kansas whose involvement in the title insurance issues as an employee
of a title company or in private law practice dates back to 1975. Coghlan Affidavit at P 1 and CV attached
thereto. William H. Dodson, II, is an attorney licensed in Georgia and Florida whose law practice has focused on real estate matters including loan closings since 1973. Dodson Affidavit at P 7 and attached biography. Both Mr. Coghlan and Mr. Dodson opine that the Line 1103 fees are [*42] not bona fide (and,
therefore, not reasonable). Coghlan Affidavit, at PP 6-7; Dodson Affidavit at PP 9(B); 9(D).
In regard to performing the first type of service, an examination of title is something done in connection
with issuing some type of opinion about title or title insurance product. Coghlan Affidavit at P 3. No title
products were issued by the recipients of the Line 1103 and 1102 charges appear in the Objectors' loan files.
Id. This lack of evidence [**77] of any title product in and of itself demonstrates that the Line 1103 fee is
not reasonable. Id. at PP 6-7; Dodson Affidavit at PP 9(b); 9(D).
Further, when legitimately performing a title examination, the examiner will look at a host of documents
and issues. No such documents or any summary of true abstract of such documents appear in these loan files.
Dodson Affidavit at P 9(A); Coghlan Affidavit at P 7. What does appear is very basic document entitled a
"Property Report." This one to two page document was typically provided by a company called General
American Corporation and provides basic information in the form of identifying the property owner, the legal description of the property and listing any tax or other liens. See e.g. Property Report attached as Exhibits 9, 14 (Property Report). Notably, it contains an express disclaimer that states the Property Report "is not
intended nor should it be considered as an opinion of title, title guarantee or title insurance policy." Id. To
perform a true title examination, a legitimate title company would have needed to see the conveyance deeds,
deeds of trust, easements and other encumbrances. Coghlan Affidavit at PP [**78] 3-4. No such documents
exist which further establishes that no title examination could have been performed as there was nothing to
examine. Id. at P 7.
[*43] The opinions of Messrs. Coghlan and Dodson are certainly supported by the candid testimony of
a former GNBT insider Michael Kevin Morin. n10 In testimony before the Commonwealth of Virginia, State
Corporation Commission, Mr. Morin provides in startling clarity a picture of the regulations-be-damned
lending atmosphere at GNBT. In regard to the conducting of title examinations, Mr. Morin flatly testifies that
title examinations were not done:
Q: Do you know what services were performed by employees of the title company owned by
the Shumways? Do you know whether or not any employees of the title company ever performed any title searches or examinations?
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2002 U.S. Dist. Ct. Briefs 714286, *; 2006 U.S. Dist. Ct. Briefs LEXIS 2628, **
A: [Morin] Not physically going to a courthouse and doing a title search or examination. There
was no time for that. They used some kind of electronic database.
Q: Do you know whether or not any employees of the title company ever performed a socalled title examination as opposed to a title search.
A: I don't think they did.
Q: [**79] Do you know whether or not any title insurance policies were ever issued in
connection with the loans?
A: I don't believe so.
Q: Do you know whether or not any of the companies run by the Shumways paid money to
somebody to do an actual title search or title examination in connection with these loans?
A: I have no knowledge that they ever did that. And I believe I would have heard about these
things had they been doing them. Because they would have been slowing down the process.
There would have been discussion points for how you bring that all in house and control it.
Exhibit 6, at p.29-30 (emphasis added); see also p. 37-38 (confirming the allegations from this case related
to the title charges not being bona fide (no services rendered) and unreasonable were true).
n10 Mr. Morin was Vice President of Business Development for Equity Guaranty, LLC, the Shumway-Bapst company that acted as the second mortgage loan originator for GNBT.
Additionally, Objectors are not [**80] the first persons to raise a concern over the Banks' title fees. Indeed, RFC expressed a "continuing concern" over whether the title fees were excessive and eventually determined that they were. In late 2001 and early 2002, RFC specifically [*44] questioned GNBT whether
the fees being charged by USA Title, LLC were "bona fide and reasonable" and it required GNBT to perform
a market conduct survey to establish that the fees were bona fide and reasonable.
Discussed GMAC/RFC's continuing concern with title fee charges. GMAC/RFC believe
that the fees are excessive. Stated that GMAC/RFC uses two methods to determine the fairness of the fee: (1) cost and (2) market analysis. Stated that GMAC/RFC is more comfortable
with market analysis approach and requested that GNB complete a market analysis immediately and forward results to them.
Exhibit 7 ("Notes from conversation with Don Russell [RFC] 1/29") (FDIC 4664-9057-00749) (emphasis
added). A market survey was in fact done and the conclusion was that - in fact- the "title fees may be too
high." See Exhibit 8, (FDIC 4664-9035-00339)(emphasis added). As a result, "title fees [were] reduced.
[**81] " Id. (emphasis added)
In summary, Objectors have more than established that their claim related to the Line 1103 charge is viable, as the entire "Title Examination" fee was bogus. Accordingly, the entirety of such charge should have
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2002 U.S. Dist. Ct. Briefs 714286, *; 2006 U.S. Dist. Ct. Briefs LEXIS 2628, **
been included in the Finance Charge which and the failure to do so necessarily resulted in an understated
APR. Objectors have commissioned the calculation of the misstated APR by virtue of the failure to include
the Line 1103 title exam charges in the finance charge and that effort, as to the 436 loans examined, 378, or
88.9% have a materially misstated APR (that is, an APR outside the 1/8 tolerance). See Exhibit 4, at P 9. Of
those loans, 387, or 91.1 % are outside the 1/8 tolerance with the addition of the mark up in Line 1102.
b. The Line 1102 Fee Was Not Bona Fide or Reasonable.
The Line 1102 Abstract or Title Search charge is neither bona fide nor reasonable. A true title abstract is
an in-depth effort by a title company to allow the closer or settlement agent to determine who can sell or encumber the property. Dodson Affidavit at P9A. The Morin testimony above establishes that the GNBT captive title company (USA Title, LLC) [**82] did not [*45] perform this search. Objectors have pled similar facts as to Title America, LLC, the captive title company used for both CBNV and GNBT loans and certainly there is no evidence to suggest that operation differed from the GNBT/USA Title methods testified to
by Mr. Morin.
Additionally no search was done by anybody that would be considered a true title abstract search from
which an Abstract of Title is created. Dodson Affidavit at P 9(A). Such an effort would result in a detailed
document revealing all owners, the legal description, taxes, recorded debts, liens, covenants, easements, survey exceptions and other items. Id. No such document appears in the Objectors files but instead there is only
the before described property report. This property report is not an Abstract of Title. Id.
Arguably then, the entire Line 1102 fee is not bona fide or reasonable. Saunders Affidavit at PP 45-46.
The Objectors, however, do not contend that the entirety of the Line 1102 charge must be added into the finance charge but only that amount in excess of the cost of the property report which is charged to the borrower as any such excess could not be reasonable. Saunders Affidavit [**83] at PP 47-48; Coghlan Affidavit at P 6. The typical property report has a charge listed right on its face. See Exhibits 9, 14 (Property Reports). The Banks, however, charged the borrower more in nearly every complete file the Objectors have reviewed. Compare Exhibits 9 and 14 (Property Reports) to Exhibits 9 and 14, HUD-1 at Line 1102). A typical markup is around $ 25.00 but in some instances, it is hundreds of dollars in some instances. See Exhibit
4D, at Column BZ. Whatever the amount of the markup is plainly not reasonable, and a separate violation of
RESPA, 12 U.S.C. P 2607(b); Santiago, 417 F.3d at 389. As such, whatever the mark up amount is, it must
be included in the finance charge.
[*46] B. SUBSTANTIVE VIOLATIONS OF HOEPA
1. Untimely Disclosures
Creditors making HOEPA loans are to provide a special HOEPA Disclosure containing the APR to their
borrowers at least three business days prior to the closing of a HOEPA loan. See 15 U.S.C. § 1639; 12
C.F.R. §§ 226.31(c); 226.32(c). "A failure to provide the pre-closing HOEPA disclosures constitutes [**84]
a material violation of TILA entitling the borrower or obligor to rescission." In re Williams, 291 B.R. at 649.
As noted, the fundamental purpose of this practice is that due to the extreme cost of a HOEPA loan, Congress wanted to provide an advanced period of notice that would disclose the true, high cost of the loan so
that the borrower would have time for cool reflection about whether they wanted to proceed with the loan. S.
Rep. 103-169; 1994 U.S.S.C.A.N. 1881, 1909.
Objectors contend that the Banks, however, routinely and systemically failed to comply with this core
HOEPA provision. First and foremost, the Banks' own operations manuals set forth a standard policy regarding the "Timing of Disclosures" which could not ensure compliance with the 3 business day rule:
The Good Faith Estimate, Truth in Lending, Price Agreement must be signed or mailed within
three business days (including Saturday as a business day) of the application date. The HUD
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Information Booklet must be mailed to the borrower but is not required to be mailed within
three business days of application. A new Truth in Lending disclosure must be generated if the
APR increases [**85] by more than .125% from the initial disclosure. The Appraisal Disclosure must be signed or mailed prior to providing the borrower with a notice of action taken on
their application (whether orally or in writing). The Servicing Transfer Disclosure must be
signed or mailed to the customer the same day as the signing of the mortgage loan application.
The Section 32 Disclosure must be signed or mailed to the customer at least three business
days prior to settlement. A new disclosure must be signed or mailed if, before closing, there
are any changes that make the initial Section 32 Disclosure inaccurate. The Lender Paid Mortgage Insurance Disclosure must be provided at the time of the mortgage commitment. If the
mortgage commitment is customarily done verbally, then the disclosure [*47] must be provided at the same time as the Good Faith Estimate, Truth in Lending, Price Agreement and
HUD Information Booklet.
Exhibits 10 and 11, at p.8 (CBNV 12/1/99 and 5/1/01 Operations Manuals)(emphasis added). Not surprisingly, given that each of these Banks was just a front for the Shumway-Bapst Organization, the GNBT Operations Manual utilized [**86] during their control of that bank contains identical provisions. Exhibit 12, at
p.10 ("The Section 32 Disclosure must be signed or mailed to the customer at least three business days prior
to settlement.")
Significantly, RFC itself was not convinced of the sufficiency of these policies to meet the delivery requirement of HOEPA. A November 7, 2001 internal memorandum of RFC produced by the FDIC as receiver
for GNBT stated:
The following is my understanding of the decisions that we made during yesterday's meeting
regarding Section 32 policies. Please let me know if I have misstated anything.
***
. Proof of Receipt of the Section 32 Disclosure. RFC will change its policy to require independent proof that the borrower received the Section 32 disclosure three days prior to closing.
An acknowledgement signed by the borrower at closing will no longer be sufficient proof. SDG
[RFC's "Sales Delivery Group"] will continue to review for proof of receipt of the disclosure
pre-purchase. If a loan does not have sufficient proof, SDG will go back to the lender and ask
them to provide proof that the disclosure was provided three days before closing. The issue will
be addressed [**87] in the client communication addressed above and will be effective on
January 1. Jane will draft the communication for review by people attending the meeting. We
will provide some specific examples of what RFC will consider sufficient proof that the the
[sic] disclosure was provided three days prior to closing.
Exhibit 13 (FDIC 4664-9057-00360).
The Defendants may argue that a written acknowledgement of receipt of a disclosure signed by the borrower or, perhaps, even that their own certifications of delivery of a disclosure [*48] prepared by a bank
employee prevents their liability under HOEPA for the time-of-delivery violation. This argument lacks merit
and is easily disposed. 15 U.S.C. § 1635(c) states:
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2002 U.S. Dist. Ct. Briefs 714286, *; 2006 U.S. Dist. Ct. Briefs LEXIS 2628, **
Notwithstanding any rule of evidence, written acknowledgment of receipt of any disclosures
required under this subchapter by a person to whom information, forms, and a statement is required to be given pursuant to this section does no more than create a rebuttable presumption of delivery thereof.
15 U.S.C. § 1635(c)(emphasis added).
Thus, an acknowledgment only creates a rebuttable [**88] presumption that the disclosures were
timely delivered. It says nothing about whether the disclosures were actually received by the borrowers,
which, of course, TILA and HOEPA require.
Given the overt, undeniable policy of TILA virtually to force-feed information to the credit
consumer and, therefore, reading the relevant statutory provisions as a consistent scheme, it is
apparent that "delivery" of the TILA disclosure form only occurred when plaintiff received that
form in the mail ...
Jenkins v. Landmark Mortg. Corp. of Virginia, 696 F. Supp. 1089, 1093 (W.D. Va. 1988); see also 12 C.F.R.
§§ 226.17(a)(1) 226.31(b)(both requiring that the disclosures be made "clearly and conspicuously in writing,
in a form that the consumer may keep."). Indeed, TILA's consumer protections "would not be furthered if a
creditor were permitted to avoid liability without producing any proof of disclosure where the debtor has,
through her sworn testimony, denied receipt of the required disclosures." In re Pinder, 83 B.R. 905, 913
(E.D. Pa. 1988)
Further, Objectors submit that the any presumption created by the acknowledgements is rebutted [**89]
by the Banks' Operations Manuals that mandate a policy that could not insure compliance with the 3 business
day notice requirement. See Exhibits 10, 11, at 8; Exhibit 12 at 10. Therefore, even if they were followed,
which is disputed, the Banks' policies did not ensure that the borrower actually timely received the required
HOEPA disclosures. Curry v. Fidelity Consumer Discount Co. 656 F. Supp. 1129, 1131 (E.D. Pa.
1987)(recession period "allows the [*49] consumer an opportunity to reflect, in the quiet of her home and
without any pressure, whether to undertake a loan transaction which would create an encumbrance on the
home."). In this same regard, whether any such acknowledgements could be relied upon is questionable in
light of Mr. Morin's testimony about "tracing tables" where borrowers' signatures were, incredibly, forged
onto closing documents. See Exhibit 6, at p.15-16.
Finally, even if the required disclosures were timely delivered, they were still inaccurate, which is the
same as the disclosure of the APR not having been given at all. These disclosures, if in fact inaccurate, would
clearly constitute "material" disclosure [**90] violations which would justify a rescission. See, e.g., 15
U.S.C. § 1635(f); In re Bumpers, 2003 WL 22119929, at *6 (N.D. Ill. 2003).
2. Prohibited Prepayment Penalties
As stated above, if a loan is covered by HOEPA, it may not contain a prepayment penalty unless the
penalty applies "only to a prepayment made with amounts obtained by the consumer by means other than a
refinancing by the creditor under the mortgage, or an affiliate of that creditor." 15 U.S.C. § 1639(c)(2)(B); 12
C.F.R. § 226.32(d)(7)(ii). A substantial majority of the Note forms utilized by CBNV and GNBT contain
provisions providing for prepayment penalties but do not disclose the HOEPA restriction that a prepayment
penalty may be collected "only to a prepayment made with amounts obtained by the consumer by means
other than a refinancing by the creditor under the mortgage, or an affiliate of that creditor." 15 U.S.C. §
1639(c)(2)(B). See, e.g., Exhibit 14, Note, at P 6.
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2002 U.S. Dist. Ct. Briefs 714286, *; 2006 U.S. Dist. Ct. Briefs LEXIS 2628, **
[*50] C. AN EXAMPLE OF THE TYPICAL BORROWER'S DAMAGES AND RESCISSION
RIGHTS
These common and typical violations of TILA [**91] and HOEPA provide an aggrieved borrower substantial statutory damages and the right of rescission. The violations of the APR disclosure requirements invoke liability under both TILA and HOEPA. 15 U.S.C. §§ 1635(g); 1640(a)(4),(g). The TILA damages include actual damages as well as statutory damages which, in a class action, are capped at $ 500,000 per creditor "for the same failure to comply." 15 U.S.C. §§ 1640(a)(1), (2). Under HOEPA, the APR violation gives
the borrower the right to HOEPA's enhanced damages which are the "sum of all finance charges and fees
paid by the consumer." 12 U.S.C. § 1640(a)(4). The substantive violations for the failure to timely deliver the
HOEPA disclosures 3 business days in advance of closing results in another assessment of HOEPA's enhanced damages. And, where applicable, a violation of the prepayment provisions of HOEPA at 15 U.S.C. §
1639(c) and 12 C.F.R. §§ 226.32(d)(6)-(7) give rise to another assessment of HOEPA's enhanced damages.
Costs and attorney's fees are also part of the damages to be assessed. 15 U.S.C. § 1640(a)(3). In [**92] addition, both the TILA and HOEPA APR violations give rise to the right of rescission. n11 Using the particular loan of Objector Sonia Gestes will serve to illustrate these TILA and HOEPA violations and attendant
damages.
n11 Again, however, the tolerances for a determination of whether the APR is materially misstated for
purposes of rescission differ under TILA and HOEPA. Under TILA, the APR is "a disclosure affected
by the finance charge" and rescission is allowed when the Finance Charge is understated by one-half
of one percent of the loan amount. 12 C.F.R. § 226.23(g). Under HOEPA, however, TILA's tolerance
does not apply and the tolerance is the 1/8% (.125%) tolerance of the APR. 12 C.F.R. §§ 226.22(a)(2);
226.31(g).
1. GNBT Loan to Sonia Gestes
On November 21, 2001, Illinois homeowner Sonia Gestes took out a $ 31,300 second mortgage loan
from Guaranty National Bank of Tallahassee at a rate of 11.99% interest for 15 [*51] years. n12 The
standard loan documents in Ms. Gestes loan file [**93] provide all the information needed to determine that
the Line 1103 Title Examination fee and 1102 Abstract or Title Search markup were not within the finance
charge, that the failure to include them is a material misstatement of the APR the TILA and her resulting
damages.
n12 Ms. Gestes' loan is within the one-year period preceding the filing of the Ulrich Complaint against
GNBT on September 19, 2002 which tolls her claims, and is within the three-year period from that
same date, making her rescission claim timely as well. See In re Community Bank, 418 F.3d at 305.
a. Necessary Information
Various Loan File Information
Term
Loan Amount
Disclosed Finance Charge
Disclosed Amount Financed
Disclosed APR (HOEPA)
Disclosed APR (TILA)
Amount
$ 31,300.00
$ 40,669.44
$ 26,909.00
14.9369%
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2002 U.S. Dist. Ct. Briefs 714286, *; 2006 U.S. Dist. Ct. Briefs LEXIS 2628, **
Term
Disclosed Monthly Pmts
Disclosed Total Payments
Property Report Fee
Term
Loan Amount
Disclosed Finance Charge
Disclosed Amount Financed
Disclosed APR (HOEPA)
Disclosed APR (TILA)
Disclosed Monthly Pmts
Disclosed Total Payments
Property Report Fee
Amount
$ 375.46 x 179 + 1 pmt of
$ 371.10
$ 67,578.44
$ 90.00
Source Document (Exhibit 14)
Promissory Note
(or HUD-1 Line 1400)
TILA Disclosure
TILA Disclosure
HOEPA Disclosure
TILA Disclosure
TILA Disclosure
TILA Disclosure
Property Report
[**94]
HUD-1 Settlement Statement Information
Line
No.
801
802
804
Charge
Paid to
Amount
Loan Origination Fee
Loan Discount Fee
Credit Report Fee
3,130.00
626.00
50.00
811
812
Underwriting Fee
Flood Certification Fee
1101
1102
1103
Settlement or Closing Fee
Abstract or Title Search
Fee
Title Examination Fee
GNBT
GNBT
Chase/
GNBT
GNBT
Fidelity
Flood Ins./
GNBT
USA Title
USA Title
450.00
1111
1112
1113
1201
Overnight Fee
Document Review Fee
Processing Fee
Recording Fee
Title
America
USA Title
USA Title
USA Title
Cook
County
Line
No.
801
802
804
811
812
110
1102
1103
1111
1112
Total
Amount
Financed
X
226.4(c)(7)(iii)
X
226.4(c)(7)(iv)
X
226.4(c)(7)(I)
X
226.4(c)(7)(I)
X
Finance
Charge
X
X
200.00
20.00
X
150.00
115.00
X
25.00
250.00
260.00
31.50
X
5,307.50
4,391.00
X
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2002 U.S. Dist. Ct. Briefs 714286, *; 2006 U.S. Dist. Ct. Briefs LEXIS 2628, **
Line
No.
Charge
Paid to
Amount
Finance
Charge
None
1113
1201
X
226.4(e)(1)
916.50
[*52] b. Determining Whether the APR Violation is Material
i. STEP 1: Determine the Settlement Charges Allocated to Finance Charges.
$ 31,300.00
$ 26,909.00
$ 4,391.00
Loan Amount
less Amt. Financed
Total Settlement Charges
[**95]
ii. STEP 2: Determine Allocation of Settlement Charges Between Amount Financed and Finance Charge
$ 5,307.50
$ 4,391.00
$ 916.50
Total Settlement Charges (HUD Line 1400)
Total Settlement Charges in Finance Charge
Settlement Charges in Amount Financed
NOTE: Review of the HUD-1 fees confirms this amount. In this case, we know the Banks standard but
wrongful practice to exclude the Title Examination (Line 1103) and Abstract or Title Search Fee (Line 1102)
necessarily will be part of this figure. Thus, this is truly not a calculation that need be done each time. In this
instance, the far right column on the HUD-1 chart demonstrates those charges and fees, including the Line
1102 and 1103 charges, that GNBT allocated to the amount financed rather than the finance charge.
[*53] iii. STEP-3: Determine if the Exclusion of the Line 1103 and 1102 Mark-Up Materially Misstated the APR
This step is simply reallocating the Line 1103 and then Line 1102 mark up back into the finance charge
(and deducted them from the amount financed) and re-running the APR to see if it was materially misstated
under the applicable tolerance. The HUD-1 gives us the 1103 amount, [**96] in its entirety, to reallocate
since it is neither bona fide nor reasonable. As to the Line 1102 charges, the amount added back to finance
charge is the difference or mark up between the cost of the property report and what GNBT charged Ms.
Gestes ($ 115 (Line 1102 charge) - $ 90 (actual cost) = $ 25 mark-up). The re-run APR shows that with just
the reallocation of the Line 1103 charge to the finance charge, the APR provided by GNBT in the HOEPA
disclosure was materially misstated.
Amount
Financed
Finance
Charge
APR n13
Disclosed APR
26,909.00
40,669.44
14.9369
Difference
from
Disclosed
n/a
Violation?
APR upon adding back
in Line 1103 to Finance
Charge
APR upon adding both
Lines 1103 + 1102
Markup ($ 25) to
Finance Charge
26,459.00
41,119.44
15.2827
.3458
?%
Tolerance =
15.0169%
YES
26,434.00
41,144.44
15.3022
.3653
YES
n13 The APR calculations for the Gestes loan were performed using the following programs: (1)
Consumer Law Math, Version 2.2.0, which is a program created by Custom Legal Software that is li-
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censed to purchasers of the Truth in Lending Manual; and (2) APR Win, Version 5.0.0, which is the
APR calculator used by the Office of the Comptroller of the Currency. It may downloaded for free
from the OCC's website at http://www.occ.treas.gov/aprwin.htm. The calculations using both programs are attached at Exhibits 16 and 17; see also Exhibit 5, at P 15.
[**97]
[*54] c. Determining Other HOEPA Violations
i. Untimely Disclosure
Objectors proof of the untimely HOEPA disclosure is class-wide proof of the failure of the Banks to
have a policy that ensures compliance, the testimony of Mr. Morin about the Banks' routine rejection of any
attempt to comply with lending laws and as an example of all class members, Ms. Gestes, whose HOEPA
Disclosure was signed on the same date as her loan closing, November 21, 2001. See Exhibit 14.
ii. Prepayment Penalty
The Gestes Note contains a prepayment penalty. See Exhibit 14 at Truth in Lending Disclosure, "Prepayment" and Note, at P 6.
d. Determining TILA and HOEPA Damages for the Gestes Loan
i. Statutory Damages
First, for the Inaccurate Disclosure violation, Ms. Gestes is entitled to her Actual Damages. 15 U.S.C. §
1640. Applying a "correction of the error" standard to refund all bogus and marked up fees, Ms. Gestes is, at
a minimum, entitled to $ 475.00 in actual damages. 15 U.S.C. § 1640(a)(1).
Second, Ms. Gestes is entitled to the statutory award under 15 U.S.C. § 1640 [**98] (a)(2)(B). Since
this is a class action, the award under subparagraph (2)(B) is capped at $ 500,000 for GNBT loans. This
amount cannot be determined until the precise number of GNBT borrowers is determined. The Objectors
understand that 21,725 GNBT loans were purchased by RFC. See Exhibit 18. Using this number, Ms. Gestes
is entitled to a statutory award of approximately $ 23.00.
[*55] Third, Ms. Gestes is entitled to an award of her costs and attorneys' fees. 15 U.S.C. § 1640(a)(3).
Fourth, Ms. Gestes is entitled to her HOEPA damages under § 1640(a)(4). This is a recovery of "all finance charges and fees paid for by the consumer." The Finance Charge includes all interest paid on the loan
as of the date of the damage award plus all settlement fees paid by the borrower. The interest amount is
easily calculated using an amortization schedule. For Ms. Gestes, as of February 16, 2006, that amount is $
14,730.83. Exhibit 4D, at Column CJ, Line 15. n14 The remaining finance charges and fees paid by the
consumer consist of the total settlement charges set forth in Line 1400 of the HUD-1 Settlement Statement,
which is $ 5,307.50. [**99] Exhibit 4D, at Column CI. Thus, Ms. Gestes enhanced HOEPA damages are
$ 20,038.33. Exhibit 4D, at Column CK.
n14 These calculations using a standard amortization schedule were performed for each of the 436
loans in the Objectors' Spreadsheet. The Gestes loan appears in Row 15, and her amortization calculation is in Column CJ. Ms. Gestes has not paid off her loan.
Additionally, TILA limits recovery for "multiple failure[s] to disclose." 15 U.S.C. § 1640(g). Providing
an inaccurate APR is a disclosure violation. The substantive HOEPA violations for untimely delivery and
prepayment penalties are not, however, limited by the language in § 1640(g). The unlawful prepayment pen-
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alty is only considered a failure to make a material disclosure for purposes of rescission. See 15 U.S.C. §
1639(j); 12 C.F.R. § 226.23(a)(3) n. 48. Thus, Ms. Gestes is entitled to an additional recovery of enhanced
damages under § 1640(a)(4). Because there are three [**100] violations of HOEPA on her loan ((1) Inaccurate Disclosure (Disclosure Violation); (2) Untimely Disclosure (Substantive Violation) and (3) Prohibited
Prepayment Penalty (Substantive Violation)), Ms. Gestes may recover a total of $ 60,932.04 under §
1640(a)(4).
[*56] From the above, the sum of Ms. Gestes' statutory damages under § 1640(a) is at least the following:
Actual Damages
Statutory Award
HOEPA Damages
Total:
(Plus an award of attorney's fees and costs)
$ 475.00
$ 23.00 (estimated)
$ 60,114.99
$ 60,612.99
ii. Value of Rescission
The violation of the HOEPA disclosure requirement also gives a borrower the extended right of rescission. The value of the rescission claim is the same as the value of the enhanced HOEPA damages because
that amount is the net amount the loan will be reduced by under rescission. See also Saunders Affidavit at
PP109-110. n15 Thus, as calculated above, the value of rescission for Ms. Gestes is $ 20,038.33.
n15 The full value of the amounts returned to the borrower under rescission is larger that the interest
paid plus all settlement charges (i.e. the HOEPA enhanced damage amount) as it also includes all
principal paid. The requirement of tender of the principal amount of the loan as part of the rescission
remedy, however, means the returned principal paid goes back to the lender. Thus, the net monetary
value of rescission to the borrower is the interest paid and all settlement charges - again, the HOEPA
enhanced damage amount.
[**101]
Under a rescission measure of damages, the borrower must tender the principal amount of the loan. 12
U.S.C. § 1635(b). Thus, the tender for Ms. Gestes is obligated to tender he remaining principal amount of her
loan, $ 27,257.83, Exhibit 4D, at Columns CT and CV, offset by the rescission reduction of $ 20,038.33,
which makes her tender obligation $ 7,219.50. The tender amount can be offset by her other TILA and
HOEPA damages, which would result in no tender and a positive damage award to Ms. Gestes as follows:
Total statutory recovery:
Value of Rescission:
Subtotal
Tender Obligation
Total Recovery from Defendants
$ 60,612.99
+ $ 20,038.33
$ 80,650.32
- $ 27,257.83
$ 53,392.49
[*57] Thus, the total value of her claims is $ 80,650.32 and the net amount she could recover, after a
deduction for her tender obligation is, $ 53,392.49.
D. EXTRAPOLATION TO THE CLASS
The damages for the Gestes loan are typical of the 436 loan data base that Objectors have reviewed and
which has been translated into the Spreadsheets attached at Exhibit 4D-G. Indeed, we see from Exhibit 4G
(Summary of Spreadsheets), that the average [**102] combined statutory damages and value of rescission
is $ 52,565.43 per violative loan. The Spreadsheet also shows that some 387 of the 436 total loans or 88.7%
have an APR violation as a result of a failure to include the Line 1103 Title Examination charge in the Fi-
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nance Charge and 9 more show a violation as a result of also reallocating the mark up on the Line 1102 Abstract and Title Search charge. See Exhibit 4, at PP 9-10.
Objectors believe this data can be extrapolated to the entire class of 44,535 loans held by RFC. Objectors
had asked that a random sampling be done of the RFC loans and the corresponding loan files be produced in
connection with preparation of this viability brief. But RFC refused this request. It did, however, produce
some 116 files relating to the actual objectors and opt outs represented collectively by the undersigned counsel. The resulting database of 436 loans formed the basis for the Spreadsheets. Had a random sampling been
done, to achieve a margin of error of 10%, a random sampling of 96 loans would have been necessary.
Chance Encounters: A First Course in Data Analysis and Inference, at p. 352, excerpt attached as [*58]
Exhibit [**103] 18. For a margin of error of 5%, the random sample size would need to be 384 loans. Id.
Here the sampling was not random but given that the number of loans in the database is 436, we can see it is
a substantial number and almost 3 times the size for a 10% margin of error sample size. The sample has, obviously, great statistical power.
Other factors support the idea that the 436 loan database is representative of the entire group of CBNV
and GNBT loans held by RFC. For example, we know that of the 44,535 loans held by RFC, 22,810, or
51.2% are CBNV loans and 21,725, or 48.8% are GNBT loans. Objectors' database of 436 loans contains
49.5% CBNV loans and 50.5% GNBT loans, which breakdown certainly suggests that the 436 loans are representative of the entire population of these Banks' loans held by RFC.
In calculating the actual damages for each loan, Objectors note that the interest paid component of the
damages which relates to the HOEPA enhanced damage and the monetary value of the rescission damages
are likely overstated because pay off date information is not available for the entire 436 loan data base. In
particular for the loans from Missouri, Illinois and Maryland (some [**104] 151 loans) no payoff information is available. For some 283 loans from Georgia, however, Objectors do have that information. As to
those loans for which Objectors do have pay off information, there total damages (statutory and rescission
value) are $ 47,220.05. Using this more conservative number, extrapolated across the entire 44,045 loans
with violations that were contained in the putative class action settlement, gives a total damage number in the
amount of 2,079,807,102.00. And to repeat, any such damage number relates only to these strict liability
damages under TILA and HOEPA.
[*59] E. THE CLAIMS ARE TIMELY
1. Statute of Limitations - Damage Claims
The statute of limitations for affirmative claims for damages under § 1640 is one year and this period is
subject to equitable tolling. 15 U.S.C. § 1640(e); In re Community Bank of Northern Virginia, 418 F.3d 277,
304-05 (3rd Cir. 2005). The Third Circuit's decision in this matter made it clear that the filing of the Davis v.
CBNV matter on May 1, 2001 and the Ulrich v. GNBT matter on September 19, 2002 provide the operative
class action tolling date for these TILA [**105] and HOEPA claims. In re Community Bank, 418 F.3d at
304-05. Further, as expressly noted by the Third Circuit, it has been admitted that some 14,000 loans were
within the one-year limitations period. In re Community Bank, 418 F.3d at 305. While the fact that nearly
one-third of the 44,535 borrower class has no limitations issue, Objectors suggest that the number of class
members within the applicable one-year periods is even higher. As part of Objectors' analysis of the 436 loan
database, it looked at the limitations issue and found that some 50.9% (11,610 of 22,810) of the CBNV loans
were made within one year of the Davis filing and some 37.7% (8,180 of 21,725) were made within one year
of the Ulrich filing. As such, it may well be that nearly 19,800 of the loans are not subject to any limitations
challenge.
2. Statute of Limitations - Rescission
All borrowers have an automatic statutory right to rescind their loans for three business days following
the closing of the mortgage transaction. 15 U.S.C. § 1635(a); 12 C.F.R. § 226.23(a)(3). If the creditor fails,
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however, to make all material disclosures and to make [**106] them accurately then the consumer's ability
to rescind is extended for up to three years. See 15 U.S.C. § 1635(a), (f); 12 C.F.R. §§ 226.23(a)(3),
226.32(d)(6) and (7); In re Community Bank of Northern Virginia, 418 F.3d at 304-05; In re Porter, 961
F.2d 1066, 1073 (3rd Cir. 1992)("TILA [*60] generally permits a consumer borrower to rescind a loan
transaction that results in the creditor taking a security interest in the borrower's principal dwelling."). This
three year period is also shortened by the "transfer of all of the consumer's interest in the property, or upon
the sale of the property." 12 C.F.R. § 226.23(a)(3). A refinancing does not cut-off rescission rights. McIntosh
v. Irwin Union Bank and Trust, Co., 215 F.R.D. 26, 31 (D. Mass 2003)(citing Pulphus v. Sullivan, 2003 WL
1964333 (N.D. Ill. April 28, 2003); In re Wright, 127 B.R. 766, 770 (Bankr.E.D.Pa.1991) (same). A foreclosure does. 15 U.S.C. § 1635(f).
While the three year period is a statute of repose not a statute of limitations, this matters not for the purpose of tolling. [**107] See Joseph v. Wiles, 223 F.3d 1155, 1168 (10th Cir. 2000)("Consequently, we
conclude that American Pipe tolling applies to the statute of repose governing Mr. Joseph's action."). As
such, in accordance with the Third Circuit's finding that the filing of the Davis v. CBNV matter on May 1,
2001 and the Ulrich v. GNBT matter on September 19, 2002 are the operative class action tolling date for the
borrowers' TILA and HOEPA claims, the three year rescission period extends to May 1, 1998 for CBNV
loans and September 19, 1999 for GNBT loans. See In re Community Bank, 418 F.3d at 304-05.
With respect to the requirement that the lender be given notice of the invocation of a borrower's rescission right, the filing of a lawsuit seeking rescission will constitute the requisite notice to the lender that the
borrower seeks rescission of their loan. See Jones v. Saxon Mortg., Inc., 161 F.3d 2, 1998 WL 614150, at *4
(4th Cir. 1998)("The rule of law of these cases is clear-the filing of a lawsuit can be sufficient written notice
of rescission under TILA so long as the complaint seeks rescission.").
In Kessler, the settling parties [**108] specifically attempted to release the class members' TILA and
HOEPA claims, including their claims for rescission, as part of their Settlement Agreement. [*61] See §§
2.25, 6 of the Settlement and Release Agreement attached as an exhibit to the Kessler settling parties' "Joint
Motion to Certify Class for Purposes of Settlement, etc." (Docket No. 7, dated July 14, 2003). After receiving Notice of the class action settlement in Kessler, certain class members objected to the settlement because
it failed to provide adequate compensation to the class members for the release of the TILA and HOEPA
claims. And, a number of class members sought to intervene as class representatives in Kessler in order to
assert TILA and HOEPA claims. See Kessler Docket Nos. 17, 18, 25. In fact, on October 1, 2003, as part of
their initial Complaint in Intervention, the objector/intervenors alleged that "[u]nder TILA, the Class members have three years to rescind their loans, if the rescission right applies. 15 U.S.C. §§ 1635(f), 1635(g),
1640." See Complaint in Intervention, P 85 (Docket No. 18).
Additionally, in the Hobson complaint, the Plaintiffs [**109] seek rescission of their loans as part of
their prayer for damages for violations of TILA and RESPA, as well as a declaratory judgment related to
their rights to rescind their loans for those violations. The defined class in that suit was all opt outs from the
nationwide class in Kessler, those individuals nationwide that were never in Kessler (those whose loans from
the Banks were not assigned to RFC) and, contingently, the entire putative class from Kessler, should the
class settlement be vacated, which of course it was. Each such assertion of the rescission rights of these putative class members is subject to class action tolling and relates back to the original filings of the Davis and
Ulrich matters. See Jones v. Saxon Mortg., Inc., 161 F.3d 2, 1998 WL 614150, at *4 (4th Cir. 1998)("The
rule of law of these cases is clear-the filing of a lawsuit can be sufficient written notice of rescission under
TILA so long as the complaint seeks rescission.").
[*62] 3. Class Action Tolling Applies to the Objectors' claims.
a. Principles of Class Action Tolling
Under principles of class action tolling, because the Objectors were members [**110] of the class defined in the Consolidated Amended Class Action Complaint in the Kessler action, the Kessler action tolls the
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statute of limitations for the individual claims of the members of that class that are related to or which derive
from the fraudulent scheme at issue. See Yang v. Odom, 392 F.3d 97 (3rd Cir. 2004); American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974) and Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983).
Moreover, because the Court has not denied class certification of any of the Kessler Plaintiffs' claims, the
claims of all of the members of the class remain tolled since the filing of the operative complaint in Davis on
May 1, 2001 as to the CBNV borrowers and September 19, 2002 in Ulrich as to the GNBT borrowers. This
unquestionably includes the TILA and HOEPA claims at issue which were known to the Defendants
throughout the Kessler litigation and which they attempted to release as part of their settlement.
Class action tolling is designed to promote a balance between the interests of defendants in the statute of
limitations and the judicial economy and efficiency of [**111] action promoted by class actions. See Yang,
392 F.3d at 102-03. The Supreme Court explained this in its seminal decision on class action tolling by first
explaining the purpose of statutory limitation periods:
[t]he policies of ensuring essential fairness to defendants and of barring a plaintiff who has
slept on his rights, [and] are satisfied when, as here, a named plaintiff who is found to be representative of a class commences a suit and thereby notifies the defendants not only of the substantive claims being brought against them, but also of the number and generic identities of the
potential plaintiffs who may participate in the judgment. Within the period set by the statute of
limitations, the defendants have the essential information necessary to determine both the subject matter and size of the prospective litigation, whether the actual trial is conducted in the
form of a class action, as a joint suit, or as a principal suit with additional intervenors.
[*63] American Pipe, 414 U.S. at 554-55. As such, to reject class action tolling would
frustrate the principal function of a class suit, because then the sole [**112] means by which
members of the class could assure their participation in the judgment if notice of the class suit
did not reach them until after the running of the limitation period would be to file earlier individual motions to join or intervene as parties-precisely the multiplicity of activity which Rule
23 was designed to avoid in those cases where a class action is found 'superior to other available methods for the fair and efficient adjudication of the controversy.'
Id. at 551. Thus, as the Third Circuit recently recognized, "[b]ecause the filing of a class complaint puts a
defendant on notice "of the need to preserve evidence and witnesses respecting the claims of all the members
of the class [,] ... [t]olling the statute of limitations thus creates no potential for unfair surprise, regardless of
the method class members choose to enforce their rights upon denial of class certification..." Yang, 392 F.3d
at 103-04 (citing Crown, Cork & Seal, 462 U.S. at 353).
b. The Tolling Principles Are Well Served In This Case
In this matter, class action tolling applies to each of the claims of the Objectors because the [**113]
policies underlying the statutes of limitations have been served via the Kessler action. Defendants have
plainly, since day one of these suits, been aware of the plaintiff borrowers' TILA and HOEPA claims and the
nature of the class asserting those claims.
First, the Consolidated Amended Class Action Complaint in Kessler was brought on behalf of a national
class. This Court deemed this Consolidated Amended Class Action Complaint to "relate back" under
Fed.R.Civ.P. 15 to the filing of the earlier actions consolidated into Kessler in order to vest the Court with
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federal subject matter jurisdiction, which decision the Third Circuit upheld. In re Community Bank, 418 F.3d
at 297-98. To that end, it is important to note that the settling parties, which include the Banks and RFC, expressly stipulated to the [*64] "relation back" of the Kessler Consolidated Amended Class Action Complaint to the original filing of the underlying actions. Id.
Second, the underlying Davis v. Community Bank case (Case Nos. 01-1406 and 02-1201) was initially
filed in state court. The defendants, removed that matter for the first time to this Court on the basis of
[**114] the plaintiffs' allegation that the loans were HOEPA loans. See Docket No. 1 in Case No. 01-1406.
While this Court found that removal on this basis was improper and subsequently remanded the matter back
to Allegheny County, Pennsylvania, see Docket No. 31 in Case No. 01-1406, there can be no question based
solely upon the removal that all parties including RFC have known that these were HOEPA loans (or alleged
to be) since the inception of these lawsuits. Certainly, RFC cannot in good faith contend that it did not know
the loans at issue were HOEPA loans.
Third, in Kessler, the settling parties specifically attempted to release the class members' TILA and
HOEPA claims, including their claims for rescission, as part of their Settlement Agreement. See §§ 2.25, 6 of
the Settlement and Release Agreement attached as an exhibit to the Kessler settling parties' "Joint Motion to
Certify Class for Purposes of Settlement, etc." (Docket No. 7, dated July 14, 2003).
Fourth, after receiving Notice of the class action settlement in Kessler, the Objectors objected to the
terms of the settlement because it failed to provide adequate compensation to the class members for the
[**115] release of the TILA and HOEPA claims. And, a number of the Objectors sought to intervene as
class representatives in Kessler in order to assert TILA and HOEPA claims. See Kessler Docket Nos. 17, 18,
25. In fact, on October 1, 2003, as part of their initial Complaint in Intervention, the objector/intervenors alleged that "[u]nder TILA, the Class members have three years to rescind their loans, if the rescission right
applies. 15 U.S.C. §§ [*65] 1635(f), 1635(g), 1640." See Complaint in Intervention, P 85 (Docket No. 18).
In sum, there can be no dispute that the Defendants were aware of the presence of the TILA and HOEPA
claims during the Kessler litigation and the identity of the class members who would assert those claims.
c. Identical Claims Are Not Required for Class Action Tolling
Regardless of the actual knowledge of the TILA and HOEPA claims, Objectors note that to properly apply class action tolling, the claims sought to be included in a finding of tolling do not have to be identical to
the claims in the first action. As explained by the Eastern District of Pennsylvania, with regard to tolling, the
important factor is whether [**116] the factual predicates giving rise to the claims are substantially the
same so the defendants were put on notice to prepare a defense:
The Supreme Court expressed a number of reasons for its holding in American Pipe. First, the
Court reasoned that refusing to extend the tolling rule to class members would "deprive Rule 23
class actions of the efficiency and economy of litigation which is a principal purpose of the
procedure," leading to the filing of numerous protective, duplicative and in many cases, unnecessary, suits by individual class members. ... Moreover, the Supreme Court concluded that the
tolling rule is not inconsistent with the purposes behind statutes of limitations, namely, preventing plaintiffs from bringing "stale claims" with no prior notice to defendants.
Crown, Cork & Seal extended the ruling in American Pipe to cases in which class members
filed individual suits instead of intervening in the class action after the denial of class certification. ... In so ruling the Court reasoned that because defendants were put on notice of the
factual predicates for all of the potential antitrust claims of class members, no "potential
for unfair surprise" [**117] would be created by tolling the statutes of limitations for plaintiffs' claims during the pendency of class certification. Crown, Cork, 462 U.S. at 353, 103 S.Ct.
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2392 (once class action is filed, "[t]he defendant will be aware of the need to preserve evidence and witnesses respecting the claims of all the members of the class").
In re Linerboard Antitrust Litigation, 223 F.R.D. 335, 344-45 (E.D. Pa. 2004)(internal citations omitted)(emphasis added).
[*66] In fact, the "strict identity of claims" requirement has been rejected as "illogical:"
City argues that because Tosti's claim of discrimination is different from that presented in
Blake, the tolling rule should not apply to her. We find no persuasive authority for a rule
which would require that the individual suit must be identical in every respect to the class
suit for the statute to be tolled. Such a rule would be illogical because one of the primary
reasons a member will opt out of a class suit is that she has strong individual claims
against the defendant that she believes will not be redressed by the overall class settlement. Tosti's individual discrimination [**118] suit involved the same allegations that were
made in the class suit of a City policy to discriminate against women in the police department
during the years 1970 to 1973. The City had ample notice of the nature of Tosti's discrimination
claims. It was thus alerted to make appropriate investigations.
Tosti v. City of Los Angeles, 754 F.2d 1485, 1489 (9th Cir. 1985); see also In re Independent Service Organizations Antitrust Litigation, 1997 WL 161940, at *3 (D. Kan. 1997)(citing cases: "Courts generally look at
whether the factual bases of the lawsuits are so similar that the same evidence, memories, and witnesses are
involved in the two suits."); Barnebey v. E.F. Hutton & Co., 715 F. Supp. 1512, 1528 (M.D. Fla. 1989)("This
Court agrees with the reasoning of the Second Circuit in Cullen v. Margiotta, 811 F.2d 698 (2nd Cir.1987),
and finds that the American Pipe tolling is properly extended where as here the individual claims involve the
same 'evidence, memories, and witnesses' as are involved in the putative class action."). n16
n16 The decision in Spann v. Community Bank of Northern Virginia, 2004 WL 691785 (N.D. Ill.
2004) does not control in this jurisdiction and does not compel a different result. There, the court
misunderstood class action tolling and required a strict identity of claims between the underlying action and the subsequent action. See id., at *5-6. The Spann court failed to address the points the Objectors set forth above to explain why the Defendants were aware of the Plaintiffs' TILA and HOEPA
claims. It also failed to address the substantial body of case law cited above which explains why a
strict identity of claims is not required.
[**119]
The Objectors were in the definition of the putative classes in the underlying Kessler actions, Davis v.
Community Bank of Northern Virginia, et al. (Case Nos. 01-1406 and 02-1201) and Ulrich v. Guaranty National Bank of Tallahassee, et al. (Case No. 02-1616), and particularly in the related-back Consolidated
Amended Class Action Complaint relating to a nationwide class. As such, all members of the putative class,
including the Objectors, may rely on class [*67] action tolling from the date of the filing of the Davis v.
Community Bank of Northern Virginia, et al. (Case No. 02-1201) and Ulrich v. Guaranty National Bank of
Tallahassee, et al. (Case No. 02-1616) actions on May 1, 2001 and September 19, 2002 respectively. This is
precisely what the Third Circuit held in this matter when it determined that "approximately 14,000 members
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of the class have loans that have closed 'within one year of the date of filing of the relevant complaint... have
affirmative TILA and HOEPA claims that are not time barred." In re Community Bank, 418 F.3d at 305.
In sum, because the Defendants were aware of the presence of the TILA and HOEPA claims during the
[**120] Kessler litigation and the identity of the class members who would assert those claims, class action
tolling clearly applies to the TILA and HOEPA claims. Since all of the loans of the class members were
consummated within three years of the class action tolling dates, every class member retains the right to rescind their loan and has made a timely demand for rescission against Defendants. Thus, the statement of the
Third Circuit in Yang is equally applicable here: "The question, then, is not whether tolling applies but
simply how." Yang, 392 F.3d at 112.
4. Equitable Tolling
As the Third Circuit recognized in this matter, "[a]n affirmative action under HOEPA must be brought
within one year of the violation, id. at § 1640(e), and an action for rescission must be brought within three
years, 12 C.F.R. § 226.23. These provisions, however, are subject to equitable tolling." In re Community
Bank, 418 F.3d at 304-305 (citing Ramadan v. Chase [*68] Manhattan Corp., 156 F.3d 499, 504 (3d Cir.
1998)). n17 Equitable tolling serves "to stop a statute of limitations from running where the claim's accrual
date [**121] has already passed." Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1387 (3rd
Cir. 1994). It applies where a plaintiff has "been prevented from filing in a timely manner due to sufficiently
inequitable circumstances." Seitzinger v. Reading Hospital & Medical Center, 165 F.3d 236, 240 (3rd Cir.
1999).
n17 The Third Circuit also noted the very significant fact that "[n]o statute of limitations applies to a
borrower asserting a violation of TILA or HOEPA as a defense (by recoupment or set-off) in a foreclosure action." In re Community Bank, 418 F.3d at 305. Thus, regardless of any limitations bar to an
aggrieved borrowers' right to assert an affirmative action, they still maintain these substantial and valuable rights which could in many cases defeat a foreclosure action.
The basis for the imposition of equitable tolling traces its roots back to the long-standing rule of Bailey v.
Glover, 58 U.S. 342 (1874):
To hold that [**122] by concealing a fraud, or by committing a fraud in a manner that it concealed itself until such time as the party committing the fraud could plead the statute of limitations to protect it, is to make the law which was designed to prevent fraud the means by which
it is made successful and secure. And we see no reason why this principle should not be as applicable to suits tried on the common-law side of the court's calendar as to those on the equity
side.
Id. at 349.
The rule of Bailey v. Glover has become a virtual mantra among all of the courts of appeals that have
confronted tolling in the context of fraudulent concealment and the discovery rule and as the Third Circuit
recognizes, equitable tolling has found particular application in regard to TILA claims:
Despite TILA's clearly remedial purpose, if we were to read its time limit literally, consumers
whose cause of action was fraudulently concealed from them until after a year had passed could
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not pursue a cause of action under TILA. That would lead to the anomalous result that a statute
designed to remediate the effects of fraud would instead reward those perpetrators who concealed their fraud [**123] long enough to time-bar their victims' remedy. We cannot believe
this was Congress' intent. Rather, in these circumstances we apply the general rule that equitable tolling applies to all federal statutes unless the statute states otherwise. Holmberg, 327
[*69] U.S. at 394-95. We therefore agree with the Third, Sixth, and Ninth Circuits that the
statute of limitations in TILA is subject to equitable tolling.
Ellis v. GMAC, 160 F.3d 703, 708 (11th Cir. 1998); see also In re Consolidated Non-Filing Ins. Fee Litigation, 195 F.R.D. at 694 n.7 ("The Eleventh Circuit Court of Appeals, and every other federal court of appeals, has recognized that TILA's statute of limitations is subject to equitable tolling when the violation of
TILA is either self-concealing or is fraudulently concealed by the defendant.").
In this case, the violations were self concealing. To determine the APR violation the borrower would
have had to have not only understood the math but would have needed their entire loan file to see that there
was no evidence whatsoever to show that a title examination was actually performed.
Likewise, they would have needed [**124] to understand that RESPA prohibits a mark up and makes
the add on to the property report unreasonable and otherwise have understood the intricacies of Reg. Z relating to whether section 1100 fees are excluded from the Finance Charge. Where a particular statute or law is
violated, that act is itself a demonstration of fraudulent concealment with regard to "self concealing" wrongs.
Hill v. Texaco, Inc., 825 F.2d 333, 335 n.2 (11th Cir. 1987). In short, to disallow equitable tolling in this circumstance would impose a "caveat borrower" limitation on consumer diligence that is directly contrary to the
remedial, consumer protection mandate of TILA and HOEPA. For these reasons, as to any borrowers whose
TILA or HOEPA claims are outside the one-year limitations period, the Court should apply equitable tolling
to also allow those borrowers the benefits and protections Congress intended that they have.
[*70] IV. CONCLUSION
In vacating the nationwide class action settlement, the Third Circuit stated that it did not seek to pretermit the viability of these TILA and HOEPA claims. See In re Community Bank of Northern Virginia, 418
F.3d at 306. [**125] In many ways, however, the Third Circuit did just that.
It articulated, for example, the fact that TILA is designed to give consumers uniform information to allow them to make informed credit decisions, that HOEPA addresses high cost loans (like these at issue) and
imposes additional disclosure rights in connection with those loans as well as enhanced damages for violations of HOEPA. Id. at 303-304. The Third Circuit noted also that while these claims are subject to a brief,
one-year limitations period, that limitations period is subject to equitable tolling, that rescission rights have a
three year repose period, and that many class members are admittedly within the one-year statute. Id. at
304-305. The Third Circuit also voiced its skepticism about the defenses to these claims that were articulated
as the reasonable basis not to pursue them (or pay anything for them in the settlement), including the limitations defense, the idea that these claims are not amenable to being addressed in a class action and the idea
that detrimental reliance is required to obtain TILA damages. Id. at 305-306.
From the foundation provided by the Third [**126] Circuit, the Objectors have now established that, in
fact, these claims are very viable. Legally the framework for the TILA and HOEPA claims is straightforward. The statutory scheme, as explained herein and through the affidavit of Objector's consumer lending
law expert, Margo Saunders, was intended to directly address rogue lenders like Community Bank of Northern Virginia and Guaranty National Bank, who absolutely prostituted their charters to the Shumway-Bapst
organization. This statutory scheme, among other things, makes assignees liable as if they had made a
HOEPA loan themselves and provides for strict liability damages if a violation does occur.
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[*71] Factually, the TILA and HOEPA violations are established by evidence that is both overwhelming and universal. The title charges at issue are neither bona fide nor reasonable - a conclusion that is demonstrated not just by the opinion of Objectors' title experts but also through the testimony of insiders. It is also
clear that RFC knew of and questioned these charges at the time they were buying up these loans. Thus, the
fact that these title charges should not have been excluded from the finance charge is established and the
[**127] result is a mathematically proven material misstatement of the APR. From this clear disclosure violation flow substantial, strict liability damages and rescission rights. Evidence of the further substantive violations of HOEPA in the form of the failure of the 3 business day advance HOEPA notice and the wrongful
inclusion of a prepayment penalty are likewise easily and universally proven. Indeed, the nature of the class
wide proof available to establish these claims not only establishes their viability but further demonstrates the
inadequacy of class counsel in ignoring claims which collectively could be worth some $ 52,565.43 per borrower or $ 2.3 billion total.
Objectors' briefing and attendant evidence provide the particular attention the Third Circuit directed be
given to the TILA and HOEPA claims and demonstrates, without question, that these are "viable" claims. As
such, the Court should find them to be viable and move forward with finding Kessler Class Counsel inadequate and appoint Objectors' counsel to proceed with the prosecution of the valuable and viable TILA and
HOEPA claims, and other claims, held by some 50,000 borrowers across the country.
[*72] Dated: February 15, 2006
Respectfully [**128] Submitted,
By /s/ J. Michael Vaughan - Lead Counsel
By /s/ R. Frederick Walters
By /s/ David M. Skeens
By /s/ Garrett M. Hodes
WALTERS BENDER STROHBEHN &
VAUGHAN, P.C.
2500 City Center Square
12th & Baltimore
P.O. Box 26188
Kansas City, MO 64196
(816) 421-6620
(816) 421-4747 (Facsimile)
and
Franklin R. Nix, Esq.
LAW OFFICES OF FRANKLIN NIX
1020 Foxcroft Road, N.W.
Atlanta, GA 30327-2624
(404) 261-9759
(404) 261-1458
and
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Scott C. Borison, Esq.
LEGG LAW FIRM, LLC
5500 Buckeystown Pike
Frederick, MD 21703
(301) 620-1016
(301) 620-1018
and
Michael Cartee, Esq.
[*73] John Lloyd, Esq.
CARTEE & LLOYD
2210 Eighth Street
Tuscaloosa, AL 35401
(205) 759-1554
(205) 758-9477
and
Knox McLaney, Esq.
MCLANEY & ASSOCIATES, P.C.
P. O. Box 4276
Montgomery, AL 36104
(334) 265-1282
(334) 265-2319
and
John W. Sharbrough, Esq.
THE SHARBROUGH LAW FIRM
156 St. Anthony Street
P.O. Box 996
Mobile AL 36601-0996
(251) 432-6620
(251) 432-5297
and
Andrew Hutton, Esq.
550 West C Street
Suite 1600
San Diego, CA 92101
(619) 274-2500
(619) 839-3489
ATTORNEYS FOR MISSOURI [**129]
OBJECTORS
AND ILLINOIS
AFFIDAVIT OF MARGOT SAUNDERS
United States of America
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State of West Virginia
County of Kanawha: To wit
The undersigned hereby states that the following facts are true to the best of her knowledge and belief:
I. Introduction
1. The following is my analysis of the application of Truth in bending and the Home Ownership and Equity
Protection Act to the loan transactions between borrowers and 1) the Community Bank of Northern Virginia
and 2) the Guaranty National Bank of Tallahassee. My professional experience includes:
2. Currently I am Of Counsel to the National Consumer Law Center ("NCLC"), after serving as Managing
Attorney of NCLC's Washington, D.C. office for fourteen years.
3. My duties at the National Consumer Law Center include policy analysis in the areas of predatory lending,
credit reporting, debt collection, electronic commerce and electronic benefits transfer, preservation of
households, and other consumer credit issues.
4. My work for the past fifteen years has required regular testimony before the House Financial Services
Committee and the Senate Banking and Housing Committee (in [**130] addition to other [*2] Congressional Committees) regarding credit related issues facing low income households in America. My responsibilities also required frequent appearances before, and meetings with, federal regulators. In this capacity, I
was the lead lawyer representing consumers in the extensive negotiations surrounding the passage of the
Home Ownership and Equity Protection Act in 1993. I was also the lead lawyer representing consumers during the Congressional discussions of the changes to the Truth in Lending Act in 1995 (known euphemistically as the "Rodash" changes). In moth instances - and indeed in all my policy work - I am always counseled
and guided by the other consumer law experts at the Center.
5. In addition to policy analysis, my duties at the National Consumer law Center include writing analytical
books and articles on issues relating to low-income consumers; providing training and expert testimony on
issues effecting low income consumers and providing analysis and assistance on credit math questions.
6. I am co-author of several of NCLC's practice treaties, including all editions of Banking and Payments Law
(3rd Ed. 2005), the original and second [**131] editions of Access to Utility Service, (2nd Ed. 2000) and
Editor and Co-author of the Manual on Water Affordability Programs, published by the American Water
Works Association Research Foundation (1998). In addition, I have been a contributing author to other
NCLC manuals, including The Cost of Credit: Regulation and Legal Challenges (2004, 2005 Supplements).
7. As of this date, I have not provided testimony in a pending case at a deposition or in a trial. My hourly rate
for this case is $ 275, paid to the National Consumer Law Center. A full list of my publications is included in
my resume, which is attached.
[*3] II. Background and Context of the Home Ownership and Equity Protection Act ("HOEPA") n1
n1 Portions of this affidavit are excerpted from NCLC's manual on Truth in Lending to which I
have been a contributing author in the past; some sections used were excerpts from testimony I wrote
for NCLC and presented at various Congressional hearings.
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A. Why was HOEPA necessary? [**132]
8. Abusive home equity lending is a longstanding problem that exploded in the early 1990's. In 1993 and
1994, the House and the Senate each held a series of hearings on the problems, and subsequently proposed
legislation to address them. n2 The record in those hearings helps explain the phenomenal growth on the sordid side of this industry. Elderly, low-income, minority and other vulnerable homeowners who could not obtain access to mainstream forms of credit were forced in many cases to turn to high-rate home equity loans in
order to finance home repairs, credit consolidation, or other important personal credit needs. A surprisingly
diverse group of lending institutions and finance companies developed home equity loan products designed
to hide the true costs and disadvantages of high-rate credit and targeted vulnerable consumers through a network of contractors, loan brokers, bird-dogs, and scam artists. Since the loans were secured by home equity,
lenders were protected from risk because they would either collect high rates from payments made from refinancing, or obtain repayment of the loan plus contract interest and costs through foreclosure.
n2 Dozens of examples were raised in the variety of Congressional hearings held on these issues.
Problems in Community Development Banking Mortgage Lending Discrimination, Reverse Redlining,
and Home Equity Lending: Hearings Before the Senate Comm. on Banking, Housing, and Urban Affairs, 103d Cong., 1st Sess. 258, 260 (Feb. 17, 1993); Hearing on S.924 Home Ownership and Equity
Protection Act, Before the Senate Banking Committee, 103d Con&, 1st Sess. (May 19, 1993); The
Home Equity Protection Act of 1993, Hearings on H. R. 3153 Before the Subcommittee on Consumer
Credit and Insurance of the House Committee on Banking, Finance and Urban Affairs, 103d Cong.,
2d Sess. (March 22, 1994); Hearing on Community Development Institutions, 103-2, before the House
Subcommittee on Financial Institutions Supervision, Regulation and Deposit Insurance, 103d Cong.,
1st Sess. (Feb 2-4, 1993).
[**133]
9. The worst problem that HOEPA attempted to address was the increased risk of foreclosure faced by
homeowners in high rate loads. The higher the interest rate, the higher the monthly payment, the more likely
the borrower will have difficulty making the payments, which all translates to an increased likelihood that a
high rate loan will end up in foreclosure. And indeed history has [*4] shown that high cost loans do have a
much higher default and foreclosure rate. An expensive interest rate geometrically increases the chances that
a homeowner will have unmanageable loan payments, which translates to higher risk of foreclosure. Higher
cost loans means greater chances that the family will lose their shelter.
10. Over the last two decades homeownership has increased by only 3.6%, while foreclosures per home have
increased 335.6%, a trend that can be traced directly to the sub prime mortgage market. n3 As of the first
quarter of 2005, 3.5% of subprime mortgage loans-approximately one in even 28 loans-were in foreclosure.
This stands in stark contrast to the rate for prime loans-0.46%. n4 for the same period. Indeed, a study of
subprime lending in Chicago showed that for [**134] every 100 additional subprime loans made on owner-occupied properties in a typical neighborhood, the community suffers from nine additional foreclosures.
n5
n3 Mortgage Bankers Association, National Delinquency Survey (Third Quarter, 2003); 2003 Statistical Abstract of the US: 2003, Tables 933 & 1184, U.S. Census Bureau; 2000 Statistical Abstract of
the US, Table 814. (increase in foreclosures is per Home-owned housing unit)
n4 Mortgage Bankers Association, National Delinquency Survey (1st Quarter, 2004).
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n5 See Risky Business- An Econometric Analysis of the Relationship Between Subprime Lending
and Neighborhood Foreclosures, Woodstock Institute, (Mar. 2004).
11. The ravaging consequences of foreclosure on a family cannot be overstated. In addition to the financial
wealth amassed in homes, families also invest tremendous amounts of emotional equity. Losing a home not
only devastates a family financially, it also devastates a family emotionally. When people lose their homes
they, suffer from [**135] a tremendous loss of self-worth and a great disenchantment with the American
Dream.
12. The exponential growth of credit card debt n6 combined with the 1986 changes to the tax code both contributed to this escalation of predatory mortgage lending. The amount of credit card [*5] debt outstanding
at the end of 2004 was $ 796 billion, n7 over three times more than existed in 1993. n8 Between 1989 and
2001 credit card debt in America almost tripled from $ 238 billion to $ 692 billion. n9
n6 The amount of credit card debt outstanding at the end of 2004 was $ 796 billion,
http://www.federalreserve.gov/release/g19/Current/; See also Consumer Federation of America, Credit Card Issuers Expand Marketing and Available Credit, Consumers Increasingly Say No. (2002) (citing data from Federal Reserve Board and Veribanc, Inc.), available at
http://www.consumerfed.org/081492bankruptcy_credit_card_report_02_2.html.
n7 http://www.federalreserve.gov/releases/g19/Current/; See also, Consumer Federation of America, Credit Card Issuers Expand Marketing and Available Credit, Consumers Increasingly Say No.
(2002) (citing data from the Federal Reserve Board and Veribanc, Inc.), available at http: /
/www.consumerfed.org/181492bankruptcy_credit_card_report_02_2.html.
[**136]
n8 Office of the Comptroller of the Currency, Advisory, Ltr., 96-7 (Sept. 26, 1996), available at
http://www.occ.gov/ftp/advisory/96-7.txt; FDIC Quarterly Banking Profile Graph Book (Dec. 31,
1997), available at http://www2.fdic.gov/qbp/1997dec/grbook/QBPGR.pdf
n9 Tamara Draut & Javier Silva, Borrowing to Make Ends Meet; The Growth of Credit Card Debt
in the 1990s (Sept. 18, 2003), available at
http://www.demos-usa.org/pubs/borrowing_to_make_ends_meet.pdf.
13. In 1986, Congress changed the tax code to allow taxpayers to deduct interest for consumer loans only if
the loan is secured by the home. n10 This sent a pervasive message to homeowners that borrowing against
home equity is sensible economic planning. Generally, families are persuaded to pay off car loans, credit
cards, and other non-housing related expenses with loans secured by their homes because of the perceived
tax savings. Unfortunately, this is quite often incorrect, even for middle-income families. This perception of
savings is generally misplaced., while the actual rate of interest is lower, the money is lent for a [**137]
much greater length of time, resulting in a much higher cost to the homeowner, even after the tax benefits are
considered. n11
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n10 The Tax Reform Act of 1986, Pub. L. No. 99-514 (1986), codified at 26 U.S.C. § 1 et seq.,
eliminated deductions for consumer interest except for interest paid on the taxpayer's principal and
one additional residence.
n11 For more information on the dangerous combinations of changes in the tax code along with
the growth of credit card debt see Saunders and Cohen, Federal Regulation of Consumer Credit: The
Cause or the Cure for Predatory Lending? Joint Center for Housing Studies, Harvard University,
BABC, March 2004. http://www.jchs.harvard.edu/publications/ finance/ babc/babc_04-21.pdf
14. Significant other contributors to the explosion of predatory mortgage lending included abandonment of
entire neighborhoods by the mainstream banks, the flood of new money to lend brought on by the growth of
asset backed securities for home equity loans from [**138] Wall Street - and the Truth in Lending Act itself. Many abusive lenders used - and indeed continue to use - the interstices of TILA to pad loans, to hide
complex terms, and to evade substantive regulation on the [*6] basis that the abusive loan terms were fully
disclosed. n12 The TILA disclosures themselves have proven inadequate both to inform consumers in language about complicated loan terms and to overcome oral fraud and other chicanery. n13
n12 See Joint Report to the Congress Concerning Reform to the Truth and Lending Act and the
Real Estate Settlement Procedures Act, Board of Governors of the Federal Reserve System and the
Department of Housing and Urban Development, July 1998, at 1. The report can be found on Board's
website at www.fedcralreserve.gov/boarddocs/press/general/19980717.
n13 In one episode of the television program Prime Time (Sept. 10, 1992), the reporter Sam Donaldson caught a purported home improvement contractor on camera telling an 80-year-old homeowner: "20% APR?, that's about 10% interest."
[**139]
B. HOEPA - Federal Response to Predatory Lending.
15. Congress passed the Home Ownership and Equity Protection Act (HOEPA) to address these problems
with predatory lending in 1993. HOEPA created a special class of regulated closed-end loans made at high
annual percentage rates or with excessive costs and fees. HOEPA is an amendment to the Truth in Lending
Act. Certain home equity loans that exceed either an APR trigger or a points and fees trigger are subject to
additional consumer protections, including: three-day advance Miranda-like disclosures; prohibitions on certain abusive loan terms and creditor practices; increased statutory damages; and an extension of potential
liability for assignees. Very high cost loans are now governed by HOEPA, as well as the federal regulations
implementing TILA and HOEPA by the Federal Reserve Board through what is known as Regulation Z
("Reg Z"). n14 The section of Reg Z which governs HOEPA is section 32. The effective date of HOEPA and
section 32 was October 1, 1995. n15
n14 16 C.F.R. §§ 226.1 et seq.
n15 The Federal Reserve Board amended and added to these regulations in 2002, but these
changes are not relevant to this case.
[**140]
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16. HOEPA only covers loans which are very expensive. A loan can qualify for coverage by hitting either
one of two triggers through the annual percentage rate ("APR"), or by measuring the points and fees charged
the borrower to close the loan. For loans consummated before October 1, 2002, the APR must have exceeded
by more than 10 percentage points the yield on treasury [*7] securities having comparable maturities at
the time the loan was made. n16 The alternative trigger for coverage is the charging of total points and fees
in excess of 8% of the "total loan amount." n17
n16 Reg Z § 226.32(a)(1)
n17 Reg Z § 226.32(a)(1)(ii).
17. If a mortgage loan is covered by HOEPA, the consumer should receive a disclosure containing the APR
and the monthly payment together with warnings about the risks of entering into a high-cost home equity
loan three days before closing. n18 Failure to receive this additional disclosure gives rise to rescission and
statutory damages.
n18 After October 1, 2002, the notice must also list. 1) the amount borrowed and 2) a statement as
to whether optional credit insurance is included in the amount borrowed if credit insurance mill be
purchased.
[**141]
18. HOEPA also prohibits or restricts disadvantageous loan terms, like prepayment penalties and balloon
payments, as well as certain acts or practices, like making unaffordable loans. Simply including these prohibited terms in the loan documents terms entitles the borrower to damages and an extended period to exercise
the right to rescission. Finally, to encourage the secondary market to police the terms and origination of these
high cost loans, the standard rules under both state and federal law for assignee liability are significantly different for HOEPA loans. Assignees of HOEPA loans are liable for any and all claims the consumer had
against the original lender, regardless of whether the claims are apparent from the face of the documents, or
the holder took the notes without notice of the claims. n19
n19 "Any person who purchases or is otherwise assigned a mortgage referred to in section
1602(aa) [a HOEPA loan] shall be subject to all claims and defenses with respect to that mortgage that
the consumer could assert against the creditor of the mortgage, unless the purchaser or assignee
demonstrates, that a reasonable person exercising ordinary due diligence, could not determine, based
on the documentation requited by this title, the itemization of the amount financed, and other disclosure of disbursement that the mortgage was a mortgage referred to in section 1602(aa). . . ." 15 U.S.C.
§S51641 (d)(1).
[**142]
C. HOEPA allows high cost mortgages with strict compliance.
19. The structure of HOEPA is based on the premise that charging high fees to make up for the additional
risk posed by some lending is permissible - but in exchange for this permissive use of [*8] high cost credit, there is an additional responsibility, to avoid the most abusive of terms, and to comply strictly with all of
the requirements of HOEPA. Once applicable, HOEPA requires strict compliance with its requirements, imposing significant penalties (rescission of the loan and enhanced statutory damages which equal the sum of
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all fees and interest paid on the loan) for a violation of both HOEPA's requirements and the underlying disclosure requirements of the Truth in Lending Act.
D. The loans in this case were very high cost HOEPA loans. n20
n20 In order to provide the information in this affidavit, I closely reviewed ten loan files supplied
to me by Objectors' counsel. These included loans from Maryland, Illinois and Missouri. I also hate
reviewed the Excel spreadsheet prepared for Objectors' counsel which includes loan specific information from approximately one hundred and fifty loans from Defendants.
[**143]
20. In the overall mortgage market, there are relatively few HOEPA loans made, n21 "This is largely because
the risk of non-compliance with the strict standards of HOEPA can be quite expensive to the lenders and the
assignees of their loans. However, the Defendants in this case deliberately set out to make HOEPA loans.
There is no question from the files that the intent all along was that these loans be governed by the provisions
of this law strictly regulating high cost loans under 15 U.S.C. §1639. All of the loans that I reviewed n22
were labeled as HOEPA loans on their face and the loan files all included the required three-day HOEPA
notice provided to the consumers (albeit the notices themselves were inherently defective - see discussion
below).
n21 See analysis by the Office of Thrift Supervision indicating that the lowering of the HOEPA
APR trigger for first mortgage loans would only expand the HOEPA share of the overall mortgage
market from 1% to 5%. 66 Fed. Reg. 65604 (Dec. 20, 2001) at 65608.
n22 I closely reviewed ten loan files supplied to me by Objectors' counsel and the Excel spreadsheet prepared for Objectors' counsel which includes loan specific information from approximately
one hundred and fifty loans from Defendants.
[**144]
21. Defendants' loans were always very expensive, in both the interest charged and the up-front points and
fees charged. While I did not specifically analyze whether each loan met the interest rate trigger as well, they
were clearly very high rate loans.
22. The loans I reviewed revealed annual percentage rates between 12.5% and 20% on loan [*9] amounts
between $ 13,000 and $ 38,000. These were loans secured by second mortgages on homes at times where the
Treasury bills for equivalent terms were in the 6 to 7 % range. n23
n23 See generally, http://www.federalreserve.gov/releases /b15/data.htm.
23. The loans easily qualified as HOEPA loans under the Points and fees trigger. On the face of the documents, the total points and fees charged these borrowers were exorbitantly expensive. The least amount of
points and fees charged was 12%. Some loans charged over 17% or 18% of the loan amount just for the cost
of making the loan.
III. HOEPA Violations by Defendants in this Case [**145]
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24. Objectors in this case are focusing on two class-wide violations of HOEPA:
1) The HOEPA advance notice is defective because the Annual Percentage Rate ("APR") is misstated in all
the loans; and
2) The HOEPA advance notice was not sent on a timely basis to the Plaintiff Class.
25. Objectors's attorney have also found an additional HOEPA violation for some loans in the Plaintiff Class:
some loans made by Defendants included a right to collect a prepayment penalty. The prepayment penalty
asserted in these loans violates HOEPA's prohibition against prepayment penalties.
26. Each - and any one - of these violations leads to heavy consequences under this federal law. "These consequences, and their effect on class members, are explained below.
A. Purpose of the HOEPA advance notice.
27. With the idea that sometimes notice of danger actually does prevent harm, Congress added a new notice
required just for HOEPA loans. At least three business days prior to written [*10] consummation of the
loan, the consumer must be furnished a HOEPA disclosure providing four essential pieces of information:
n24
n24 This discussion applies to HOEPA loans consummated on or before October 1, 2002, the time
period in which all of the loans in the class appeared to have been made. There are additional disclosures which are also required for loans closed after that date; no requirements were deleted.
[**146]
. the true cost of the loan, expressed accurately as the Annual Percentage Rate. ("APR");
. the amount of the monthly payment to be required;
. that the consumer could lose his/her home for failure to meet the loan obligations;
. the fact that the consumer is not obligated to complete the agreement.
28. The creditor must furnish the required disclosures in writing at least three business days before consummation of the transaction. n25 The intent was to give early disclosures to the consumer about the expense and
the risk of these high cost loans. Thus to accomplish this important goal, it is essential - and requiredly the
law, - that these disclosures be delivered three business days in advance, and that they be accurate.
n25 See H.R. Conf. Rep. No. 652, 103d Cong. 2d Sess. 147, 165 (1994); 1994 U.S.C.C. A.N.
1987 (accompanying H.R. 34741).
29. From my review of the loan files, it appears that the Defendants did not provide accurate notices, and that
the Defendants' procedures [**147] did not assure that the notices were provided on a timely basis.
B. HOEPA notices require that the APR be disclosed correctly.
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30. One of the four critical pieces of information required to be in these important three day advance HOEPA
notices is the Annual Percentage Rate. In this case, it appears that the APR was routinely understated in the
HOEPA notices provided to the consumers by Defendants.
31. The APR is a creation of the Truth in Lending Act, designed to provide American consumers a universal
way of evaluating and comparing the cost of credit. The APR is a [*11] measurement of the rate of return
to the creditor based on the finance charges imposed on the transaction. n26 The APR is a derived figure
which results from a mathematical comparison of other known figures: the finance charge, the amount financed, the term of the loan and the payments required. Reg Z suggests that the ATR be described on the
disclosure form as: "the cost of your credit as a yearly rate." n27
n26 National Consumer Law Center, Truth in Lending (5th Ed. 2003)§4.6.4.3.
n27 Reg Z §226.18(c).
[**148]
32. The APR is only accurate if all of the components of the APR are accurate. Thus if the creditor has incorrectly allocated charges to the amount financed, rather than the finance charge, the APR will appear to be
smaller than it actually is.
33. Once the various charges have been allocated by the creditor between amount financed and finance
charge, the appropriate calculation method is applied to those allocations. n28 In this case, neither the calculation method nor its mathematical application to the numbers is the issue - it is the allocation of fees between amount financed and finance charge. n29
n28 Reg Z §226.18(a).
n29 To see the mathematical methodology used to calculate the APR from the derived figures of
amount financed, finance charge and schedule of payments, see NCLC Truth in Lending (5th
Ed.2003) §4.6.4.
34. The "amount financed" is described in Reg Z as "the amount of credit provided to you or on your behalf."
According to Reg Z, the amount financed for [**149] a loan is calculated by determining the principal loan
amount and
. adding other amounts financed by the the creditor but not included in the finance charge and
. subtracting any prepaid finance charge. n30
n30 Reg Z §226.18(b).
35. The finance charge is described by Reg Z as "the dollar amount the credit will cost you." n31 [*12]
Otherwise Phrased, the finance charge is all of the interest that the consumer will pay through the cost of the
loan, plus the points and fees that are charged the consumer up-front, except for certain fees which are permitted to be excluded by TILA and Reg Z.
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n31 Reg Z §226.18(d).
36. The amount financed, the finance charge, and the APR, as well as several other disclosures must be disclosed accurately on the TILA disclosure provided to the consumer at closing. n32 However, [**150] as
noted above, the APR must also be provided to the consumer in a HOEPA transaction in the three day notice
provided in advance of the loan closing. In this case, the APR in both the HOEPA notice and the TILA disclosure provided at closing to the Plaintiff Class was routinely wrong.
n32 Reg Z §226.18.
37. Mathematically, to derive the proper APR in a transaction, one first determines the proper amount financed. In this case, the simple method of calculating the amount financed is to start with the principal
amount of the loan and subtract from it those fees and charges which are required by TILA to be included in
the finance charge. Each particular fee charged to the consumer - and disclosed in the HUD1 - must be allocated either to the amount financed or to the finance charge. Each fee must be in one- or the other, and it
cannot be in both.
38. The APR is essentially a ratio between the amount financed and the finance charge analyzed over the
time period of the loan term. Thus when the finance [**151] charge goes up, the amount financed goes
down by the same amount. The higher the finance charge the larger the APR will be.
C. The APR is wrong on the HOEPA notices because the finance charge was understated.
39. The HUD 1 is a uniform form provided in almost all loans secured by homes in the U.S., governed by the
Real Estate Settlement Procedures Act n33 and regulated by HUD. The HUD 1 reveals all of the charges assessed the members of the class in this case by the Defendants as a cost of making the loan. The consumers
did not pay these fees in cash, instead the fees were added to [*13] the amount borrowed by the consumers, thus increasing the principal of the loan and decreasing the consumers' equity in their homes.
n33 12 U.S.C. § 2601 et seq.
40. The Truth in Lending Act requires that each of these charges must be included in the finance charge unless it meets the requirements for an exception:
The finance charge is the cost of consumer credit as [**152] a dollar amount. It includes any
charge payable directly or indirectly by the consumer and imposed directly or indirectly by the
creditor as an incident to or a condition of the extension of credit. . . . (Emphasis added.) n34
n34 Reg. Z §226.4(a).
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41. There are a number of exceptions for various charges to be excluded from the finance charge in §226.4,
including real estate related charges in 226.4(c)(7), and charges incurred for establishing security interests in
226.4(e). The charges imposed by Defendants in this case which were routinely, improperly excluded from
the finance charge all must be evaluated under the exclusion allowed for real estate related charges:
(c) Charges excluded from the finance charge.
The following charges are not finance charges:
...
(7) Real-estate related fees. The following fees in a transaction secured by real
property or in a residential mortgage transaction, if the fees are bona fide and
reasonable in amount:
(i) Fees for [**153] title examination, abstract of title, title insurance, property survey, and similar purposes.
(ii) Fees for preparing loan-related documents, such as deeds, mortgages, and
reconveyance or settlement documents. . . . (Emphasis added.) n35
n35 Reg Z §226.4(c)(7).
[*14] 42. In other words, to be properly excluded from the finance charge each real estate charge must
meet several tests:
. The fee must be one of the charges listed for potential exclusion;
. The fee must be bona fide - which means both that is legal and actually incurred in the amount that is
charged; n36
. The fee must be reasonable - which means that the fee cannot be either
a) in excess of the market rate for that service,
b) for a service which is otherwise already paid for by the consumer,
c) for work which is not actually performed. n37
n36 See National Consumer Law Center, Truth in Lending (5th Ed. 2003) §3.9.6.3.
[**154]
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n37 Id.
1. Title exam fees (lin03) are not bona fide or reasonable.
43. I understand that virtually every consumer in the plaintiff class was charged fees similar to those charged
in the ten files that I was given to review. I also understand that an expert in real estate closings will state that
the property reports provided in these cases were not really "abstracts" and were not sufficiently detailed to
provide an attorney with information to make a finding related to clear title. I understand that an expert on
title issues will opine that the entire fee charged for "title examination" on line 1103 of the HUD 1s provided
to consumers in these cases is neither bona fide, nor reasonable.
44. If the fees charged on lines 1103 are not bona fide and reasonable, they cannot be excluded from the finance charge. Yet in all ten loan files that I reviewed, and in the loans which are detailed in the Objectors'
Excel Spreadsheet, the fees on line 1103 appear to have been excluded.
2. Title abstract fees (line 1102) are not bona fide.
45. In every loan file I reviewed, a "Real [**155] Estate Property Report" was included. The cost for this
[*15] report was routinely listed on its face. In every file, the cost listed on the Report was a different and
lower amount than the fee listed for the abstract on line 1102 of the HUD 1. I am told by Objectors' counsel
that this is typical of Defendants' loans. The overcharging of this fee makes it not bona fide under Reg Z §
226.4(c)(7), thereby disqualifying it from the exclusion from the finance charge listed in that section.
3. How much of these fees should be excluded from the finance charge?
46. Section 226.4(c)(7) provides an exclusion for the entire amount of the fee if it is bona fide and reasonable. It stands to reason that the entire amount of the fee ought to be included in the finance charge if the fee
does not meet the bona fide and reasonable test. Indeed the plain language of supports regulation this analysis. However, some may argue - and indeed some courts have held - that only the non-bona fide portion of
the fee should be excluded from the finance charge, rather than the entire fee. This question is only relevant,
however, in a tiny number of actual loans in this case.
47. [**156] The issue of whether to exclude the non-bona fide portion of the 1102 fee, or the entire 1102
fee, only matters in those loans where the combination of the 1103 title exam charges, plus the non-bona fide
portion of the 1102 title abstract charges, yields a number which is not sufficient to establish that the APR in
the HOEPA notice was misstated by more than 1/8th of one percent (see discussion below on APR tolerance).
48. The mathematical analysis performed by Objectors' counsel in their Excel Spreadsheet indicates that the
routine improper exclusion of the title exam fee (Line 1103) causes a mis-statement of the APR sufficient to
establish a HOEPA claim for almost all class members. In a small proportion of class members, one must
also include the non-bona fide portion of the title abstract fee, to establish a violation of HOEPA and TILA.
This simple arithmetic analysis would then confirm that the APR was routinely misstated to all class members because of the mis-allocation of 1) the title exam fee on line 1103, or 2) the title exam fee plus the
non-bona fide portion of the title abstract fee on Line 1102.
[*16] 49. It should be noted that there were numerous other [**157] mis-allocations of fees to the amount
financed in the reviewed files, but the exclusion of the fees listed on lines 2102 and 1103 were the only rou-
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tine ones, regularly excluded and consistently improper in all the loans. An incorrect allocation of the finance
charge resulting in the incorrect statement of the APR is just as illegal under TILA and HOEPA if it is based
on one mis-allocation, as it is if it were based on five mis-allocations. The only issue is whether the disclosed
APR is sufficiently wrong to meet the tolerances for liability - see discussion below.
4, How far off does the APR have to be to state a HOEPA claim?
50. Congress has allowed creditors to make some mistakes in the required disclosures. Tolerances are permitted in several different places of the statute. n38 However, there is only one relevant tolerance applicable
to the APR disclosure in the three day advance HOEPA notice. This is the rule - set out in Reg Z §
226.22(a)(2) - that the APR is considered to be accurate so long as the disclosure is no more than 1/8th of
one percent above or below the actual rate:
(2) As a general rule, the annual percentage rate shall be considered accurate [**158] if it is
not more than 1/8 of 1 percentage point above or below the annual percentage rate determined
in accordance with paragraph (a)(1) of this section. n39
n38 Tolerances were established for the finance charge disclosures, "and other disclosures affected by any finance charge" by Congress in 1995. They are referred to commonly as the Rodash
amendments because they were precipitated by the decision in Rodash v. AIB Mortgage Co., 16 Fad
1142 (11th Cir. 1994). 15 U.S.C. § 1605(f) and 15 U.S.C. 1635(i).
n39 Reg Z § 226.22(a)(2).
51. The section of the Federal Reserve Board's regulations which govern disclosures made for HOEPA loans,
Reg Z § 226.31, indicates that this tolerance - 1/8th of one percent of the APR - is the appropriate tolerance
to determine the accuracy of the APR on the HOEPA three day advance notice which is required by Reg Z §
226.32:.
[*17] (g) Accuracy of annual percentage rate. For purposes of section 226.32, [**159] the
annual Percentage rate shall be considered accurate and may be used in determining whether a
transaction is covered by section 226.32, if it is accurate according to the requirements and
within the tolerances under 226.22. The finance-charge tolerance for rescission under section
226.23(6;) or (h) shall not apply for this purpose. n40
n40 Reg Z § 226.31(g).
52. The HOEPA notice required to be provided all consumers receiving HOEPA loans three days in advance
of the loan closing is required in section 226.32(c). Therefore, the plain language of this regulation makes
clear that the tolerance for the accuracy of the APR disclosed on this notice is only 1/8 of one percent. The
Supplementary Information regarding §226.31 (g) when the regulation was issued by Federal Reserve Board
states this even more explicitly:
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31 (g) Accuracy of Annual Percentage Bate
Paragraph 31(g) is intended to clarify that for purposes of determining whether a transaction is
covered under § 226.32(a) and [**160] in making the disclosures required by § 226.32(c), a
creditor may rely on its APR calculations if they are considered accurate according to the APR
tolerances provided in § 226.22. For this purpose, the APR tolerances in paragraph 22(a) (4)
and (5) apply only if the finance charge is considered accurate under 5226.18(d)(1); the rescission tolerances in 226.23 (g) or (h) do not apply. n41
n41 61 Fed. Reg. 49237, (Sept. 19 1996) at 49244.
53. Thus the appropriate tolerance to apply to determine if there is a violation of HOEPA's requirement to
provide the APR disclosure to the consumer in the three day advance notice is whether it is off by at least
1/8th of one percent.
5. All the loans appear to meet the tolerance test easily.
[*18] 54. In the ten loans I analyzed, the mis-disclosure of the APR on both the HOEPA notice and the
TILA disclosure provided at closing, was incorrect by an amount far in excess of 1/8th of one percent. The
mathematical review conducted by Objectors' [**161] counsel and set out in the Excel Spreadsheet indicated this as well for the vast majority of loans.
55. In my review of the ten loans, all of them met the 1/8th of 1 percent tolerance using only the title exam
fee on line 9103. It appears that this is also the case for almost all of the loans on the Excel Spreadsheet. For
those few loans in the class for which the mis-allocation of the title exam fee alone does not meet the tolerance level, it is very likely that adding the non-bona fide portion of the title abstract fee on line 1102, will
bring it over the tolerance.
6. The Watkins loan - an illustration
56. The following is an illustration of the analysis applicable to these class-wide problems. The Watkins loan
is typical of the ten loans which I evaluated. I am told by Objectors' counsel that it is typical of the loans to
class members. It also appears to be typical of the loans described in the Excel Spreadsheet.
57 Mr. and Mrs. Watkins signed a loan with Guaranty National Bank of Tallahassee ("GNBT") on March 31,
2001 secured by their home in Illinois. The note, for $ 35,000, charged an interest rate of 11.99% and called
for monthly [**162] payments of $ 368.37 for 25 years. The total of payments is $ 110,510.72.
58. The 535,000 borrowed included $ 5,751 in closing costs, including a loan origination fee of $ 3,500, a
loan discount fee of $ 700 and an underwriting fee of $ 200, all payable to GNBT. In total, all the points and
up-front charged to the Watkins were over 16% of the amount they borrowed.
59. The HUD 1 (RFC-PA-WB 00002808) reveals the following settlement charges:
801
802
804
Loan origination fee to Guaranty National Bank of Tallahassee
Loan discount fee to Guaranty National Bank of Tallahassee
Credit report fee to Guaranty National Bank of Tallahassee
$ 3,500.00
700.00
50.00
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807
Flood certification fee to Guaranty National Bank of
Tallahassee
Underwriting fee to Guaranty National Bank of Tallahassee
Settlement or closing fee to USA Title, L.L.C.
Abstract or title search to USA Title, L.L.C.
Title examination to USA Title, L.L.C.
Overnight fee to USA Title, L.L.C.
Document review fee to USA Title, L.L.C.
Processing fee to USA Title, L.L.C.
Recording fee to Cook County Recorder
Total Settlement Charges
811
1109
1102
1103
1111
1112
1113
1201
1400
20.00
200.00
150.00
115.00
450.00
25.00
250.00
260.00
11.50
$ 5,751.50
[**163]
[*19] 60. The fees that appear to be routinely mis-allocated in the class loans are those in line 1102 -here $
115 - for the abstract or title search to USA Title, and line 1103 - here $ 450 - for Title examination to USA
Title.
61. In the Watkins loan File, the Property Report revealed that its actual cost was $ 90.00 (RFC - PA-WB
00002809), yet the fee listed on line 1102 was $ 115.00. This overcharging of the fee listed on line 1102 was
typical of all ten files I reviewed, and I am told by Objectors' counsel, is also typical of all the loans made to
the class. The overcharging of this fee makes it not bona fide under Reg Z § 226.4(c)(7), thereby disqualifying it from the exclusion from the finance charge listed in that section.
62. As explained above, an expert witness on title issues will show why the charge on line 1103 is not a reasonable or bona fide fee.
63. The disclosures made on the HOEPA notice and the TILA disclosure show the following:
Disclosed APR Disclosed Amount Financed -
14.22%
$ 30,105.00
[*20] 64. The disclosed finance charge includes all of the interest that will be charged on the loan. But one
can [**164] easily determine that portion of the finance charge that comes from the points and fees charged
at closing (known as "prepaid finance charges") by deducting the amount financed from the loan amount of
the note.
Loan Amount Disclosed amount financed Prepaid finance charges -
$ 35,000.00 minus
30,165.00 =
4,835.00
65. If one adds to the Defendant's allocated finance charges just the amount of the title exam fee (line 1103) $ 450, the new prepaid finance charges is $ 5,285.
66. This would make the correct disclosure for the amount financed § 29,715. If one plugs these numbers
into an Annual Percentage Rate calculator, n42 the resulting APR is 14.468%
n42 I used the NCLC APR program, which calculates the Annual Percentage Rate, Rule of 78 rebates, and makes Amortization Charts. This NCLC APR program handles not only regular, but also
irregular transactions, for example where monthly payment amounts change over the course of the
loan. It also prepares amortizaion charts for split rate and variable rate transactions. Finally, for regular transactions, it calculates the payment given the principal, term, and contract rate of interest. This
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program was developed by Mark Leymaster, the author of the NCLC's venerable (1980's) DOS APR
program. The NCLC APR Program is Copyright (c)2002 by the rational Consumer Law Center, all
rights reserved.
[**165]
67. If one also added only the non-bona fide part of the abstract fee from line 1102, the finance charge disclosure would be off by another $ 25, and the correct APR would be 14.481%. But in the Watkins' loan, as it
appears to be in most of the loans in the class, adding this second, commonly omitted fee, is not necessary to
breach the tolerance hurdle for APR mis-disclosures.
68. This is illustrated in the chart below Amount Financed
Disclosed Terms
Reallocating Title Exam
fee only
Also reallocating non-bona
fide Abstract fee
APR
$ 30,165.00
$ 29,715.00
Finance
Charge
$ 80,343.72
$ 80,795.72
14.220%
14.468%
APR +1/8
Tolerance
14.345%
over
$ 29,690.00
$ 80,820.72
14.481%
over
[*21] 69. This analysis appears to be replicated in the Excel Spreadsheet prepared for Objectors' counsel.
In all of these files the creditor excluded from the finance charge the fees listed on lines 1102 and 1103 - the
fees charged for the abstract (line 1102) and for the title exam (line 1103). This practice of excluding both of
these charges was an incorrect allocation of these fees to the amount financed, rather than to [**166] the
finance charge, resulting in the miscalculation of the APR in these loans. As a result, the APR disclosures on
both the HOEPA three-day notice and the TILA disclosure provided at closing were incorrect by amounts
exceeding the tolerance allowed.
D. The effect of the failure to deliver the HOEPA notices to the Plaintiff Class a full three days before
closing.
70. Counsel for objectors have informed me that there is proof that as a routine practice neither of the banks
timely provided HOEPA disclosures. Assuming this to be true, then this failure to deliver the HOEPA notice
in a timely manner provides an independent violation of HOEPA.
71. Reg Z is explicit:
(c) Timing of disclosures.
(1) Disclosures for certain closed-end home mortgages. The creditor shall furnish the disclosures required by Section 226.32 at least three business days prior to consummation of a mortgage transaction covered by [*22] section 226.32. n43
n43 Reg Z § 226.31(c)(1). (Emphasis added.)
[**167]
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72. The Federal Reserve Board clarifies this to mean that the consumer must receive this notice three days
prior to consummation in the Official Staff Commentary:
Furnishing disclosures. Disclosures are considered furnished when received by the consumer.
n44
n44 Official Staff Commentary § 226.31(c)1.
73. Lenders have been known to mail the notice but fail to do so far enough in advance of the closing to ensure that the consumer receives it three days in advance. Creditors cannot rely on state receipt-upon-mailing
laws to argue that mailing constitutes receipt. The timing rules in TILA are federal law which govern a particular class of transactions and pre-empt state law on this issue.
74. A written acknowledgment of receipt of the HOEPA notice of the receipt of HOEPA notice ordinarily
creates only a rebuttable presumption of delivery. n45 Evidence of the Defendants' procedures regarding delivery of the three day notice should also be sufficient to rebut the presumptions that [**168] might arise
from the signed acknowledgements of receipt in the files of class members.
n45 See 15 U.S.C. § 1635(c) (in the rescission contest).
75. If it is determined that Defendants' procedures were such that the HOEPA notices were only put into the
mail three days prior to the closing, that would lead to another ground for a finding that HOEPA's requirements were violated. This would be an independent basis for determining that the class members are entitled
to both enhanced damages under HOEPA and rescission under Reg Z § 226.23.
76. The failure to provide the HOEPA notice as required by the statute is a "material" requirement for purposes of rescission. This is made explicit by the change that Congress made to [*23] the definition of
"material disclosures" in TILA when it passed HOEPA:
(u) The term "material disclosures" means the disclosure, as required by this title, of the annual
percentage rate, the method of determining the finance charge . . . [**169] , and the disclosures required by section 1639(a). n46
n46 15 U.S.C. §1602(u) (emphasis added).
77. Thus the failure to give a copy of the HOEPA notice on a timerly basis triggers the extended right of rescission. n47
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n47 See Williams v. BankOne (In re Williams), 291 B.R. 636 (Bankr.E.D. April 3, 2003).
E. Loans that included a prepayment penalty also violated HOEPA.
78. I am told by Objectors' counsel that some, but not all of the loans made to the plaintiff class members
also included a provision calling for the payment of a prepayment penalty. HOEPA carefully governs prepayment penalties - completely prohibiting them for HOEPA loans unless a complicated five part exception
has been specifically met. To invoke the exception, the creditor is required to prove all [**170] five preconditions contained in the statute. n48
n48 15 U.S.C. § 1639(c).
79. First, measured as of the time the loan is consummated, the loan must not cause the consumer to pay
more than fifty, percent of his or her monthly gross income toward "monthly indebtedness payments." n49
n49 15 U.S.C. § 1639(c)(2)(A)(i); Reg. Z § 226.32(d)(7)(ii).
80. The second prerequisite to the exception is that the income and expenses of the consumer must be verified by a financial statement signed by the consumer and by a credit report. n50
n50 15 U.S.C.§1639(c)(2)(A)(ii); Reg. Z § 226.32(d)(7)(iii)
[**171]
[*24] 81. The third precondition to the exception is that it does not apply to repayments by refinancing
with the creditor who made the initial mortgage or with an affiliate of that creditor. This will prevent a creditor from invoking the exception to pad the payoff of a loan it is refinancing itself or through a related company. A provision that on its face does not limit the imposition of a prepayment penalty to situations when
the refinancing occurs by a non-related entity violates this precondition. n51 This is the provision which Objectors' Counsel say was routinely violated by Defendants in this case.
n51 Rodrigues v. U.S. Bank (In re Rodrigues), 278 B.R. 683, 688 (Bankr. D.R.I. 2002). See also
McIntosh v. Irwin Union Bank & Trust Co., 215 F.R.D. 26 (D. Mass. 2003) (class consisting of those
whose loans from the defendant contained a prepayment penalty that did not, by its terms, prohibit
application if the loan was refinanced with the same lender certified).
82. [**172] The fourth prerequisite is that the penalty can only be imposed during the first five years of
the loan, calculated from the date on which the mortgage is consummated. n52
n52 15 U.S.C. § 1639(c)(2)(C); Reg. Z § 226.32(d)(7)(i).
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83. The final prerequisite is that the penalty must be legal under other applicable law. n53 This preserves
state law limits on prepayment penalties.
n53 15 U.S.C. § 1639(c)(2)(D).
84. In this case, I am told that Defendants' loans to some of the Plaintiff class borrowers included prepayment
penalty provisions stating that in the case of a prepayment of the loan, the borrowers would owe a prepayment penalty. These provisions failed to explain that if the loan was refinanced by the same lender, or an affiliate of the lender, that no prepayment penalty would [**173] be assessed. This means that this prepayment Penalty provision, as included in these loans made by Defendants did not strictly and accurately incorporate the limits on the exception contained in the statute - thus the assertion of the right to collect the prepayment penalty was wrong, and a specific violation of HOEPA.
85. One reason predatory lenders include prepayment provisions in loans is to deter borrowers from considering refinancing. The mere presence of this contract term has a negative effect on consumers who might
otherwise try to obtain less expensive credit. This provision would be [*25] especially harmful to the
Plaintiff Class, because the interest rates were so much higher than market rates, and thus the payments
themselves would be expensive. Cautious consumers among the Plaintiff Class would likely have been deterred from refinancing just by the presence of the contract term stating this prepayment penalty. These consumers had no reasonable way of knowing that the provision might not have been enforced in some instances. It is because of the effect of the assertion of a prepayment penalty that the assertion of the right to collect
it is prohibited [**174] by HOEPA, as well as the actual practice of collecting the penalty.
F. Remedies for including a prohibited term in a HOEPA loan.
86. Inclusion of a prohibited term will give rise to civil liability under 15 U.S.C. § 1640(a) and enhanced
damages pursuant to 15 U.S.C. § 1640(a)(4). In addition, inclusion of a prohibited term gives rise to the extended right to rescind the loan under 15 U.S.C. §1635.
(j) Consequence of failure to comply. Any mortgage that contains a provision prohibited by this
section shall be deemed a failure to deliver the material disclosures required under this title, for
the purpose of section 1635. n54
n54 15 U.S.C. § 16390).
87. Thus, the extended right of rescission will apply to the mere inclusion of a notice of a prepayment penalty. Since the language of the statute makes the remedy available whenever a prohibited term is "contained" in
a mortgage, the extended [**175] rescission remedy is available even if that term is never invoked.
IV. Monetary effect of Defendants' failure to comply with HOEPA and TILA
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88. TILA and HOEPA are the only federal laws to address the predatory activities of lenders who are taking
advantage of the complex and expensive mortgage process to bleed the equity of [*26] America's homeowners, These practices are costing too many of this nation's families their homes, and their share of the
American dream. Complying with the specific requirements of TILA and HOEPA are the price high cost
lenders are required to pay to charge these high prices to America's homeowners.
89. TILA is a strict liability statute. It achieves its remedial and consumer protection goals by a system of
strict liability. n55 Any violation triggers liability. Without this strict enforcement, there would be virtually
no limit on many mortgage lenders in this nation. The Act is designed to protect borrowers who are not on an
equal footing with creditors either in bargaining power or knowledge. n56
n55 Porter v. Mid-PennConsumer Discount, 961 F.2d 1066 (3rd Cir. 1992) (TILA achieves its
remedial goals by a system of strict liability; "[o]nce the court finds a violation, no matter how technical, it has no discretion with respect to liability.); Rodash v. AIB Mortgage Co., 16 F.3d 1442 (11th
Cir. 1994) (strict compliance required; liability will flow from minute deviations from requirements);
Pollice v. National Tax Funding, 59 F. Supp. 2d 474 (W.D. Pa. 1999) aff'd in part, rev'd in part on
other grounds, 225 F.3d 379 (3rd Cir. 2000).
[**176]
n56 Thomka v. A.Z. Chevrolet, Inc. 619 F.2d 246 (3rd Cir. 1980) (TILA was passed to aid the
unsophisticated consumer). An additional goal is "to deter generally illegalities which are only rarely
uncovered and punished." Fairley v. Turan-Foley Imports, Inc., 65 F3d 475, 480 (5th Cir. 1995).
90. The violation of any, provision n57 of HOEPA gives rise to standard TIL civil liability, under 15 U.S.C §
1640(a) for actual damages, statutory damages, attorney fees and costs. In addition, there are special enhanced damages for violations of HOEPA available under 15 U.S.C. § 1640(a)(4), unless the creditor
demonstrates that the failure to comply is not material. The enhanced damages include all finance charges
and fees paid by the consumer. By using the conjunction "and" in section 1640(a), Congress intended that the
enhanced damages subsection supplements existing civil liability provision: n58
(a) . . . [A]ny creditor who fails to comply with any requirement [*27] imposed under this
chapter . . . with respect [**177] to any person is liable to such person in an amount equal to
the sum of (4) in the case of a failure to comply with any requirement under section 1639, an amount
equal to the sum of all finance charges and fees paid by the consumer ...." n59
n57 All violations of section 1639 will give rise to civil liability. Unlike for other TILA requirements, there is no provision limiting liability for these special high-rate loan protections under section
1640 to certain types of violations. Cf. 13 U.S.C. § 1640(a) (the paragraph following § 1640(a)(4) limits statutory damage remedies for disclosure violations to those specified in certain subsections of
§1637 (open-end credit) and of § 1638 (closed-end credit).
n58 See Newton v. United Companies Fin. Corp., 24 F. Supp. 2d 444 (E.D. Pa. 1998) (violations
of HOEPA give rise to rescission and awards of §§ 1640(a)(2) and 1640(a)(4) statutory damages).
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n59 15 U.S.C. §1640(a)(4) (Emphasis added).
[**178]
91. It should also be remembered that the amendments to TILA creating HOEPA only supplement existing
TILA requirements. Civil liability for violations of the other provisions of TILA will also apply to a covered
loan.
92. Finally, there is no cap in class actions on the total amount of HOEPA enhanced damages that can be
awarded by a court, although the court must consider certain factors. The $ 500,000 or 1% of net worth class
action cap applies only to statutory damages under 15 U.S.C. § 1640(a)(2). n60
n60 The plain language of 15 U.S.C. § 1640(a) confirms this interpretation. The class action cap
exists only in § 1640(a)(2) which creates the right to obtain statutory damages generally under TILA.
The enhanced damages provision was added to § 1640 as subsection (a)(4). The paragraph immediately following the enhanced damages subsection contains the factors that the court must consider in
awarding class damages but it contains no explicit cap.
A. [**179]
No defense that violations were not material.
93 While a creditor can potentially defeat a claim for enhanced damages in section 1640(a)(4) by showing
that the violation is not "material," that claim cannot be reasonably made in this case. First, the creditor has
the burden of demonstrating that a failure to comply was not material. n61
n61 15 U.S.C. § 1640(a)(4).
94. According to Congress when it passed HOEPA: n62
The Conferees intend the word "material' to reference a common [*28] legal standard not to
reference "material disclosures" under TILA. Case law under section 130(c) [the bona fide error defense codified in section 1640(c)] may be used to evaluate materiality and the reasonableness of the procedures for preventing errors under this section. The Conferees intend that
miscalculations, computer malfunctions and printing mistakes shall not be deemed material if
the creditor maintained reasonable procedures to prevent such mistakes.
n62 H.R. Conf. Rep. No. 652, 103d Cong, 2d Sess. 147, 165 (1994); 1994 U.S.C.C.A N. 1987
(accompanying H.R. 3474).
[**180]
95. This language makes clear that in evaluating violations for these purposes, the concept of a "material disclosure" under TILA rescission rules is irrelevant. Rather, Congress intended to track existing case law under
other existing provisions of the Act. The conference report clearly indicates that the primary concern was to
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exclude the penalty only for some inadvertent violations where the error was based on a simple miscalculation or other mistake and where the editor maintained procedures to catch such errors.
96. The violations of HOEPA and TILA in this case are class wide. They are systemic, consistent and intentional actions.
B. The value of enhanced damages under HOEPA to the Plaintiff Class.
97. Enhanced damages are measured as the sum of all finance charges and fees "paid by the consumer." n63
Such charges should include all fees and charges ever paid during the course of the transaction up to judgment or any settlement since the statutory language is expansive. Examples of such fees are origination fees,
points, closing costs paid at or before settlement, and late charges paid during the course of the loan term.
n63 15 U.S.C. § 1640(a)(4).
[**181]
98. For enhanced damages calculations, all origination fees are paid by the consumer at the time [*29] of
closing so that the can be recovered as damages. n64 Lenders themselves may argue otherwise in the HOED
A context. However, lenders themselves typically treat prepaid finance charges as "earned" as of the date of
settlement. In this case the fees were paid from the equity of consumers homes, immediately reducing the
equity they had available in their homes and increasing the amount they would have to repay on their loans
with Defendants, or refinance with another lender. These fees were thus "paid" at closing.
n64 See Newton v. United Companies Fin. Corp., 24 F. Supp. 2d 444 (ED, Pa. 1998) (finding that
all payments made by the borrowers were either interest or prepaid finance charges (origination fees),
the court allocated 100% of the borrowers' payments to finance charges, so that the enhanced damages
were equal to the pay rents made; arguably, the court should have returned the full amount of the loan
origination fees and any other prepaid finance charges though it is unclear from the opinion what were
the actual amounts charged for those fees).
[**182]
99. One additional question is whether the enhanced damages in the form of finance charges and fees paid
will be available in conjunction with rescission remedies and/or an award of actual damages. In either case,
compound damages for the same financial harm appears to be contemplated, since the statute uses the conjunctive "and" to link section 1640(a)(4) to the earlier damage provisions. (Compound damages would occur
in a rescission, because it automatically cancels the finance charge and fees.) Multiple damages appear to be
what Congress intended by making multiple remedies available under the same statutory provision. n65
n65 Newton v. United Companies Fin. Corp., 24 F. Supp. 2d 444 (E.D. Pa. 1998) (awarding rescission, $ 2000 statutory damages, and enhanced damages).
100. Generally, enhanced damages can be calculated simply by looking at two closing documents - the HUD
1 (to obtain the total fees paid at closing) and the note (to obtain the interest rate and the payment schedule).
[**183] If the loan has been paid off before the date this calculation has been performed then the payoff
date also must be determined. (Note, this analysis will not include any other fees or charges that have been
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paid by the consumer during the loan term, like late charges, which consumers are also entitled to receive
back in enhanced damages.)
C. Example - Calculating the value of enhanced damages for the Watkins.
101. The enhanced damages that are available for the Watkins include all the charges paid at [*30] closing
($ 5,751.50), plus all of the interest that they have paid to date. As the loan was closed on March 31, 2001
and the first payment was due on May 5, 2001, they would have made 57 payments through January, 2000.
The interest portion of these payments equals $ 19,573.07. n66
n66 The sum of the interest paid in the first 57 payments was obtained by running an amortization
for this loan.
Watkins' Enhanced Damages:
Fees paid at settlement Interest paid to through January, 2006 Total enhanced damages -
$ 5,751.50
$ 19,773.07
$ 25,52457
[**184]
D. Rescission is also applicable.
102. As explained above, the failure to properly provide the required disclosures in the HOEPA notice also
triggers the extended right to rescind under 15 U.S.C. § 1635(a).
103. TILA gives consumers the right to rescind loans secured by the equity in their homes. The idea is to
provide a cooling off period to allow consumers to reflect quietly and without pressure on the risks of encumbering their family home and give them an opportunity to reconsider such a major decision. Thus the
statute provides an initial three-day period during which the consumers have an unconditional right to change
their minds and cancel the transaction for any reason, or for no reason. However, if the creditor does not
meet certain requirements under TILA, the three-day clock never starts ticking, and so the right to rescind
extends for three years. n67
n67 15 U.S.C. § 1635(f).
104. The statute and the Regulation set forth precise rules [**185] for calculating the three days. Unless the
right to rescind has been validly waived (which is not an issue in this case), the consumer may exercise the
right to rescind until midnight of the third business day following the latest of the following three events:
[*31] . Consummation of the transaction;
. Delivery of a proper notice of the right to rescind: or
. Delivery of all material disclosures correctly made. n68
n68 Reg Z § 226.23(a)(3).
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105. 1n this case, the failure to properly provide the HOEPA notice three days before closing - whether that
failure flowed from the incorrectly disclosed APR, or the failure to provide it in the time period required means that the material disclosures were never provided. So in this case, the three-dap clock never started.
106. If the three-day clock does not start, the extended right to rescind lasts until whichever of the following
events occurs first:
. The expiration of three years after consummation of the transaction;
. The [**186] transfer of all of the consumer's interest in the property; or
. The sale of the property. n69
n69 Reg Z § 226.23(a)(3).
107. The three-year period limits only the consumer's right to rescind, not the consumer's right to seek judicial enforcement of that rescission right. n70
n70 See, e.g. Miguel v. Country Funding Corp., 309 F.3d 1161 (9th Cir. 2002).
108. The filing of a complaint for rescission has been held to be sufficient written communication of the
consumer's election to cancel the loan. n71
n71 See National Consumer Law Center, Truth in Lending (5th F.d. 2003) at § 6.6.2.5, note 552.
109. Generally, once a consumer [**187] sends a notice of rescission the creditor is obligated to cancel the
security interest. As the loan is considered rescinded, the consumer owes no fees or charges or interest. Once
the creditor cancels the security interest the consumer is required to tender the amount still [*32] due on
the loan - the loan amount minus all fees and charges and interest. n72 However, the consumer is also entitled to have the amount due reduced by other TILN damages. n73 The effect of this means that all of the
payments that have been made on the loan must be applied to principal, rather than proportioned between
interest and principal.
n72 Reg Z § 226.23(d)(1).
n73 See National Consumer Law Center, Truth in Lending (5th Ed. 2003) at § 6.8.1.
110. The value of a rescission claim - or the amount that the loan amount will be reduced by - is the same
calculation as enhanced damages for a violation of HOEPA. In both instances, the total amount of all fees
and charges paid - whether paid at closing or [**188] through interest on the loan is the value of the claim.
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111. Consider the following example in the Watkins's loan:
If one were to just evaluate the value of the rescission claim it would be:
1)
2)
Fees paid at settlement Interest paid to through January, 2006 Total value of rescission claim -
$ 5,751.50
$ 19,773.07
$ 25,524.57 n74
n74 This underestimates somewhat the value of the rescission claim, because any fees and charges
accruing during the loan, such as late charges, also must be refunded to the consumer.
112. To determine the amount of the tender requirement we start with the loan amount, deduct from it all fees
paid at settlement, and all payments made to date. We deduct the entire amount of the payments made to date
because that part of each payment that has already been applied to the principal of the loan to pay it down
should still be applied. So a shorthand way of calculating the tender amount is to simply deduct the total of
payments made. But [**189] this method of calculation does not provide us with the monetary value of the
rescission claim.
113. In the Watkins's case, to determine the value of both the rescission claims and the enhanced damages for
violations of HOEPA (as opposed to a tender amount), the math is as follows: [*33]
Total enhanced damages Total value of rescission claim Total value of combined claims -
$ 25,524.57
$ 25.524.57
$ 51,049.14
114. This amount far exceeds the amount that the Watkins owe as of January 5, 2006, which is - assuming all
payments due have been made, and no additional charges have been assessed -$ 33,575.99. So - as the result
of the HOEPA violations by Defendants - the WatKins should be entitled to have their loan cancelled and
receive a credit back for the difference between $ 51,049.14 and $ 33,575.99:
Total value of combined claims Amount still due on loan Amount due Watkins -
$ 51,049.14 minus
$ 33,575.99
$ 17,473.15 after loan cancellation.
115. Some members of the class will have already refinanced their loans, so that the value to them of the enhanced damages and the value of the rescission [**190] claim may not be as high. Other members of the
class may have lost their extended right to rescind because their house has been sold or foreclosed upon. It is
theoretically conceivable that some members of the class still have outstanding loans with. Defendants but
are so far behind in their payments that the combined value of these claims will not exceed the amount due
on the note (although it must be remembered that no fees of any bind are permitted, even late charges, when
a loan has been rescinded). However, given the length of time that has transpired since the loans to class
members were originally made, and hence the number of payments which have already, been made by the
members, the number of class members who are in this latter category must be very small.
E. Rescission should be available to Plaintiff Class because no tender is required.
116. Rescission under TILA can be seen as a somewhat awkward process, because of the requirement that
the consumer tender an amount still due after the creditor has completed its obligation to cancel the security
interest. This obligation to tender the amount remaining due on the [*34] loan requires most consumers to
obtain [**191] a new loan, albeit at a reduced amount. This obligation to tender the remaining amount due
on the loan, after the loan amount has been reduced by the deduction of all closing charges and the payments
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made to date, can be daunting in an individual case. Rescinding loans on a class-wide basis where there
would be tenders required would be pretty clearly unmanageable. As a result, class actions for rescission
claims have generally been limited to permitting a declaratory judgment that class members have the right to
rescind their loans with the creditor. n75
n75 See National Consumer Law Center, Truth in Lending (5th Ed. 20103) at § 6.9.9.
117. However, this case presents a unique set of circumstances, which does not appear to have been the subject of previous litigation. In this case, because of the presence of enhanced damages under HOEPA and the
value of the rescission claims, there would be no tender amount in the vast majority of loans in the Plaintiff
Class. Indeed, as can be seen above, [**192] once the value of these claims is combined, class members
would be entitled to both cancellation of the loan and money back from Defendants. This set of circumstances could reasonably be the basis of allowing class-wide rescission.
118. The analysis in previous litigation relating to class rescission have talked about the individual decision
that consumers should be entitled to make regarding a rescission. But this individual decision rests on how
the consumer will come up with the tender amount. In this case, when rescission is an additional claim to one
for HOEPA enhanced damages, what decision is there to make? No consumer is going to refuse to accept a
full payoff of their loan.
119. Alternatively, the court could simply determine that the members of the Plaintiff Class are entitled to
exercise their right to rescind. This remedy is separate from and in addition to the enhanced damages awarded for violations of HOEPA.
[*35] F. The value of statutory damages under TILA to the Plaintiff Class.
120. The Defendants' failure to properly allocate the title exam fee (line 1103) and the title abstract fee (line
1102) to the finance charge, resulted in a wrongful [**193] disclosure of the APR on the TILA disclosure
as well as the HOEPA notice. The tolerance rules established by Congress in 1995 would apply to this analysis.
121. The 1995 tolerance rules establishes that for statutory damages, the disclosure of the finance charge and all disclosures which are affected by it, including the APR is considered accurate if it is not greater than
the actual finance charge by more than $ 100. n76
n76 15 U.S.C. § 1605(f)(1).
122. In the ten loans that I reviewed, every one of the title exam fees in line 1103 exceeded $ 100, so meeting
this tolerance does not seem to be an issue. It also appears from the Excel Spreadsheet prepared by Objectors'
Counsel that all of the line 1103 charges for those loans exceeded $ 100.
123. This is a material violation of TILA which would entitle individual consumers to statutory damages of
52,000. However, these statutory damages mould be capped by the limitation on statutory damages in class
actions 111 15 U.S.C. § 1640 [**194] (a)(2)(B). This limitation - applicable to the same failure to comply
by the same creditor - is the lesser of $ 500,000 or 1% of the net worth of the creditor. However, the limitation is per creditor, so each of the Defendants in this case would appear to liable for the capped amount.
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[*36] I, Margot Saunders, hereby state that the foregoing is true.
/s/ [Signature]
MARGOT SAUNDERS
Taken, sworn to, and subscribed before me this 13th day of February, 2006.
My commission expires: Sept. 18, 2006
/s/ [Signature]
NOTARY PUBLIC
[*1] AFFIDAVIT OF WILLIAM H. DODSON, II, ATTORNEY
Comes now William H. Dodson, II, who, after being duly sworn, deposes and states the following:
1.
I, William H. Dodson, II, am over the age of 21. I am competent in all respects to testify and state my
opinion(s) regarding the matters set forth herein. This Affidavit is given in support of Objectors' and
Opt-Outs' pleadings in the above referenced cases and I authorize its use for any and all purposes allowed by
law.
2.
I am a resident of Atlanta, Fulton County, Georgia and since 1972 have been a member of the State Bars
of Georgia and Florida.
[*2] 3.
A copy [**195] of my brief biography and speaking or publication experience is attached as Exhibit
"A".
4.
A list of other cases in which I have participated as an expert is attached as Exhibit "B".
5.
I have also based by opinions upon my review of the files listed in Exhibit "C", especially the HUD 1
Statements, the Real Estate Property Reports or Property and Judgment Reports. I presume for the purposes
of my opinion that said files are complete. true and correct.
6.
I was contacted by Objectors' and Opt-outs' attorneys, and was engaged by them to give my opinion as to
the following:
a. Whether or not there is evidence of an "abstract of title" in the files examined:
b. Whether or not there is evidence of a "title search" or "title examination" in the files examined;
c. Whether the fees charged on Line 1102 of the HUD 1 Statements are bona fide and reasonable; and
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d. Whether the fees charged on Line 1103 of the HUD 1 Statements are bona fide and reasonable.
[*3] 7.
My opinion is based upon my education, training and experience as an attorney whose law practice since
1973 has been focused upon real estate matters especially loan and sale closings, title examinations [**196]
and title insurance. I have closed thousands of real estate closings in my career and have examined or certified over 45,000 real estate titles since opening my own practice in 1984. I consider myself to be educated
and experienced in the above areas of real estate law and am generally familiar with title practices and title
terminology on a nationwide basis.
8.
My charge for expert testimony is $ 300.00 per hour consulting time, $ 350.00 per hour for testifying at
depositions or at trial. Out of office appearances are charges from the time I leave the office until I return and
I am reimbursed all out of pocket expenses. As my involvement is ongoing, it is not possible at this time to
estimate my total charges for work on the present matter.
9.
Based upon my qualifications, expertise and experience and my review of the materials provided and
those listed in Exhibit "C". I have developed the following opinions in this case:
(A) IS THERE IS EVIDENCE OF AN "ABSTRACT OF TITLE" IN THE FILES EXAMINED?
OPINION: NO An abstract of title is universally viewed as a research exercise wherein the abstractor personally examines the relevant deed records to establish a "chain of title" [**197] for a particular parcel of
land as of a particular date. [*4] It is produced for the use of the closer or settlement agent for a sale or
loan to determine who can sell or encumber the property, the description of the property, what taxes or secured debts need to paid off and what other encumbrances may affect ownership of the land. Following this
exercise wherein the abstractor may refer to title plant resources or actual courthouse records, a formal "Abstract of Title" is produced which discloses to the reader several items about the particular piece of property,
that is, the "title". These items generally include, but are not limited to: the current owner of the land, the legal description of the land, the property tax status of the land, recorded debts secured by the land such as
mortgages; other liens which may be against the land such as condominium homeowner association liens,
restrictive covenants, easements and possibly survey exceptions. Copies or abbreviated notes (abstracts) of
the relevant instruments referred to in the Abstract of Title are usually attached. IT IS MY OPINION THAT
THE "REAL ESTATE PROPERTY REPORTS" OR THE "PROPERTY AND JUDGMENT REPORTS"
ARE NOT ABSTRACTS [**198] OF TITLE.
(B) IS THERE EVIDENCE OF A "TITLE SEARCH" OR "TITLE EXAMINATION" IN THE
FILES EXAMINED? OPINION: NO. A "title search" or "title examination" is a universal term used to
describe the actual activity described above. The results of a "title search" is used in the same way as an abstract of title by the closer or settlement agent for a sale or loan. As previously explained, it is the research
activity by which the "title" to the property is determined. There is no single form of a title search but all include the same core information. "Title Searches" may be nothing more than assembled copies of the individual deed abstracts or by a summary copies of [*5] the individual encumbrances together with some
form of certification date. Regardless of form. however, "Title Searches" set out the same information as Title Abstracts. Furthermore, each of Real Property Reports contains the expressed written disclaimer that the
"...information is provided from public records and is not intended nor should it be considered as an opinion
of title, title guarantee or title insurance policy." IT IS MY OPINION THAT THE "REAL ESTATE PROPERTY REPORTS" AND THE "PROPERTY AND JUDGMENT [**199] REPORTS" ARE NOT "TITLE
SEARCHES" OR "TITLE EXAMINATIONS".
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(C) WERE THE FEES CHARGED THE BORROWERS ON LINE 1102 BONA FIDE OR REASONABLE? OPINION: NO. WITH RESPECT TO THE LINE 1102 CHARGES, TO THE EXTENT
THEY ARE CHARGES FOR AN "ABSTRACT" OR FOR A "TITLE SEARCH", THE REAL ESTATE
PROPERTY REPORTS AND THE PROPERTY AND JUDGMENT REPORTS FOUND IN THE FILES
SET FORTH IN EXHIBIT "C", ARE NEITHER AN "ABSTRACT" NOR "TITLE SEARCH" AND THE
CHARGES SHOWN ON LINE 1102 ARE NEITHER BONA FIDE NOR REASONABLE. ADDITIONALLY, TO THE EXTENT THESE CHARGES WERE MARKED UP FROM THE ACTUAL CHARGE,
SUCH A MARK UP IS NEITHER BONA FIDE NOR REASONABLE.
(D) WERE THE FEES CHARGED THE BORROWERS ON LINE 1103 BONA FIDE OR REASONABLE? OPINION: NO. WITH RESPECT TO THE LINE 1103 CHARGES, THEY WERE NEITHER BONA FIDE NOR REASONABLE [*6] BECAUSE NO TITLE EXAMINATION WAS PERFORMED BY THE TITLE COMPANY WHO RECEIVED THE LINE 1103 CHARGE.
FURTHER THE AFFIANT SAITH NOT
I have read the foregoing and it is true and correct and is based upon my personal knowledge of the facts,
and I authorize its use for any and all purposes allowed by law.
Sworn to and subscribed before me
this 13th day of February, 2006
/s/ [**200] [Signature]
Notary Public
AFFIANT
/s/ [Signature]
William H. Dodson, II
AFFIDAVIT OF JOHN T. COGHLAN
STATE OF MISSOURI
ss.
COUNTY OF JACKSON
JOHN T. COGHLAN, for his Affidavit, states as follows:
1. I am an attorney licensed to practice law in the states of Missouri and Kansas. I have been licensed to
practice law in Missouri since 1989 and in Kansas since 1990. I am also admitted to the United States District Court for Missouri and Kansas and to the United States Court of Appeals for the Eighth Circuit. I am
currently in good standing in Kansas and Missouri. I have been recognized by, and qualified as, an expert
witness regarding real estate issues in a bankruptcy case in Kansas and in a real estate breach of contract case
dealing with title insurance issues in Missouri. As part of my work experience, I worked for two title companies for about 18 years in various capacities and have extensive experience in examination of real estate titles. I attach a copy of my Curriculum Vitae to this Affidavit. My Curriculum Vitae contains my prior testimonial experiences as an expert.
2. In connection with this opinion, I reviewed documents in 124 [**201] loan files provided to me covering loan transactions in Illinois, Missouri, Maryland, California, and Georgia; reviewed the testimony of
Michael Kevin Morin, former employee of Equity Guaranty regarding the title process and loan process that
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occurred on loan transactions generally; and reviewed various statutes and regulations regarding title insurance and closing transactions.
3. By way of background, title insurance is not like most other forms of insurance, which is issued on the
basis of risk assumption, and spreading of losses across a broad base of policy holders. Rather, title insurance
is a contract of indemnity which, when the policy is issued, is done so on the basis on risk identification, risk
evaluation, risk elimination or limitation, and loss prevention. Title insurance is a risk line of insurance. Title
insurance companies review real estate issues and undertake risk in connection with issuing title insurance
policies. Part of the risk analysis a title company undertakes when evaluating real estate matters includes
searching various property records to determine ownership interests, easements, encumbrances, liens, and
other suits and judgments that involve and impact [**202] real estate interests. This process is commonly
referred to as "title examination". A title examination involves reviewing various conveyance documents,
lien documents, and other court documents and instruments to determine its effect on the proposed insured
land. Typically, a "title examination" would only occur if a title insurance product was to be issued. My review of the loan files provided to me did not show that any title insurance product was ever issued by U.S.A.
Title, LLC, Resource Title, LLC, or Title America, LLC (collectively referred to as the "Title Companies"
or "Title Company").
4. As part of its examination process, an examiner will typically examine certain documents and determine the following:
(a) conveyance documents, like warranty deeds, special warranty deeds, and other types of
conveyance documents in the chain of title for incorrect legal descriptions, easement reservations and rights contained in the conveyance documents, forgeries; and other issues that address
legal status of grantor and its authorization to convey the property;
(b) incorrect indexing or recording of documents such that the prior instruments of conveyance do not show [**203] up in the chain of title;
(c) problems of the legal status of the grantor, including confusion due to identical or similar names such as the person executing the warranty deed, deed of trust, or other encumbrance
instrument where they do not truly have an interest in the property, inaccurate representation of
the marital status of the grantors, conveyances by a minor, or deeds executed under lapse or
false powers of attorney or by public or private entities without proper authorization;
(d) problems caused by the transfer of property after the death of the owner, such as undisclosed or missing heirs, improper probate of wills, and examining probate cases for determination of devisees, report of administrators of estates, estate representative deeds, and various
other documents including wills and codicils that purport to convey interests in real property to
parties;
(e) possible failure to include necessary persons in judicial or non-judicial foreclosures by
reviewing trustee's deeds, affidavits of publications and notices to borrowers; quiet title actions;
partitions or legal proceedings; and divorce actions looking for separation agreements and decrees of dissolution to examination [**204] on which party receives certain real property; and
(f) liens or unsatisfied claims against the property in the form of deeds of trust to determine
if they have been released of the public record.
5. I have been retained to render an opinion on charges listed on HUD Settlement Statement Line 1102
("Abstract or Title Search) and Line 1103 ("Title Examination") of various HUD Settlement Statements
("Closing Statements") in the above-loan files to determine whether these charges were reasonable and/or
bona fide.
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6. Based upon my review of the above documents, I found that in all loan files, the Title Company that
did the closing never did any title examination nor did the Title Company issue any title commitment or loan
policy to lenders in connection with these loans. As a result, I found and determined that the Title Company's
charges found on Line 1102 of various Closing Statements contained in the loan files should not have exceeded the amount charged by General American to search and prepare real property reports for the Title
Companies. Almost all of the charges found in Line 1102 exceed the amount actually charged by General
American for the real property reports. [**205] Any amounts appearing in the Closing Statements, over
and above the actual costs charged by General American for the real property reports are unreasonable and
excessive
7. Based on my review of the above documents, I found that in all of the loan files, the Title Company
that did the closing never did any title examination that resulted in the issuance of a title commitment or loan
policy to the lenders. As a result, the charges appearing on Line 1103 of the Closing Statement for Title Examination work are completely unreasonable and are not bona fide because: (1) none of the loan files indicated that any kind of "title examination" occurred; and (ii) no "title examination" could be done from the
real property reports provided by General American because none of the actual documents needed for examination of the chain of title (i.e. copies of all conveyance deeds, deeds of trust, easements, and other encumbrances) were in the file for a title examination. If the Title Companies suggest that they did a title examination of the real property reports these assertions could not be true in the sense of a title examination. If they
did any sort of examination it would have been [**206] done in connection with their closing function and
not in a title insuring function, because they never issued any title insurance product.
AFFIANTS FURTHER SEETHE NAUGHT.
Dated this 14th day of February, 2006.
/s/ [Signature]
John T. Coghlan
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal at my office in
Jackson County, Missouri, the day and year last above written.
/s/ [Signature]
Notary Public in and for said
County and State
My Commission Expires:
Jan. 5, 2008
/s/ [Signature]
(Type, print or stamp the Notary's
name below his or her signature)
[*1] AFFIDAVIT OF HASBROUCK HAYNES, JR., C.P.A.
COMES NOW Hasbrouck Haynes, Jr., who, after being duly sworn, deposes and states the following:
1. I, Hasbrouck Haynes, Jr., am over the age of 21. I am competent in all respects to testify and state my
opinion(s) regarding the matters set forth herein. I have personal knowledge of the facts stated including my
reliance upon the attached documents, herein and know them to be true. This Affidavit is given in support of
Objector's Brief with respect to TILA HOEPA viability in the above captioned matter as [**207] well as in
MDL No. 1674 and I authorize its use for any and all purposes allowed by law.
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2. I am a resident of Birmingham, Alabama and since 1964 have been a Certified Public Accountant.
3. A copy of my qualifications is attached as Exhibit "A".
[*2] 4. A list of other cases in which I have participated as an expert is attached as Exhibit "B".
5. I was contacted by Objector's Counsel to construct the attached Three (3) Excel databases for
Opt-Outs, Objectors, and class members in Case No. 03-425 for purposes of analyzing the data with respect
to the occurrence of TILA and HOEPA claims, dates of occurrence and their damage value. I was provided
data from four (4) sources from which I or those under my direct supervision prepared the Excel spread sheet
data bases.
DOCUMENTS
6. The documents which I relied upon for the data in the Excel spreadsheets are generally described on
Exhibit "C". The sources of those documents are:
a. Loan files from 116 borrowers which Objectors' Counsel, Walters Bender Strohbehn &
Vaughan, represented to me were produced to them by Defendant, Residential Funding Corporation's Counsel, as the loan files for Objectors that included the states [**208] of Missouri,
Illinois, California, Georgia and Maryland.
b. Loan file documents from 285 borrowers provided to me by Objectors' Counsel, Mr.
Nix, for borrowers from Georgia and Alabama.
c. Loan file documents from 35 borrowers provided to me by Objectors' Counsel, Mr.
Borison, for borrowers from Maryland, Florida and Georgia.
d. I or employees under my direct supervision accessed the Georgia Superior Courts Clerks
Cooperative Authority and searched for and imaged [*3] documents with respect to release
or payoff data for the Georgia borrowers. The website can be found at www.gsccca.org.
THE EXCEL SPREAD SHEET DATA BASES
7. From these documents the data was obtained for the spread sheet data entries. Each borrower's data is
on a discrete line. The columns on that discrete line contain data or calculations from the data with respect to
that individual borrower. The column headings describe the data or calculation. The closing fee information
was typically obtained from the HUD-1 Settlement Statement. A separate Excel spread sheet was created for
each of the set of documents referred to in 6a ("Illinois-Missouri"), 6b ("Georgia") and 6c ("Maryland"),
above. It is a simple [**209] process from the documents to prepare the spread sheet and perform the calculations referenced in subsequent paragraphs.
HOEPA LOAN DETERMINATION
8. Objectors' Counsel asked me to determine how many of the 436 loans in the sample were HOEPA
loans. I performed the alternative "points and fees" or APR calculations as directed by 15 U.S.C. § 1602(aa)
and 12 C.F.R. § 226.32(a)(1) on each of the 436 loans. Those individual calculations are found at columns
BK through BR for each borrower. 425 of the 436 loans or 97.5% are HOEPA loans. Extrapolating this percentage over the 44,535 loans held by RFC indicates that (97.5% x 44,535) or 43,421 loans are HOEPA
loans.
HOEPA APR VIOLATION DETERMINATION
9. Objectors' Counsel informed me and asked me to assume that the HUD-1 line 1103 "Title Examination Fee" was incorrectly excluded from the finance charge for [*4] each loan because it was not bona fide
and reasonable. Based on this information and assumption Objector's Counsel asked me to allocate the line
1103 "Title Examination Fee" to the finance charge and determine with respect to each of the 436 loans in
the sample whether there was a misstatement [**210] of the APR in the HOEPA disclosure sufficient to
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2002 U.S. Dist. Ct. Briefs 714286, *; 2006 U.S. Dist. Ct. Briefs LEXIS 2628, **
cause a statutory violation for any of the 436 loans in the sample in accordance with 15 U.S.C. § 1606(c), 12
C.F.R. § 226.22(a)(2) and 12 C.F.R. § 226.31(g). I performed the allocation and made the calculation in accordance with the foregoing provisions. Those individual calculations are found at columns BS through BX
for each borrower on the Excel spreadsheets. 378 of the 425 HOEPA loans or 88.9 % had an APR violation.
10. From the 116 loan files referenced in 6a, above, data showed that 96% of the time if the 1103 fee exceeded $ 100 there was a minimum markup of a property report in the amount of $ 25. We did not have the
documents in the Maryland and Georgia information that would show the markups. Objectors Counsel asked
me to assume that the HUD-1 line 1102 "Abstract or Title Search" fee had been marked up by $ 25 or more
per the documents in the Illinois- Missouri spreadsheet and to assume based on that data that for any 1102
fee that exceeded $ 100 in the Maryland and Georgia spread sheets that a $ 25 dollar markup had occurred.
Objectors' Counsel then asked me to assume that the sum of HUD-1 line 1103 [**211] "Title Examination
Fee" and the $ 25 markup in the HUD-1 line 1102 was incorrectly excluded from the finance charge for each
loan because those fees were not bona fide and reasonable. Based on this information and assumption Objector's Counsel asked me to allocate the line 1103 "Title Examination Fee" and the $ 25 mark up to the finance charge and determine with respect to each of the 436 loans in the sample whether there was a misstatement of the APR in the HOEPA disclosure sufficient to [*5] cause a statutory violation for any of the
436 loans in the sample in accordance with 15 U.S.C. § 1606(c), 12 C.F.R. § 226.22(a)(2) and 12 C.F.R. §
226.31(g). I performed the allocation and made the calculation in accordance with the foregoing provisions.
Those individual calculations are found at columns BY through CE for each borrower on the Excel spreadsheets. 387 of the 425 HOEPA loans or 91.1 % had an APR violation. Extrapolating this percentage over the
43,421 HOEPA loans (see 8 above) held by RFC indicates that (91.1% x 43,421) or 39,557 loans have a
HOEPA APR violation.
TILA APR VIOLATION DETERMINATION
11. Using the same facts set forth in paragraph [**212] 10, Objectors Counsel asked me to determine
with respect to each of the 436 loans in the sample whether there was a misstatement of the APR in the TILA
disclosure sufficient to cause a statutory violation providing grounds for rescission for any of the 436 loans in
the sample in accordance with the tolerance set forth at 12 C.F.R. § 226.23(g)(1). I performed the allocation
and made the calculation in accordance with the foregoing provisions. Those individual calculations are
found at column CF for each borrower on the Excel spreadsheets. 413 of the 436 loans or 94.7 % had a TILA
APR violation by virtue of the disclosed Finance Charge being understated by more than one half of one
percent of the borrower's Note amount. Extrapolating this percentage over the 44,535 loans held by RFC indicates that (94.7% x 44,535) or 42,175 loans have a TILA APR violation providing grounds for rescission.
[*6] HOEPA DELIVERY VIOLATION
12. Objectors Counsel asked me to assume that for each HOEPA loan the HOEPA disclosure had not
been timely delivered to the borrowers as required by 15 U.S.C. § 1639(a); 12 C.F.R. §§226.31(c); 226.32(c).
That assumption is found at [**213] column CG for each borrower on the Excel spreadsheets. Extrapolating this percentage over the 44,535 loans held by RFC indicates that (97.5% x 44,535) or 43,421 loans have a
HOEPA delivery violation.
HOEPA ENHANCED DAMAGES
13. Objectors' Counsel asked me to calculate the enhanced damages required to be assessed for a
HOEPA APR violation or a HOEPA delivery violation for each of the 436 borrowers in the sample. I performed the HOEPA enhanced damage calculation required by 15 U.S.C. § 1640(a) (4) for each borrower in
the sample. That amount is the sum of the line 1400 fees and the interest paid. Those calculations are found
at columns CI through CK for each borrower on the Excel spreadsheets. 425 of the 436 borrowers in the
sample or 97.5% are due enhanced damages. The average amount for enhanced damages for the 425 borrowers is $ 26,477.46. Extrapolating this average over the predicted 97.5 % of the 44,535 loans held by RFC
calculates (.975 x 44,535 x $ 26,477.46) to $ 1,149,694,339.
Page 76
2002 U.S. Dist. Ct. Briefs 714286, *; 2006 U.S. Dist. Ct. Briefs LEXIS 2628, **
VALUE OF RESCISSION
14. Objectors' Counsel asked me to calculate the value of rescission which results from either a HOEPA
APR violation or a TILA APR violation or [**214] a HOEPA delivery violation for the borrowers within
the 436 sample who have one or more of [*7] those violations. I performed the rescission valuation calculation required by 15 U.S.C. § 1635(b); 12 C.F.R. § 226.23(d) for each borrower in the sample (the calculations have been made without regard to either the sale or foreclosure of the property). That amount is the sum
of the line 1400 fees and the interest paid. Those calculations are found at column CL for each borrower on
the Excel spreadsheets. 431 of the 436 borrowers in the sample or 98.9% have rescission claims with monetary value. The average value of rescission for the 431 borrowers is $ 26,456.58. Extrapolating this average
over the predicted 98.9 % of the 44,535 loans held by RFC calculates (.989 x 44,535 x $ 26,456.58) to $
1,165,283,109.
DAMAGES
15. Objectors Counsel asked me to calculate the average amount due the 436 borrowers in the sample for
enhanced damages and rescission value. Those calculations are found at column CM for each borrower on
the Excel spreadsheets. 431 of the 436 borrowers in the sample or 98.9% are due enhanced damages and/or
have rescission value. The average [**215] amount for enhanced damages plus the rescission value for the
431 borrowers is $ 52,565.43. Extrapolating this average over the predicted 98.9 % of the 44,535 loans held
by RFC calculates (.989 x 44,535 x $ 52,565.43) to $ 2,315,250,409.
STATUTE OF LIMITATIONS
16. Objectors' Counsel also asked me to investigate and report the number of loans in the sample for
CBNV and GBNT that were before and after certain dates that may be asserted as statute of limitation dates.
I have done that and report as follows:
Lender
CBNV
Loans
216
Date
Lender Sued
05/01/2001
GBNT
220
09/19/2002
1 Year
Prior to Suit
05/01/2000
Before
After
106
110
49.1 %
50.9%
09/19/2001
Before
After
137
83
62.3 %
37.7 %
3 Years
Prior to Suit
05/01/1998
Before
After
0
216
100%
09/19/1999
Before
After
0
220
100 %
[*8] Objectors' Counsel have informed me that RFC owns 44.535 loans. Of these loans CNBV was the
lender for 22,810 and GBNT was the lender for 21,725. Extrapolating the sample results to the RFC loans
provides the following:
Lender
CBNV
Loans
22,810
Date
Lender Sued
05/01/2001
GBNT
21,725
09/19/2002
1 Year
prior to suit
05/01/2000
Before
After
11,200
11,610
49.1%
50.9%
09/19/2001
Before
After
13,535
8,190
62.3 %
37.7%
3 Years
Prior to Suit
05/01/1998
Before
After
0
22,810
100%
09/19/1999
Before
After
0
21.785
100%
[**216]
Based on the extrapolation, 19,800 borrowers' claims were filed within 1 year of the loan date and 44,
535 borrowers' claims were filed within 3 years of the loan dates.
Page 77
2002 U.S. Dist. Ct. Briefs 714286, *; 2006 U.S. Dist. Ct. Briefs LEXIS 2628, **
[*9] FURTHER THE AFFIANT SAITH NOT
Sworn to and subscribed before me
this 15th day of February, 2006
/s/ [Signature]
Notary Public
AFFIANT
/s/ [Signature]
Hasbrouck Haynes, Jr.
CERTIFICATE OF SERVICE
I hereby certify that I filed this document electronically with the United States District Court for the
Western District of Pennsylvania with notice of case activity to be generated and sent electronically by the
Clerk of the Court to all designated persons this 15th day of February 2006:
/s/ J. Michael Vaughan
Attorneys for Hobson Plaintiffs
[SEE AFFIDAVIT OF JOHN T. COGHLAN IN ORIGINAL]
[SEE EXHIBIT "A" BRIEF RESUME AND LIST OF PUBLICATIONS IN ORIGINAL]
[SEE EXHIBIT "B" IN ORIGINAL]
[SEE EXHIBIT "C" IN ORIGINAL]