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accepting Rate Manual as representing the relevant market for title insurance rates
Summary of this case from In re StrongOpinion
Civil Action No. 03-378
May 26, 2004
MEMORANDUM AND ORDER
Plaintiffs John and Mabel Johnson assert an array of federal and state claims against Defendant mortgage broker The Knox Financial Group, L.L.C. ("Knox") and lender Banc One Acceptance Corporation d/b/a Bank One, N.A. ("Bank One") (collectively "Defendants"). Specifically, Count One of Plaintiffs' Second Amended Complaint contends that Defendant Bank One violated the federal Truth in Lending Act, 15 U.S.C. § 1601et seq. ("TILA"), and the federal Home Ownership and Equity Protection Act, 15 U.S.C. § 1639 et seq. ("HOEPA"). With respect to state based claims, the Second Amended Complaint avers violations of the Pennsylvania Credit Services Act, 73 Pa.C.S. § 2181et seq. ("CSA"), the Pennsylvania Loan Broker Trade Practice Regulations, 37 Pa.ADC 305.3(a)(1)-(4), and the Pennsylvania Unfair Trade Practices and Consumer Protection Law, 73 Pa.C.S. § 201-1 et seq. ("UTPCPL"). These claims arise out of a refinance mortgage loan that the parties closed on November 29, 2000.
Presently before the Court is Defendant Bank One's Motion For Summary Judgment on Count One of the Second Amended Complaint, Defendants' Motion To Dismiss Second Amended Complaint, and Plaintiffs' Cross-Motion For Partial Summary Judgment As To Their Truth-In-Lending Claims Against Bank. For the following reasons, we grant-in-part and deny-in-part Defendant Bank One's Motion For Summary Judgment and deny Plaintiffs' Cross-Motion For Partial Summary Judgment. In light of these findings, we deny Defendants' Motion To Dismiss Second Amended Complaint.
I. Statement of Jurisdiction
We have jurisdiction to adjudicate Plaintiffs' federal TILA and HOEPA claims pursuant to 28 U.S.C. § 1331. We exercise our supplemental jurisdiction under 28 U.S.C. § 1367(a) to consider Plaintiffs' state law claims, as they arise out of the same transaction or occurrence as do their federal claims.
II. Standard of Review
The court shall render summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). An issue is "genuine" only if there is a sufficient evidentiary basis on which a reasonable jury could find for the non-moving party. Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A factual dispute is "material" only if it might affect the outcome of the suit under governing law. Id. at 248, 106 S.Ct. 2505, 91 L.Ed.2d 202.
On a motion for summary judgment, the moving party bears the initial burden of identifying those portions of the record that it believes demonstrate the absence of material fact. Celotex Corp. v. Catrett. 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). To defeat summary judgment, the non-moving party must respond with facts of record that contradict the facts identified by the movant and would support a favorable jury finding. Id. at 321 n. 3, 106 S.Ct. 2548, 91 L.Ed.2d 265 (quoting Fed.R.Civ.P. 56(e)); Anderson. 477 U.S. at 248-49, 106 S.Ct. 2505, 91 E.Ed.2d 202; see First Nat'l Bank of Pa. v. Lincoln Nat'l Life Ins. Co., 824 F.2d 277, 282 (3d Cir. 1987). The party opposing summary judgment may not rest upon mere allegations or denials, but must set forth specific facts, presenting affirmative evidence showing that there is a genuine issue for trial.Anderson. 477 U.S. at 256-57, 106 S.Ct. 2505, 91 E.Ed.2d 202.
III. Procedural Posture and Background
The following section outlines the basic facts and procedural history surrounding this matter. We undertake a more in-depth review of the facts in connection with our legal analysis.
At some time in the year 2000, Plaintiffs were solicited by Defendant Knox to refinance the mortgage on their home in Easton, Pennsylvania. Plaintiffs had previously procured two loans in connection with their residence. The first, a mortgage from Delta Funding Corporation ("Delta"), closed on February 3, 1998. (J. Johnson Aff. ¶ 5.) At that time, pursuant to Delta's instructions, Plaintiffs transferred the title to the home from themselves and their daughter, Joanne Cressman, to themselves only. (Id. at ¶ 5.) Plaintiffs have been the exclusive owners of the home since that time. (Id.) On October 7, 1998, Plaintiffs closed a subsequent loan from Indymac Mortgage Holdings, Inc. ("Indymac") (Id. at ¶ 6.) The present loan ("Loan") was made to Plaintiffs by Defendant Bank One on November 29, 2000. Defendant Knox brokered the Loan, and Third-Party Defendant Chelsea Settlement Agency of Pittsburgh, Inc. ("Chelsea") served as the settlement and title insurance agent for the Loan. Plaintiffs obtained the Loan in an effort to reduce their monthly mortgage payments (Id. at ¶ 10) and repay credit card indebtedness (Second Am. Compl. ¶ 8.)
As detailed in our prior Memorandum and Order entered on July 7, 2003,see Johnson v. Banc One Acceptance Corp., 278 F. Supp.2d 450, 453 (E.D. Pa. 2003), the principal amount of the Loan was $72,000 at an annual percentage rate of 10.765 percent. The refinancing Loan, secured by the Plaintiffs' residence, was structured such that Plaintiffs were required to make one hundred and seventy-nine monthly payments of $621.15 commencing on January 18, 2001, and a single balloon payment of $59,231.22 as the one hundred eightieth payment on December 18, 2015. This meant that Plaintiffs' total payments would amount to $170,417.07 over fifteen years. As indicated on the face of the Truth in Lending Disclosures form, of this, some $103,588.07 was the "finance charge" and $66,829.00 was the "amount financed." (Second Am. Compl. Ex. A.) The Truth in Lending form further reveals that there were prepaid finance charges of $5,171.00, as well as other itemized charges which include charges for "Insurance Companies" of $627.40, "fld/transunion" of $6.00, "tl srch/chelsea tl" of $10.00, and "tx info/chelsea" of $15.00. (Id.) The settlement statement associated with the transaction clarifies that charges imposed for an abstract or title search ($10), notary fees ($10), title insurance ($627.40), flood determination ($6) and tax information ($15) were not included in the calculation of the prepaid finance charges. (Id. at Ex. C.)
Plaintiffs allege, inter alia, that their new monthly payments in fact exceeded their prior monthly mortgage payments in contradiction of Knox's solicitation. They sought to rescind the refinancing Loan by letter dated September 30, 2002. (Id. at Ex. B.) Bank One did not respond to their letter, and Plaintiffs subsequently filed suit.
This action was originally commenced on January 28, 2003. Plaintiffs submitted an Amended Complaint to this Court on May 6, 2003. In a Memorandum and Order entered on July 7, 2003, this Court granted-in-part and denied-in-part Defendants' Motion To Dismiss Plaintiffs' Amended Complaint. See 278 F. Supp.2d 450. Specifically, we allowed Plaintiffs to proceed forward with their claims that (1) Defendant Bank One violated TILA by failing to include in the computation of the finance charge the title insurance premium and notary charges; (2) Defendant Bank One failed to make disclosures required pursuant to the HOEPA; and (3) Defendants violated the Pennsylvania CSA, the Pennsylvania Loan Broker Trade Practice Regulations, and the UTPCPL. Id at 456-57, 458-460. The parties were provided a period of discovery. We granted Defendants' Motion To Dismiss Plaintiffs' Amended Complaint with respect to, inter alia, Plaintiffs' allegation that Defendant Bank One violated TILA by failing to respond to their exercise of their alleged right of rescission. Id. This Court, however, reinstated that claim by Order dated August 5, 2003, and it now appears in Count One of the Second Amended Complaint. We noted that Plaintiffs' rescission claim would not be time barred in the event the Loan falls within the purview of HOEPA. The August 5, 2003 Order further permitted Plaintiffs to amend the Amended Complaint. Defendants Bank One and Knox thereafter moved to join Chelsea as a third-party defendant on October 8, 2003. Defendants filed the motions sub judice on March 16, 2004.
Our Order of August 5, 2003 explains:
The Truth in Lending Act provides obligors three days in which to rescind a loan agreement to be measured from the later of the loan closing or the date that required disclosures are delivered to them. 15 U.S.C. § 1635(a). However, where required disclosures are never delivered, an obligor has three years from the earlier of the date the loan is closed or the property is sold. 15 U.S.C. § 1635(f). We found in our prior memorandum that the defendants made all required disclosures under TILA, although we left open the possibility that they may have been materially inaccurate. Johnson v. Banc One Acceptance Corp., et al., Memorandum and Order of July 7, 2003, p. 5-8. As noted above, the legal import of materially inaccurate disclosures with regard to the statute of limitations question is not before us and was not discussed in our prior memorandum. Our ruling at this time is not final. However, we have allowed discovery on the issue of whether the loan at issue is covered by the Home Owner's Equity Protection Act. If it is so covered, then the defendants may have failed to deliver disclosures required under 15 U.S.C. § 1639. If this is the case, then the plaintiffs had three years from the date of the loan closing, or until November 29, 2003 in which to request rescission. They requested rescission on September 30, 2002, within this three year time period. In addition, they filed the present action on January 28, 2003, within the one year statute of limitations for actions alleging a failure to honor a legitimate rescission request. See Smith v. Fidelity Consumer Discount Co., 898 F.2d 896, 902-03 (3d Cir. 1990). We therefore grant the plaintiff's [sic] motion for reconsideration on this issue and determine for the purposes of this motion that the plaintiffs' claim for rescission would not be time-barred in the even that the loan is covered by HOEPA.
IV. Discussion
Count One of Plaintiffs' Second Amended Complaint seeks rescission of the Loan transaction, statutory damages and attorney fees against Bank One. Plaintiffs aver two alternative theories in support of their claim to the remedy of rescission. First, Plaintiffs contend that Defendant Bank One violated TILA through its failure to accurately disclose the finance charge associated with the Loan. (Second Am. Compl. ¶ 25.) Assuming Plaintiffs are correct in their assertion that a materially inaccurate TILA-prescribed disclosure extends the applicable rescission period statute of limitations to three years, see infra notes 1, 14, then Defendant Bank One is entitled to summary judgment only if it demonstrates that the disclosed finance charge was accurate as a matter of law.See 15 U.S.C. § 1605(f); Regulation Z, 12 C.F.R. § 226.23(g). Second, if, as Plaintiffs contend in Count One, the Loan is subject to the provisions of the HOEPA, and if the appropriate HOEPA pre-settlement disclosures were not furnished, then Plaintiffs must be permitted to rescind. When the terms of a mortgage meet the prerequisites of 15 U.S.C. § 1602(aa), HOEPA requires a creditor to deliver certain pre-closing disclosures at least three business days prior to the loan closing. Newton v. United Cos. Fin. Corp., 24 F. Supp.2d 444, 451 (E.D. Pa. 1998); 15 U.S.C. § 1639(a), (b); Regulation Z, subpart E, 12 C.F.R. § 226.31, 226.32. A failure to provide the mandated disclosures constitutes a material violation of TILA entitling the borrower to rescission. See 15 U.S.C. § 1602(u), 1639(a); 12 C.F.R. § 226.23(a)(3) n. 48.
As explained above, see infra note 1, Plaintiffs' rescission request and subsequent suit fell within the relevant statutes of limitations time periods. The determination of whether the Loan in fact falls within the province of HOEPA hinges upon the calculation of the "total points and fees," as well as the "total amount of the loan." See 15 U.S.C. § 1602(aa)(1). The gravamen of the dispute surrounds the appropriateness of the charges comprising this calculation.
Thus, the overarching issues to be resolved are as follows: (1) whether fees imposed by Bank One in connection with the Loan for title insurance, notary, abstract or title search, flood hazard determination and tax information were not reasonable; (2) whether the Loan is subject to the HOEPA; (3) whether the disclosed finance charge was understated in excess of the tolerance for accuracy of one-half of one percent of the loan principal under TILA; and (4) in light of our disposition of these issues, whether we should decline to exercise jurisdiction over Plaintiffs' state law claims. For the reasons explicated below, we find as a matter of law that the title insurance fee charged by Bank One in connection with the Loan was unreasonable. Because this finding renders the Loan subject to HOEPA and its disclosure requirements, we need not address the reasonableness of the remaining fees. We further find, however, that Plaintiffs have not met their burden of demonstrating the absence of a genuine dispute on the material fact of whether Bank One tendered HOEPA disclosures. Accordingly, we deny Plaintiffs' Cross-Motion For Partial Summary Judgment, and deny-in-part Defendant Bank One's Motion For Summary Judgment. In addition, we find that the disclosed finance charge was accurate as a matter of law, and consequently grant-in-part Defendant Bank One's Motion For Summary Judgment. Finally, we deny Defendants' Motion To Dismiss Second Amended Complaint.
A. The Truth in Lending Act and Home Owner's Equity Protection Act
The Truth in Lending Act requires that creditors disclose certain information in a prescribed manner to potential debtors prior to the extension of credit. 15 U.S.C. § 1601 et seq. Through its enactment of the TILA, Congress sought "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." 15 U.S.C. § 1601(a). Congress enacted the Home Ownership Equity Protection Act, 15 U.S.C. § 1639(a) et seq., amendments to TILA because "the type of disclosures required under TILA were insufficient to ensure adequate notification to the consumer of the financial ramifications of high cost, nonpurchase money mortgages."Newton v. United Cos. Fin. Corp., 24 F. Supp.2d 444, 450 (E.D. Pa. 1998).
In 15 U.S.C. § 1604, Congress authorized the Federal Reserve Board to "prescribe regulations to carry out the purposes" of the TILA. Consequently, the Federal Reserve Board promulgated "Regulation Z" which is located in 12 C.F.R. Pt. 226.Rossman v. Fleet Bank (R.I.) Nat'l Ass'n. 280 F.3d 384, 389 (3d Cir. 2002). The Board "also published extensive 'Official Staff Interpretations.' 12 C.F.R. Pt. 226 Supp. I." Id. As the Third Circuit observed in Ortiz v. Rental Management, Inc., 65 F.3d 335 (3d Cir. 1995), "the Supreme Court has emphasized the broad powers that Congress delegated to the Board to fill gaps in the statute."Id. at 339. The Supreme Court has instructed courts to "honor that congressional choice. Thus, while not abdicating their ultimate judicial responsibility to determine the law . . . judges ought to refrain from substituting their own interstitial lawmaking for that of the Federal Reserve, so long as the latter's lawmaking is not irrational." Ford Motor Credit Co. v. Mihollin. 444 U.S. 555, 568, 100 S.Ct. 790, 63 L.Ed.2d 22 (1980). In analyzing the parties' contentions, this Court thus defers to the statutory provisions of the TILA and HOEPA, as well as to Regulation Z and the accompanying Official Staff Interpretations.
B. This Loan Transaction is Subject to the Provisions of HOEPA
HOEPA disclosures apply to mortgages described in 15 U.S.C. § 1602(aa). 15 U.S.C. § 1639. Section 1602(aa) provides in pertinent part:
(1) A mortgage referred to in this subsection means a consumer credit transaction that is secured by the consumer's principal dwelling, other than a residential mortgage transaction, a reverse mortgage transaction, or a transaction under an open end credit plan, if — . . . . (B) the total points and fees payable by the consumer at or before closing will exceed the greater of —
(i) 8 percent of the total loan amount; or
(ii) $400.
15 U.S.C. § 1602(aa). Defendant Bank One contends that the Loan does not meet this standard because the points and fees constitute less than 8% of the total loan amount. The determination of whether a loan meets the standards for HOEPA involves a two-step calculation: (1) determining the amount of "points and fees;" and (2) determining whether those points and fees exceed 8% of the "total loan amount." Specifically, HOEPA and its implementing regulations, Regulation Z, 12 C.F.R. § 226.32, and the Official Staff Commentary of the Federal Reserve Board to Regulation Z, 12 C.F.R. § 226, Supp. I, provide the uniform method for making the appropriate calculations.
1. The Points and Fees Calculation
"Points and fees" are defined by § 226.32(b)(1) of Regulation Z to include the following:
(i) All items required to be disclosed under § 226.4(a) and 226.4(b) [i.e. the "finance charge"], except interest or the time-price differential;
(ii) All compensation paid to mortgage brokers;
(iii) All items listed in § 226.4(c)(7) (other than amounts held for future payment of taxes) unless the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor; and
(iv) Premiums, or other charges for credit life, accident, health, or loss-of-income insurance, or debt-cancellation coverage (whether or not the debt-cancellation coverage is insurance under applicable law) that provides for cancellation of all or part of the consumer's liability in the event of the loss of life, health, or income or in the case of accident, written in connection with the credit transaction.12 C.F.R. § 226.32(b)(1). See also 15 U.S.C. § 1602(aa)(4). Pursuant to § 226.32(b)(1)(i) of Regulation Z, the following charges are undoubtedly included in the points and fees calculation:
a. Broker Fee $4,864.00
b. Life of Loan Monitoring $2.00
c. Processing Fee $125.00
d. Settlement Fee $150.00
e. Courier Fees $30.00
Total $5,171.00
These items represent the finance charge, defined in the statute 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). The parties dispute the appropriateness of including the following charges in the points and fees calculation. These charges appear in the settlement statement (See Second Am. Compl. Ex. C):
Charges such as interest, service charges, loan fees, credit report or investigation fees and borrower-paid mortgage broker fees must be included in the finance charge. 15 U.S.C. § 1605(a). Certain items, however, are specifically exempted from the computation of the finance charge in a transaction secured by real property or in a residential mortgage transaction, 15 U.S.C. § 1605(e), so long as they are "bona fide and reasonable in amount" 12 C.F.R. § 226.4(c)(7), including:
(1) Fees or premiums for title examination, title insurance, or similar purposes. (2) Fees for preparation of loan-related documents. (3) Escrows for future payments of taxes and insurance. (4) Fees for notarizing deeds and other documents. (5) Appraisal fees, including fees related to pest infestation or flood hazard inspections conducted prior to closing. (6) Credit reports.15 U.S.C. § 1605(e).
a. Flood Certificate $6.00
b. Abstract Fee $10.00
c. Notary Fee $10.00
d. Tax info $15.00
e. Title Insurance $627.40
The flood certification charge, abstract or title search charge, notary charge, and title insurance charge are real estate fees listed in 12 C.F.R. § 226.(c)(7) of Regulation Z. Such fees are ordinarily excluded from the finance charge, but will be included for purposes of ascertaining points and fees if (1) the charges are not reasonable; (2) the creditor receives, directly or indirectly, compensation from the charges; or (3) the charges are paid to a third party affiliate of the creditor. See 15 U.S.C. § 1602(aa)(4); Regulation Z, § 226.32(b)(1)(iii). Plaintiffs' Cross-Motion argues that the charges imposed for title insurance, notary fees, abstract or title search, and flood certification are not reasonable, and were thus improperly excluded from the calculations.
Regulation Z, 12 C.F.R. § 226.4(c)(7) provides in relevant part:
(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 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. (iv) Property appraisal fees or fees for inspections to assess the value or including fees related to pest infestation or flood hazard determinations.12 C.F.R. § 226.4.
In addition to the title insurance and notary fees, Plaintiffs' Cross-Motion argues that fees charged for flood hazard determination, abstract or title search, and tax information have been improperly excluded from the TILA calculation. Although our disposition of this matter obviates the need to consider these arguments, we note that Plaintiffs failed to include appropriate allegations pertaining to the three latter disputed charges in their Second Amended Complaint. Although Plaintiffs' Amended Complaint alleged the unreasonableness of these charges, it is axiomatic that an amended complaint that does not refer to or incorporate an original complaint supercedes the original complaint and renders it of no legal effect. See New Rock Asset Partners, L.P. v. Preferred Entity Advancements, Inc., 101 F.3d 1492, 1504 (3d Cir. 1996). Thus, any allegations regarding flood hazard determination fees, abstract or title search fees, and tax information fees arc, in any event, not properly before us. Moreover, our Memorandum and Order entered on July 7, 2003 observed that although Plaintiffs incorporated these averments in their Amended Complaint, they offered factual allegations only with respect to the reasonableness of the title insurance and notary charges. Johnson, 278 F. Supp.2d at 456. Accordingly, we elected to limit our analysis to Plaintiffs' contentions regarding the title insurance and notary fees only. Our accompanying Order, dated July 3, 2003, thus denied Defendants' Motion To Dismiss "[t]he plaintiffs' allegation that defendants violated the Truth in Lending Act by failing to include in the computation of the Finance Charge the title insurance premium and notary charges." (emphasis added). Accordingly, we will not address Plaintiffs' arguments regarding the flood hazard determination charges, abstract or title search charges, and tax information charges.
Assessing first the reasonableness of the title insurance fee charged in connection with the Loan, both parties agree that the Manual of the Title Insurance Rating Bureau of Pennsylvania (the "Manual"), which sets forth a schedule of the maximum premiums any title insurance company may impose, are binding with respect to the title insurance rates charged to Plaintiffs in condition of the property if the service is performed prior to closing, connection with the Loan. (See Def.'s Mem. Supp. Summ. J. at 12-14; Second Am. Compl. ¶ 16.) Consequently, if Bank One charged Plaintiff in excess of the applicable title insurance fee as computed by the Manual, then the title insurance fee is not "reasonable" and at least a portion of that fee must be included in the points and fees calculation. See Regulation Z, § 226.4(b)(1)(iii).
Our prior Memorandum and Order directed the parties to brief the "legal issue of the relationship between the term in the federal [TILA] act 'reasonable in amount' and the schedule of rates in the Manual." 278 F. Supp.2d at 457. Although both parties' agreement that the Manual is binding on Plaintiffs' Loan transaction renders this unnecessary, we note that courts have assessed reasonableness through comparison of the disputed charges with the prevailing rates of the industry in the locality. See, e.g., Brannam v. Huntington Mortgage Co., 287 F.3d 601, 606 (6th Cir. 2002) (quoting Grigsby v. Thorp Consumer Discount Co., 119 B.R. 479 (Bankr. E.D. Pa. 1990), vacated on other grounds, 127 B.R. 759 (E.D. Pa. 1991)). The parties concur that the Manual reflects prevailing practices in the industry in the Commonwealth. (See Def.'s Mem. Supp. Summ. J. at 25; Pls.' Response at 6, 9; Second Am. Compl. ¶¶ 16-19.)
The parties do not dispute that Bank One charged Plaintiffs $627.40 for title insurance fees in connection with the Loan. We found in our prior Memorandum and Order that, pursuant to the Manual, the maximum allowable rate for title insurance that could have been charged for the Loan was $660.75. 278 F. Supp.2d at 456, 457 n. 3. Plaintiffs assert, however, that they were entitled to be charged the Manual's "refinance rate" for title insurance. (Second Am. Compl. ¶ 18.) According to the Manual, the maximum charge for "refinanced" title insurance that may be imposed on a Loan of $72,000 is $475.74, the equivalent of 72% of the maximum allowable rate. (Manual §§ 5.3, 5.6, 5.17.) If Plaintiffs are correct, Defendant Bank One exceeded the maximum permissible charge by $151.66.
In response to interrogatories propounded by Knox and Bank One, Chelsea explained that Plaintiffs were charged less than the maximum $660.75 that the Manual allows for title insurance in connection with the Loan because Chelsea inadvertently used the lesser rates that were in effect through September 30, 2000, rather than the rates in effect on the date of closing. (See Answer by Chelsea to Interrogatory 13 propounded by Knox and Bank One.)
The Manual defines the "refinance rate" as eighty percent of the reissue rate, or seventy-two percent of the maximum rate. (Manual § 5.6.) The "reissue rate" is defined as ninety percent of the maximum allowable rate. (Id. at § 5.3.)
Section 5.6 of the Manual sets forth the prerequisites for application of the refinance rate for title insurance:
When a refinance or substitution loan is made within 3 years from the date of closing of a previously insured mortgage or fee interest and the premises to be insured are identical to or part of the real property previously insured and there has been no change in the fee simple ownership, the Charge shall be 80% of the reissue rate.
(Id. at § 5.6.) It is undisputed that Plaintiffs' predecessor mortgage with Indymac closed on October 7, 1998. The instant refinancing Loan closed approximately two years later, on November 29, 2000. Nor do the parties dispute that Plaintiffs have been the sole owners of their residence since February 3, 1998, when they transferred the title from themselves and their daughter to themselves.
Plaintiffs were not offered the refinance rate because "there had been a change in the fee simple ownership of the mortgaged premises within three years from the date of closing." (Answer by Chelsea to Interrogatory 12 propounded by Knox and Bank One (emphasis added).) Defendant apparently reads section 5.6 of the Manual as conditioning application of the refinancing rate on the prerequisite that there be no change in fee simple ownership within the three years preceding the instant Loan. (See Def.'s Mem. Supp. Summ. J. at 14-15; Def's Reply at 4.) Under this interpretation, Plaintiffs are ineligible for the refinance rate because a change in fee simple ownership of their residence occurred on February 3, 1998, approximately two years and nine months prior to the instant Loan. This reading of the provision, however, is contrary to its plain language. The provision's point of reference is not the date of the instant Loan, but rather the "date of closing of a previously insured mortgage." (Manual § 5.6.) Consequently, the refinance rate applies to a refinancing transaction conducted within three years following the "date of closing of the previously insured mortgage," so long has there has been no change in the fee simple ownership of the previously insured real property since the "date of the closing of the previously insured mortgage." Pursuant to the plain language of the provision, Plaintiffs, who have unquestionably held exclusive title to their home at all times since October 7, 1998, the "date of closing of the previously insured mortgage," were entitled as a matter of law to the refinance rate. This reading of section 5.6 comports with its apparent underlying intention, which is to limit the cost of title insurance when the risk insured against is almost precisely the same as that involved in the previous transaction.
Our finding that Plaintiffs were, as a matter of law, entitled to receive the Manual's refinance rate in this transaction obviates the need to consider, alternatively, whether title insurance should have been calculated at the Manual's relevant reissue rate of $594.68. (Manual § 5.3.) In any event, the issue of the applicability of the reissue rate is not properly before this Court, for the same reasons explained in footnote 4. Although Plaintiffs' Amended Complaint alleged entitlement to the Manual's reissue rate (Am. Compl. ¶ 14), the superceding Second Amended Complaint abandoned this assertion.
Accordingly, we find as a matter of law that the title insurance charge of $627.40 imposed on Plaintiffs with respect to the Loan is not "reasonable," 12 C.F.R. § 226.32(b)(1)(iii), in that it exceeded the maximum amount of title insurance that Plaintiffs could have been charged under the Manual by $151.66. As such, at least a portion of the title insurance charge must be included in the points and fees computation. § 226.32(b)(1)(iii).
Defendant Bank One argues that only the portion of a charge that renders it not reasonable should be included in the points and fees calculation. Plaintiffs, in turn, counter that the entire charge is unreasonable and should thus be included in its entirety. Under the former scenario, only the portion of the fee in excess of the maximum allowable title insurance charge, or $151.66, would be included in the points and fees calculation. Pursuant to the latter approach, the full $627.40 title insurance fee would be added. For the following reasons, we find that only the portion of the charge which renders it not "reasonable," 12 C.F.R. § 226.32(b)(1)(iii), is to be included in the total points and fees calculation.
This Court has been unable to locate case law that addresses the issue as it arises in this context. Several courts have held, however, that only the unreasonable portion of a charge deemed not to be "reasonable in amount," 12 C.F.R. § 226.4(c)(7), should be included as a finance charge. These cases focused upon comparing the disclosed finance charge with the actual finance charge for purposes of assessing whether the disclosed finance charge fell within TILA's accuracy tolerances.See 15 U.S.C. § 1605(f). Indeed, every court to have considered the issue has reached this same result, in part because adopting the contrary position would render TILA's accuracy tolerances meaningless. See Marquez v. New Century Mortgage Corp., No. 03-7136, 2004 WL 742205, at *3 (N.D. Ill. April 5, 2004); Scott v. Indymac Bank. FSB. No. 03-6489, 2004 WL 422654, at *2 (N.D. Ill. Feb. 3, 2004); Quinn v. Ameriquest Mortgage Co., No. 03-5059, 2004 WL 316408, at * 4 (N.D. Ill. Jan. 26, 2004); Walker v. Gateway Fin. Corp., 286 F. Supp.2d 965, 967-68 (N.D. Ill. 2003); Guise v. BWM Mortgage, LLC, 2003 WL 22019346, at *2 (N.D.Ill. 2003). As stated above, however, these cases are not directly on point because those courts were interpreting the clause "reasonable in amount," which appears in § 226.4(c)(7) of Regulation Z. Nonetheless, there is no reason to treat differently the phrase "reasonable" in § 226.32(b)(1)(iii) of Regulation Z, whose purpose is to determine which of the charges enumerated in § 226.4(c)(7) are to be included in the points and fees calculation, and which specifically cites to § 226.4(c)(7). Accordingly, we find that, pursuant to 12 C.F.R. § 226.32(b)(1)(iii), the $151.66 title insurance overcharge is to be included in calculating the total points and fees.
Notably, the inclusion of only the unreasonable portion of the title insurance fee in the points and fees calculation as opposed to the entire charge is not outcome determinative in this action. In either case, the Loan is subject to HOEPA.
Based on the foregoing, the total points and fees for this loan transaction are:
$5171.00 (as agreed by the parties) $151.66 (unreasonable portion of title insurance fee)
We reiterate that, for the reasons previously explained, we did not incorporate the charges for tax information, flood hazard certification, and title/abstract search in conducting our analysis and drawing our conclusions. Moreover, we did not consider the reasonableness of the notary charges. Inclusion of all any or all of these charges in the HOEPA calculations would not alter the result in this matter.
2. Determining Whether the "Points and Fees" Exceed 8% of the Total Loan Amount
Upon ascertaining the total points and fees, 15 U.S.C. § 1602(aa)(1)(B) requires a determination of whether the "total points and fees payable by the consumer at or before closing will exceed . . . 8 percent of the total loan amount." 15 U.S.C. § 1602(aa)(1)(B). The Official Staff Commentary to Regulation Z instructs that "the total loan amount is calculated by taking the amount financed, as determined according to § 226.18(b), and deducting any cost listed in § 226.32(b)(1)(iii) and § 226(b)(2)(iv) that is both included as points and fees under § 226.32(b)(1) and financed by the creditor." Official Staff Commentary, 12 C.F.R. Pt. 226, Supp. I, § 226.32(a)(1)(ii).
12 C.F.R. § 226.18(b) provides that the "amount financed" is calculated by: "(1) Determining the principal loan amount or the cash price (subtracting any downpayment); (2) Adding any other amounts that are financed by the creditor and are not part of the finance charge; and (3) Subtracting any prepaid finance charge." 12 C.F.R. § 226.18(b). Employing this formula, the amount financed in the instant transaction is as follows:
12 C.F.R. § 226.2(a)(23) defines "prepaid finance charge" as "any finance charge paid separately in cash or by check before or at consummation of a transaction, or withheld from the proceeds of the credit at any time."
a. $70,835 Principal Loan Amount
b. + $300 Appraisal Fee
c. + $475.74 Reasonable Portion of Title Insurance
d. + $150.00 Endorsements
e. + $46.00 Recording Fee
f. — $5171.00 Total Prepaid Finance Charges
Amount Financed = $66,677.34
After subtracting the additional points and fees under § 226.32(b)(1)(iii)-$151.66-and under § 226.32(b)(1)(iv)-$0-, the "total loan amount" becomes $66,525.68.
Eight percent of the total loan amount is $5322.05. Because the total points and fees of $5322.60 exceed $5322.05, the Loan falls within the purview of HOEPA.
We must, however, deny Plaintiffs' Cross-Motion For Partial Summary Judgment because one genuine issue of material fact remains. As articulated in Part IV above, one of Plaintiffs' rescission claims requires a finding that the Loan is subject to HOEPA, and that Defendant Bank One failed to furnish the disclosures mandated by 15 U.S.C. § 1639. Although this Court finds as a matter of law that the Loan is subject to HOEPA, Plaintiffs have not met their burden in showing the absence of a genuine issue regarding Defendant's supposed failure to provide the HOEPA disclosures. Indeed, Defendants' Answer to Second Amended Complaint denies the allegations set forth in Paragraphs 22 and 26 of the Second Amended Complaint (Defs.' Answer § II, ¶¶ 22, 26), which aver Plaintiffs' failure to receive the requisite HOEPA presettlement disclosures (Pls.' Second Am. Compl. ¶¶ 22, 26.) Plaintiffs' Cross-Motion does not highlight any additional evidence in support this allegation, and there appear to be no admissions on file on behalf of Defendants with respect to this material issue. Accordingly, we deny Defendant Bank One's Motion For Summary Judgment, and further deny Plaintiffs' Cross-Motion For Partial Summary Judgment In Their Favor As To Their Truth-In-Lending Claims Against Bank.
C. The Disclosed Finance Charge is Accurate as a Matter of Law
Count 1 of the Second Amended Complaint charges that,
[t]he failure of any party to clearly disclose the final terms of this transaction, the failure to include all charges which were in fact part of the finance charge as such, and the failure to properly disclose the finance charges in this transaction constituted material disclosure violations which entitled the Plaintiffs to rescind the instant loan transaction as to its holder, the Bank.
(Second Am. Compl. ¶ 25.)
TILA mandates strict disclosure requirements with respect to finance charges. The statute requires a creditor to reveal, inter alia, the amount of the finance charge imposed on the loan. 15 U.S.C. § 1637. A plaintiff may bring an action to rescind a loan where the creditor has failed to fully disclose or has otherwise hidden finance charges from a borrower. 15 U.S.C. § 1640. To preclude a flood of such claims where the hidden finance charges are de minimus, however, Congress amended TILA in 1995 to provide that lenders would not be liable under TILA so long as the disclosed finance charges fell within a certain permissible range of tolerance for accuracy. Specifically, 15 U.S.C. § 1605(f) provides in pertinent part that:
In connection with credit transactions not under an open end credit plan that are secured by real property or a dwelling, the disclosure of the finance charge and other disclosures affected by any finance charge — . . . .
(2) shall be treated as being accurate for purposes of section 1635 [TILA's rescission provision] of this title if —
(A) except as provided in subparagraph (B), the amount disclosed as the finance charge does not vary from the actual finance charge by more than an amount equal to one-half of one percent of the total amount of credit extended.15 U.S.C. § 1605(f). See also Regulation Z, 12 C.F.R. § 226.23(g)(1)(i) (implementing 15 U.S.C. § 1605(f) by permitting a tolerance of one-half of one percent).
Thus, for purposes of rescission in this instance, the disclosed finance charge is considered accurate as a matter of law if the disclosed amount does not deviate from the actual finance charge by more than one-half of one percent of the amount of the Loan.
The parties agree that the disclosed finance charge in this transaction is $5171.00. (See Second Am. Compl. Ex. A.) Plaintiffs argue that this value was understated. As quoted above in note 3,infra. Regulation Z, 12 C.F.R. § 226.4(c)(7) enumerates several charges that are specifically excluded from the "finance charge" as that term is defined by 12 C.F.R. § 226.4(a), so long as such charges are "bona fide and reasonable in amount." 12 C.F.R. § 226.4(c)(7). Plaintiffs argue that the title insurance fee, notary fee, abstract/title search fee, and flood certification fee-all ordinarily characterized by § 226.4(c)(7) as not finance charges-were not "reasonable in amount," § 226.4(c)(7), and thus were improperly excluded from the total finance charge. Defendant Bank One argues that the disclosed finance charge was accurate as a matter of law, i.e. that the disclosed finance charge did not vary from the actual finance charge by more than one-half of one percent of the loan amount.
As discussed in Part IV.B.I., infra, this Court found that Defendant Bank One overcharged Plaintiffs for title insurance by $ 151.66, and further explained that, in accordance with every court that has considered the issue, only the unreasonable portion of the fee is to be added in calculating the actual finance charge. To include the entire title insurance fee as a finance charge would penalize Bank One for the portion of the title insurance cost that actually went towards providing Plaintiffs with title insurance, and, in addition, would render TILA's accuracy tolerances meaningless. Thus, we find that $151.66 should have been disclosed as a finance charge. For the reasons articulated in note 4, infra, we do not consider Plaintiffs' challenges to the reasonableness of the fees imposed for flood certification, title search, or tax information.
Therefore, the issue of whether Defendants have proved that the disclosed finance charge is accurate as a matter of law boils down to a simple mathematical calculation. We must ascertain whether the amount overcharged for title insurance was greater than one-half of one percent of the amount borrowed by Plaintiffs. Plaintiffs were extended $72,000 of credit. One-half of one percent of that amount is $360.00. Because the $151.66 differential between the disclosed finance charge and the actual finance charge is less than $360, or one-half of one percent of $72,000, we find that the disclosed finance charge is accurate as a matter of law. Plaintiffs cannot rescind the Loan pursuant to TILA, 15 U.S.C. § 1605(f). Accordingly, we grant Defendant Bank One's Motion For Summary Judgment on this claim.
We recognize that Plaintiffs did adequately plead and argue the unreasonableness and improper exclusion of the notary fees charged in connection with this transaction. Significantly, however, inclusion of the notary fee, title fee, tax information fee, and flood certification fee in our calculations would not cause the difference between the disclosed and actual finance charge to exceed one-half of one percent of the amount of credit extended. Specifically, assuming arguendo that the actual finance charge was understated by $192.66 (the sum of $151.66 (title insurance overcharge) + $10.00 (notary fee) + $6.00 (flood certification fee) + $15.00 (tax information fee) + $10.00 (title search fee)), this still does not exceed one-half of one percent of $72,000. The disclosed finance charge would still be accurate as a matter of law.
TILA makes clear that a failure to deliver material disclosures, defined as "the required disclosures of the annual percentage rate, the finance charge, the amount financed, the total of payments, the payment schedule, and the [HOEPA] disclosures and limitations referred to in 12 C.F.R. § 226.32(c) and (d)," Regulation Z, 12 C.F.R. § 226.23(a)(3) n. 48, extends the three-day period to rescind to three years. 12 C.F.R. § 226.23(a)(3); Federal Reserve Board Official Staff Commentary, 12 C.F.R. § 226, Supp. I, cmt. 23(a)(3)-l. Our order of August 5, 2003 left open the question of whether an inaccurate disclosure of any TILA prescribed material disclosure beyond TILA's specified accuracy tolerances extends the rescission period from three days to three years. Defendant Bank One conceded for purposes of its motion that material inaccuracy of TILA-mandated "material disclosures" of which the "finance charge" is one, does extend the applicable rescission period statute of limitations. (Def.'s Mem. Supp. Summ.(. at 7 n. 1.) Our finding that the disclosed finance charge was accurate as a matter of law renders consideration of the statute of limitations question unnecessary.
D. State Claims
Because the disposition of Defendant Bank One's Motion For Summary Judgment leaves unresolved Plaintiffs' HOEPA based rescission claim of Count I of the Second Amended Complaint, we at this time deny Defendants' Motion To Dismiss Second Amended Complaint.
V. Conclusion
For the foregoing reasons, Defendant Bank One's Motion For Summary Judgment is granted-in-part and denied-in-part, Plaintiffs' Cross-Motion For Partial Summary Judgment As To Their Truth-In-Lending Claims Against Bank is denied, and Defendants' Motion To Dismiss Second Amended Complaint is denied. An appropriate order follows.