E-Alert Case Updates

SunTrust Mortgage’s Failure to Use Model Form H-9 Found Not to be in Violation of Truth in Lending Act

Watkins, v. SunTrust Mortgage Incorporated
Case No. 10-1915 (U.S. Court of Appeals for the Fourth Circuit, December 14, 2011)
by Eric M. Leppo, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In this recently issued opinion from the U.S. Court of Appeals for the Fourth Circuit, the Appellate Court affirmed the U.S. District Court for the Eastern District of Virginia’s decision granting Defendant’s Motion to Dismiss for Failure to State a Claim. The Court found that the Truth in Lending Act was not violated under the facts alleged.

In May 2007, the Plaintiff Edward Watkins, and his then wife, Danielle, refinanced the loan on their Richmond, Virginia home. At the closing, SunTrust gave Mr. & Mrs. Watkins written notices of their right to rescind the transaction, using SunTrust’s form notice which was substantially similar to Form H-8 as included in the Appendix to Regulation Z, 12 C.F.R. pt. 226. Form H-8 is a model form for general rescission of a mortgage agreement. The parties agree that the form did not include some language specific to refinancing transactions, which is included in Model Form H-9. There is also no question that this was in fact a refinance as opposed to a new home purchase loan.

The Watkinses fell behind on their loan payments and SunTrust scheduled a foreclosure sale of the house in December 2009. Mr. Watkins issued correspondence seeking to rescind the refinance transaction of May 2007 contending that the notice of cancellation he was provided applied only to new extensions of credit, as opposed to an additional extension of credit to an existing customer such as himself. He claimed that using the general form as opposed to the model form associated with refinancing was a material violation of the federal Truth in Lending Act “TILA” 15 U.S.C. § 1601 et seq.

SunTrust declined to rescind the transaction and/or cancel the foreclosure sale. As a result Mr. Watkins filed this Declaratory Judgment action. SunTrust filed a Motion to Dismiss pursuant to FRCP 12(b)(6) asserting that the Plaintiff had failed to state a claim. SunTrust argued—and the District Court agreed—that the form provided to the Watkinses, while not reflective of a refinancing transaction, contained all of the required statutory language.

The Fourth Circuit noted that the TILA requires lenders to "clearly and conspicuously" make certain disclosures to borrowers, including disclosure of the borrowers’ right to rescind a consumer credit transaction. 15 U.S.C. §§ 1601(a), 1635(a). Importantly, the right of recission lasts for only three (3) days after the transaction is closed, however, if the required disclosures are not made, the agreement can be rescinded for up to three (3) years. 15 U.S.C. § 1635(a), (f).

Furthermore, pursuant to the statutory construct, the Federal Reserve Board promulgated Regulation Z, 12 C.F.R. pt. 226, in which it itemized the notice requirements for disclosing the right of rescission to borrowers. The appendix to the Regulation is where model forms H-8 and H-9 are provided. The Court stated, “Model Form H-9 . . . provides essentially the same information as does Model Form H-8, but it also includes two additional sentences to reflect that the transaction is a refinancing.” Watkins at *8.

The Court then noted that nothing within the statute or regulation requires that lenders use the model forms, only that the disclosures comply with the law. “[The] suggestion that the failure slavishly to follow the language of Form H-9 in giving notice of the right of rescission is a violation of TILA cannot be supported by the language of TILA or of Regulation Z.” Watkins at *11. The Court held that since the form used by SunTrust contained all of the required disclosure elements, Plaintiff’s claim of violation could not be sustained.