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Noonan and Lieberman keeps you current on litigation news with its regular Case Law Update focusing on important and emerging trends in federal and state case law. Case Law Update is edited by attorney James V. Noonan.

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June 2008

Florida district courts hold that only “credit repair organizations” can be liable under the Credit Repair Organization Act.

In Moret v. Select Portfolio Servicing, Inc., No. 08-61996-CIV (May 6, 2009, S.D. Fla.), a Florida District Court sided with its sister courts and an Alabama Bankruptcy Court when it held that only an entity qualifying as a credit repair organization has liability under the Credit Repair Organization Act (CROA). The plaintiffs in that case sued the loan servicer for credit reporting violations under § 1679b(a)(1) of CROA which, unlike other sections of CROA, prohibits conduct by “any person” as opposed to only “credit repair organizations”. In tossing the claim the District Court joined its sister courts in adopting the reasoning of an Alabama Bankruptcy Court which held that the suggestion that § 1679b(a)(1) does not require the defendant to be a credit repair organization is to read that section out of context. See, Hyppolite v. Citi Residential Lending, Inc., 2009 WL 1109320, (S.D.Fla. Apr. 24, 2009) and Lopez v. ML #£3, LLC, 607 F.Supp.2d 1310 (N.D.Fla. Apr. 15, 2009). The Bankruptcy Court in In re Wright, 2007 WL 1459475, (Bankr.N.D.Ala. May 16, 2007) observed that: “Section 1679b(a)(1) should be construed within the context of the entire Act, including its codified findings and purposes, not as if § 1679b(a)(1) were a stand-alone statute. When it enacted CROA, the focus of Congress was on the credit repair industry, not enacting a federal cause of action creating liability for every person guilty of making defamatory statements about a consumer’s creditworthiness. Remedies for such wrongs are adequately provided for under state tort laws. This Court cannot assume Congress intended to add a federal question cause of action to the dockets of federal courts without some mention of its reasons for doing so in the codified findings and purposes or in the Act’s legislative history. The congressional findings, purposes and history only discuss the credit repair industry, nothing more”. Compare this reasoning to that of the district courts in Illinois which read § 1679b(a)(1) literally to mean that “persons” other than “credit repair organizations” can be held liable under CROA. See, Rodriguez v. Lynch Ford, Inc., 2004 WL 2958772 (N.D.Ill. Nov. 18, 2004); Parker v. 1-800 Bar None, a Financial Corporation, Inc., 2002 WL 215530 (N.D.Ill. 2002); Bigalke v. Creditrust Corporation, 162 F.Supp.2d 996, 998 (N.D.Ill. 2001); Vance v. National Benefit Assn., 1999 WL 731764 (N.D.Ill. 1999).

The borrowers failed to overcome the presumption that they received two copies of the notice of the right to cancel under TILA.

At trial the borrowers contended that the evidence presented proved that neither of them received two copies of the Notice of Right to Cancel required under TILA. 15 U.S.C. § 1635(a); 12 C.F.R. § 226.23(b)(1). The district court found for the lender that it was more likely than not that they were provided with the requisite number of Notices. In an unpublished opinion, the Tenth Circuit did not disturb that finding. The borrowers’ sole evidence that they did not receive the requisite four copies was the wife’s trial testimony, which consisted in its entirety of the following statement: [D]id Tom and I receive four copies of Notices of Right to Cancel in a form that the consumer can keep. The answer is no…. [D]id Tom and I mail Notice of Rescission within three years of closing. The answer is yes.” But on cross-examination, she admitted that she did not know how many copies of the Notice her husband received. The originator, on the other hand, entered into evidence several copies of the Notice which it retained, provided a copy of the instructions from the closing which stated that each borrower was to receive two copies of the Notice, and presented testimony from an employee who authenticated the instructions. The employee also testified that more than four copies of the Notice were provided to the closing agent. She also testified that under their firm’s procedures, issuance of a loan was conditioned on receipt of a document executed by the closing agent stating that the agent had followed these instructions, and that the subject loan file contained such an executed copy. The district court also made an explicit factual finding that Mrs. Smith’s testimony was not credible based in part upon her evasive and defensive demeanor and concluded that the preponderance of the evidence weighed in favor of the lender. The case is Smith v. Argent Mortg. Co., Nos. 07-1409, 07-1525, 08-1199 (10th Cir., May 18, 2009).

Loan Servicer does not lose right to alter the rescission procedure by waiting four months to do so.

A federal judge in California has backed a loan servicer in a dispute over a loan cancellation claim brought under the Truth in Lending Act (TILA). In Aurora Loan Services LLC v. Britton, 2:08-cv-01535-GEB-KJM, (E.D. Calif., May 21, 2009), the Servicer asked the court to modify the normal rescission procedures (in the fashion proscribed by Yamamoto v. Bank of New York, 329 F.3d 1167) after the borrower was unwilling to return the balance on the loan. The borrower objected, contending that the Servicer effectively waived its right to ask for the modification by waiting four months after receipt of the notice to do so. The court did not buy that argument. It held for the servicer, assigning particular importance to the fact that the homeowner refused the Servicer’s proposal to use an escrow agent to hold deposits and transfer agreements that had sparked disagreement between the parties. “Since it is undisputed that [Britton] refuses to repay the loan by using the assistance of an escrow agent, conditions should be imposed on rescission to assure that [Britton] repays the loan proceeds,” the court said. Given the negotiations, four months was not too long.