A Borrower’s Knowing And Voluntary Waiver Of His Right Of Rescission In A Loan Modification Agreement Upheld And The Disclosure Of The APR Incorporating A Performance Based-reduction In Rate Complied With TILA

The borrower in In Re Angelo DiVittorio (1st Cir., No. 11-1188, January 6, 2012) took out an adjustable rate mortgage which included a performance-based rate reduction feature that lowered the rate if the borrower timely made the first twenty-four monthly payments. He later filed a chapter 13 bankruptcy where he successfully negotiated a modification of the loan reducing the annual rate and changing the loan from an adjustable to a fixed rate loan. As part of the modification agreement, the borrower also knowingly and voluntarily released the assignee of the loan from any claims in connection with the loan. The borrower defaulted on the modified loan, filed another bankruptcy, and in an Adversary proceeding sought to rescind the original loan under the Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA), (which is modeled after, and interpreted in accordance with, TILA), claiming that the incorporation of a performance-based rate reduction to calculate the APR violated TILA and thus MCCCDA. The TILA disclosure also allegedly significantly underestimated the Finance Charge. The Bankruptcy court found that the borrower failed to state a claim because the incorporation of the performance-based rate reduction in the calculation of the APR did not violate TILA and because his right of rescission in recoupment was waived when he signed the release of claims. The district court affirmed and the borrower appealed to the First Circuit Court of Appeals where he argued that the waiver was ineffective because TILA and MCCCDA are consumer protection laws and the rights they bestow can only be waived under very limited circumstances. The Appellate Court found TILA and MCCCDA’s requirements for waiver were not applicable to a waiver of rescission right in recoupment – brought six years after the loan was consummated – because recoupment was not a right created by TILA or MCCCDA. The right was created by state law; the consumer protection laws merely preserved the right. The Appellate Court also rejected the borrower’s challenge to the inclusion of the performance-based reduction in the APR calculation. TILA requires that the disclosures, including the APR, must reflect the terms of the legal obligation between the parties. The terms of the note obligated the borrower to make payments of principal and interest every month, while the creditor was obligated to reduce the rate if the borrower makes the twenty-four monthly payments timely. Accordingly, the performance-based rate reduction reflected the legal obligation of the borrower to make timely monthly payments, which accorded with TILA. The Court also rejected the contention that the increased interest rate resulting from a late payment was not unanticipated and therefore a Finance Charge, because borrower was a subprime borrower and likely to default within the first period. The FRB’s Official Staff Commentary makes clear, however, that any increase in the interest rate resulting from a borrower’s failure to make timely payment was unanticipated and thus properly excluded from the Finance Charge calculation.

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