The risk of negative amortization was not a material disclosure triggering the right to rescind under TILA

In Jordan v. Paul Financial, LLC, NO. C 07-04496 SI (N.D.Cal., July 01, 2009) the plaintiff sued for rescission under TILA contending that the creditor’s alleged failure to adequately disclose the risk of negative amortization is a material disclosure for purposes of the extended three-year statute of limitations for rescission. The Court disagreed. It started its analysis by recognizing that with respect to variable-rate loans TILA requires two sets of disclosures. The first set of disclosures, which generally concern features of the particular variable-rate loan, must be made at the time an application form is provided or before the consumer pays a non-refundable fee, whichever is earlier. 12 C.F.R. § 226.19(b). The second set is required before consummation of the transaction and must include a statement that the transaction contains a variable-rate feature and a statement that [the] variable-rate disclosures have been provided earlier. 12 C.F.R. § 226.18(b) & (f)(2). It then determined that Regulation Z provides that [t]he term ‘material disclosures’ means the required disclosures of the annual percentage rate, the finance charge, the amount financed, the total payments, the payment schedule, and the disclosures and limitations referred to in § 226.32(c) and (d). 12 C.F.R. § 226.23(a)(3) n. 48. The Commentary on this regulation states that only one of the required disclosures regarding variable-rate loans-that the transaction contains a variable-rate feature-is considered material such that it triggers the extended rescission period. 12 C.F.R. Pt. 226, Supp. I ¶ 23(a)(3)-2 (emphasis added). Thus, because the box labeled Variable Rate Mortgage was checked on plaintiff’s TILDS, there is no disputing that the creditor disclosed to plaintiff that his loan contained a variable-rate feature. Thus, even if plaintiff is correct that defendants otherwise violated TILA by failing to adequately disclose the risk of negative amortization, such a violation was not material and did not entitle plaintiff to the extended three-year statute of limitations for rescission of the loan. The complaint, however, was sustained on other grounds.

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