February 7, 2012
The Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1692–1692p, is a federal consumer protection statute intended "to promote consumers' 'informed use of credit' by requiring 'meaningful disclosure of credit terms[.]'" Chase Bank USA v. McCoy, 131 S. Ct. 871, 874 (2011) (quoting 15 U.S.C. § 1601(a)). Pursuant to its authority under TILA, the Board of Governors of the Federal Reserve System has promulgated Regulation Z, codified as 12 C.F.R. part 226, "which requires credit card issuers to disclose certain information to consumers." Id. Among other things, TILA and its implementing Regulation Z give the consumer-borrower a remorse period in which to rescind a transaction.
Significantly, when the TILA notice is provided in writing, as opposed to electronically, Regulation Z requires that lenders "deliver two copies of the notice" and that such notice include "[t]he date the rescission period expires." 12 C.F.R. § 226.23(b)(1). Ordinarily, the rescission period is three business days, see 15 U.S.C. § 1635(a), but that period is extended to three years if the requisite notice of the right to cancel is not delivered to the borrower, see 12 C.F.R. § 226.23(a); see also 15 U.S.C. § 1635(f). This distinction proved critical in a recent case from the U.S. Court of Appeals for the Ninth Circuit.
In Balderas v. Countrywide Bank, No. 10-55064, 2011 WL 6824977 (9th Cir. filed Dec. 29, 2011), a Spanish-speaking couple alleged that they had been pressured by a bank and its representatives to enter into a mortgage loan that the bank knew they could not afford and on terms they did not agree to. Among other theories, the plaintiffs sought to rescind the entire transaction, alleging that they had been given defective copies of TILA's notice of right to cancel in that the notice did not include the date on which their right to rescind expired. However, the district court granted the bank's Rule 12(b)(6) motion to dismiss, because the court determined that the plaintiffs had been entitled under TILA to only a three-day rescission period, which had elapsed prior to the filing of their lawsuit. The court's decision was based upon a copy of a nondefective notice-of-right-to-cancel letter bearing the plaintiffs' signatures, attached as Exhibit 14 to the complaint, that included an acknowledgment that the plaintiffs had received two copies of said notice. Upon the plaintiffs' appeal, the Ninth Circuit reversed and remanded.
Initially, the appellate court recognized that the plaintiffs' signatures on the disclosure statement did not conclusively prove that it had been delivered to them as required by TILA. "[P]roviding someone a document long enough to sign it does not comply with 12 C.F.R. § 226.23(b)(1), which requires the lender to 'deliver' copies of the Notice of the Right to Rescind to the consumer." Id. at *3. By using the word "deliver," Regulation Z undoubtedly commands that the consumer be allowed to keep the notice. See also 12 C.F.R. § 226.17(a)(1) (the requisite written disclosures must be provided "in a form that the consumer may keep"). The court drove this point home by relating a couple of common-sense analogies: "When you have pizza delivered, you don't sign for it and let the deliveryman take it back to the restaurant. And when a newspaper boy delivers a paper, he doesn't show you the headlines and then return it to the printer." 2011 WL 6824977, at *3.
Furthermore, the appellate court noted that the plaintiffs' signed acknowledgment of receipt of the requisite notice was merely prima facie evidence of delivery. "Notwithstanding any rule of evidence, written acknowledgment of receipt of any disclosures required under this subchapter by a person to whom information, forms, and a statement is required to be given pursuant to this section does no more than create a rebuttable presumption of delivery thereof." 15 U.S.C. § 1635(c). Admittedly, the presumption will certainly be helpful to the bank when the trier of fact is called upon to decide whether the plaintiffs received proper TILA notice, e.g., upon a motion for summary judgment. But such presumptions are inappropriate in the context of a Rule 12(b)(6) motion, wherein the plaintiffs' factual allegations must be accepted as true. And in this case, the plaintiffs sufficiently stated facts to support their plausible assertion that they had not received a properly prepared notice of right to cancel as required by TILA.
In sum, there are three important lessons to be learned from the Balderas case. First, on a substantive point, Regulation Z's "delivery" mandate means that the consumer-borrower must be allowed to keep a copy of the requisite notice of right to cancel; a mere visual inspection by the consumer is not sufficient. Second, a practical and strategic tip for plaintiff's counsel is that "it's unwise to use a complaint as an ersatz document production." 2011 WL 6824977, at *2. Absent Exhibit 14 attached to the complaint, the Balderases' written acknowledgment of the TILA disclosures would not have been in issue upon the bank's motion to dismiss. This last statement dovetails nicely into the third lesson learned from Balderas: While it is by no means a lesson introducing a groundbreaking legal principle, counsel must recognize the distinct standards of review applicable to motions to dismiss versus those for summary judgment, and that such differences are often dispositive.
But see 15 U.S.C. § 1641(b) ("Except as provided in section 1635(c) of this title, in any action or proceeding by or against any subsequent assignee of the original creditor without knowledge to the contrary by the assignee when he acquires the obligation, written acknowledgment of receipt by a person to whom a statement is required to be given pursuant to this subchapter shall be conclusive proof of the delivery thereof[.]").