Eleventh Circuit Finds Failure to Give Clear and Conspicuous Notice of Right to Rescind a Loan to be Material Violation of Truth in Lending Act (TILA)

In Harris v. Schonbrun, No. 13-15505 (Dec. 10, 2014), the Eleventh Circuit decided two questions: “(1) whether a lender can satisfy a statutory obligation to give a borrower clear and conspicuous notice of a right to rescind a loan . . . when the lender instructs the borrower to sign simultaneously both the loan and a postdated waiver of the borrower’s right to rescind,” and (2) if the court chooses to rescind the loan, whether the borrower may be awarded statutory damages, attorney’s fees, and costs.

In 2009, Darcel D. Fisher Harris entered into a loan agreement with Harvey Schonbrun, a trustee of a mortgage investment trust, secured by a mortgage for Harris’s residential property. After Harris defaulted on the loan in 2011, Schonbrun sued to foreclose. Shortly thereafter, Harris informed Schonbrun that she wanted to rescind the loan transaction, alleging that Schonbrun had violated TILA by failing to notify Harris “clearly and conspicuously,” as required by the act, that she had a right to rescind the loan within three business days. Due to this failure to notify her, Harris contended that her right to rescission extended to October 2012. Schonbrun denied this request, and Harris filed a complaint in response alleging that the notice Schonbrun had given her “was inadequate because Schonbrun instructed her to sign a postdated waiver of her right to rescind when she signed the loan documents . . . and did not give her two copies of the notice of her right to rescind,” all in violation of TILA. Despite conflicting evidence, the district court found that Schonbrun had violated the Act and granted rescission of the loan. However, the court did not find that the violation was a “material” violation and decided rescission was a sufficient remedy, thereby negating the need for statutory damages, attorney’s fees, and costs. The Eleventh Circuit affirmed the granting of rescission and reversed the district court’s ruling on statutory damages, attorney’s fees, and costs.

Schonbrun contended to the Eleventh Circuit that Harris signed a waiver of her right to rescind three business days after she signed the loan documents, and that Harris was therefore not entitled to rescission. However, deferring to the district court’s “decision to credit Harris’s testimony,” the Eleventh Circuit found that although Harris had indeed signed a waiver form, it had been backdated to October 21st, 2009 and that Harris had handwritten “16 Oct. 09” next to her signature. Thus, Harris had signed the waiver earlier than the three-day requirement specified in the Act. TILA requires that the notice of the right to rescind must be “clearly and conspicuously” communicated to the borrower to give him or her a “cooling off period” to reconsider the loan transaction. If the lender fails to fulfill this obligation, then the borrower’s right to rescind extends to three years beyond the consummation of the transaction.

Although Schonbrun argued that his violation was only technical and thus not “material,” the Eleventh Circuit disagreed, noting that Schonbrun had failed to comply with two requirements of the Act by instructing Harris to simultaneously sign the loan documents and a postdated waiver of right to rescission. Moreover, he had failed to give her two copies of her right to rescind. This combination, the Eleventh Circuit said, failed to provide Harris with clear and conspicuous notice of her right to rescind, as “execution of the waiver ‘during the transaction would confuse any reasonable [borrower] because it implies . . . that waiver is generally possible within [three business days of the transaction],’” making the violation material. Had Harris wanted to rescind the transaction within the three-day period, the Eleventh Circuit said, “it would have been reasonable for her not to have exercised that result as a direct result of [the waiver].”

Finally, the Eleventh Circuit reversed the district court’s determination that noncompliance with the Act was “immaterial” and that it should not award damages, attorney’s fees, and costs to Harris, holding this decision to be inconsistent with the text of the Act. To the contrary, such an award was “mandatory” according to the Eleventh Circuit, because the text of the Act states that any lender who fails to comply with section 1635 would be liable to the borrower in an amount including “costs of the action, together with a reasonable attorney’s fee as determined by the court.”

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