Appeals Court Rules Substantial Compliance With TILA Is Sufficient to Avoid Rescission Period for Disclosure Violations
On December 14, 2011, the Fourth Circuit Court of Appeals endorsed the view that “substantial compliance” with the Truth in Lending Act (“TILA”) disclosure requirements was sufficient to avoid the Act’s three year rescission period for disclosure violations.
In Watkins v. SunTrust Mortgage, Inc., No. 10-1915 (4th Cir. Dec. 14, 2011), the borrower appealed a dismissal of his action under TILA seeking to rescind a 2007 refinancing transaction based on an alleged disclosure violation. The borrower alleged that during the refinance the lender had provided him a TILA disclosure form based on Model Form H-8 from the Appendix of Regulation Z, 12 C.F.R. pt. 226, for new credit transactions, rather than a form based on Model Form H-9, for refinancing transactions. According to the borrower, failure to use a form based on Model Form H-9 alone, without any other alleged deficiencies in the disclosure, was sufficient to extend the TILA’s general three day rescission period to the three year period for transactions in which disclosures are not delivered properly to the borrower.
The Fourth Circuit disagreed, affirming the district court’s dismissal. As the Court explained, while TILA does require the Federal Reserve Board to promulgate Model Forms, Model Form H-8 “contains all of the information required by TILA and Regulation Z to disclose the right to rescind.” Slip Op. at 5, 8. The Court also rejected on two grounds the borrower’s argument that failure to provide notice that a rescission of his refinancing transaction would only affect the new amount financed was a violation of TILA.
First, the Court explained that the disclosure contained in Model Form H-8 sufficiently apprised the borrower that rescission would result in extinguishing the new loan and returning the parties to the status quo ante. Id. at 13. Second, the Court noted that to the extent the disclosure did not describe the consequences of rescission in the same detail as the H-9 Form, TILA requires “only substantial compliance with the rescission notice requirements.” Id. at 14. In sum, as the Court noted, “Watkins’ suggestion that the failure slavishly to follow the language in Form H-9 in giving notice of the right to rescission is a violation cannot be supported by the language of TILA or Regulation Z.” Id. at 11.
While this decision lends definitive support to the notion that technical compliance with TILA is not required in all instances in the Fourth Circuit, in a dissent Judge Wynn took a different approach. Arguing that while lenders were free to develop their own forms as long as those forms were in substantial compliance with TILA, Judge Wynn contended that if a lender chooses to use the model forms, failure to provide the correct form should constitute a TILA violation without inquiry into whether that form substantially complied with the Act.
It is also important to note that the panel that decided Watkins was different than a Fourth Circuit panel that has reached different conclusions in several similar consumer finance contexts.
Troutman Sanders’ Financial Services Litigation Practice Group attorneys have a wealth of experience arguing before the Fourth Circuit and district courts within the Circuit, and therefore are well-equipped to assist clients
in navigating through applicable precedent.