The United States Court of Appeals for the First Circuit soundly rejected in Melfi v. WMC Mortgage Corporation, Series 2006-WMCZ under the pooling and servicing agreement without recourse, a line of judicial interpretation standing for the proposition that technical violations of the Truth In Lending Act (“TILA”) are “fatal” in cases where a lender fails to complete the blank spaces for specific dates in rescission notices. Indeed, the First Circuit referred to cases in other circuits, including the Ninth and Fifth Circuit Courts of Appeal, where those courts have held that failing to fill in a blank on a rescission notice automatically triggers an extended rescission right as “elderly” and “in tension with later [TILA] amendments….” The First Circuit surmised that Congress “aimed in general to guard against widespread rescissions for minor violations” through its 1995 amendments to the TILA.
The facts of the Melfi case and the legal arguments are straightforward. Joseph Melfi refinanced his home mortgage with WMC Mortgage Corporation. At the closing, Melfi received a notice of right to rescind as required by TILA. WMC date stamped the rescission notice in the top left-hand corner, but did not complete the blank spaces designated for the date of the transaction and the actual deadline to rescind. Melfi sought to rescind the transaction nearly two years after the closing on the refinance transaction arguing that the defective notice afforded him the right to rescind during the three-year extended rescission period prescribed by TILA. Not surprisingly, WMC refused to allow the rescission.
At trial, the court followed the 2006 First Circuit decision in Palmer v. Champion Mortgage and dismissed Melfi’s complaint holding that “even if the omissions in the notice were violations, they were at most technical violations that did not give rise to an extended rescission period because the notice was clear and conspicuous despite the omissions[.]” In affirming the trial court’s decision, the First Circuit reiterated that the test for a proper TILA rescission disclosure is whether a reasonable person would have understood the rescission notice. In applying that test, the First Circuit observed that Melfi must have known the date of the loan transaction and was capable of counting three days thereafter. Therefore, the First Circuit determined that the blank spaces in the notice did not mislead Melfi, and he would not be entitled to a windfall as a result of the technical defect in the notice.
For those who might view the Melfi case and its reliance on the 1995 TILA amendments as yet another ominous sign of so-called deregulation, instead I would suggest that the Melfi case and the 1995 TILA amendments are simply an appropriate response to overly exuberant regulation which, in this circumstance, the First Circuit properly concluded would impose “a penalty [that] serves no purpose.” This, perhaps, may be a good lesson to be mindful of in these times where re-regulation seems to be coming so rapidly that it is likely that future amendments may be necessary to rectify some aspects of the current changes, which upon further reflection, might be driven more by the perceived need to do something to re-regulate the consumer finance industry rather than well thought out solutions designed to encourage better industry and consumer behavior.
Dana Frederick Clarke is a partner in the California office of Hudson Cook, LLP. Basis Points readers can reach Dana at 310-349-8433 or by email at dclarke@hudco.com.