Chapter 8

8.1

Truth In Lending Rescission in Bankruptcy Court

TIL Rescission Letter

This rescission letter is quite detailed. Truth in Lending does not require this type of completeness. In fact, the model rescission letter found at National Consumer Law Center, Truth in Lending Appx. E (2d ed. 1989 and Supp.) is quite short. Moreover, the Rescission Model Forms in FRB Regulation Z, Appendices H-8 and H-9 are shorter still, merely stating "I wish to cancel," and signed and dated by the consumer. The consumer's attorneys in the case being reprinted chose a detailed rescission letter because they believed it would lead to a quicker and more beneficial settlement of the case -that it is best to present to the creditor the consumer's case in as much detail and as persuasively as possible as early as possible. January 22, 1993 VIA CERTIFIED MAIL Susan Black, President Street Financial, Inc. 100 Natick Road Worcester MA Re: John Homeowner - Rescission of Mortgage Loan Dated November 29, 1990 Pursuant to Massachusetts General Laws, c. 140D, 10

Dear Ms. White: I represent John Homeowner, a Street Financial Services, Inc. ("Street") mortgagor. Mr. Homeowner refinanced his principal residence with Street on November 29, 1990. On January 15, l993, you sent Mr. Homeowner a demand letter informing him that you were to begin foreclosure proceedings next week if he did not immediately pay off the Street loan. Because the refinancing transaction which you base this demand on contained several violations of the state Truth in Lending Act (M.G.L. c.140D, 1 et seq.) ("TILA"), my client has authorized me to rescind the transaction pursuant to c.140D, 10, and the Massachusetts Banking Commissioner's Regulations promulgated thereunder, 209 CMR 32.23.

The following synopsis of the facts and law which outlines Mr. Homeowner's right to rescind incorporates citations to the federal Truth in Lending Act (15 USC 1601, et. seq.), the Federal Reserve Board Regulations promulgated thereunder (12 CFR 226.1 et. seq., "Regulation Z"); the Official Staff Commentary of the Federal Reserve Board; and relevant federal case law. As the Massachusetts TILA and regulations are identical to the federal statutory and regulatory scheme in

all substantive aspects, the state courts are guided by this federal law in interpreting the cognate provisions of state law. Therefore, although reference is made to federal law throughout this letter for illustrative purposes, the rescission claim and all other claims made herein are solely grounded in state law.

Truth in Lending: Material Disclosures and Rescission Rights

The purpose of TILA is to enable consumers to intelligently shop for credit (15 USC 1601(a)). To achieve this purpose, TILA requires that the true "cost" of credit be stated as both an interest rate (annual percentage rate, or APR) and as a dollar amount (Finance Charge). The APR incorporates certain fees and charges imposed as part of the credit transaction, and which Congress has determined to constitute part of the "costs" of obtaining financing. Correspondingly, the finance charge discloses the net effect of such additional costs of credit as a dollar figure. Therefore, the finance charge may equal the sum of any points, broker's fees, credit insurance, and other charges which, in the particular context, TILA requires the disclosure of as credit costs.

As such, a note with a ten percent interest rate, executed as part of a transaction which imposed such additional "finance charges," may have an APR, or "true" interest rate, of 12%. Only when a creditor makes accurate disclosure of the true cost of credit can a consumer compare different lenders' offerings and make the informed credit decision which is TILA's goal. To provide a self-enforcement mechanism which promotes such accurate disclosures, Congress provided that the failure of a creditor to comply with certain of TILA's disclosure requirements (the "material disclosures") gives the borrower an extended right to rescind the transaction. See, G.L. c.140D, 10; 209 CMR 32.23; 15 USC 1635; Regulation Z, 226.23.

Here, Street has violated TILA in a number of respects. The violations which give rise to Mr. Homeowner's right to rescind this transaction include, but are not limited to, the following.

Unfair and Deceptive Conduct and Disclosure Laws Violations

In the fall of 1990, Mr. Homeowner responded to Easy Cash Inc. ("Easy Cash") television and print advertisements offering low interest rate loans by visiting the Easy Cash offices seeking information about obtaining a mortgage loan to refinance his home. Mr. Homeowner met with Easy Cash representative Lisa Smith. Ms. Smith informed him that his poor credit precluded a long term, low interest rate loan, but that if he took out a two year loan with a balloon payment and made his payments on time, that the Easy Cash would then provide long term, low interest refinancing as offered in its advertising. Ms. Smith provided Mr. Homeowner with a blank mortgage application and procured his signature on it. Mr. Homeowner was never provided with a copy of either the application form he signed or the completed application. As such, Mr. Homeowner never received the statutorily required notice mandated by Mass. General Laws, c.184, 17B. Mr. Homeowner had no further contact with Easy Cash until he was subsequently informed that he had been given a loan commitment.

Mr. Homeowner was led to believe and did believe that Easy Cash was a lender. In fact, Easy Cash does not provide financing, but instead arranges or "brokers" financing with Street and other lenders. Easy Cash did not inform Mr. Homeowner either that it was a broker and not a lender, or that it would impose a broker's fee for the purported service of arranging the Street loan.

Easy Cash is owned, operated and controlled by William Black. Mr. Black is Easy Cash's sole shareholder, officer and director. Street is owned, operated and controlled by Susan Black, William Black's sister. Ms. Black is Street' sole shareholder, officer and director. At all times relevant to this matter, Easy Cash and Street shared the same office address, 100 Natick Road Worcester, Massachusetts. Street indirectly imposed the broker's fee by informally requiring that all borrowers be channelled to it through Easy Cash or other brokers. This practice was a device to accomplish three goals: to increase not only Easy Cash's profit, but Street' as well; to avoid the

application of Massachusetts points and fees statute, c.183, 63, which prohibits lenders from charging more than two points on any consumer mortgage loan; and to circumvent the application of TILA, which requires such conduit "broker's fees" to be disclosed as components of the finance charge.

On November 29, 1990 Mr. Homeowner drove to the loan closing location, the office of attorney Larry Lawyer. Mr. Lawyer's office, like the offices of Street and Easy Cash, was also located at 100 Natick Road, Worcester, Massachusetts. Mr. Lawyer was the closing attorney for Street. However, it was not until Mr. Lawyer provided him with loan papers indicating that Street was the lender that Mr. Homeowner learned that Easy Cash was not directly providing the financing. Without Mr. Homeowner's consent or knowledge Easy Cash acted either through a correspondent lender contract, as broker, or as Street' agent. In any event, Easy Cash did not act pursuant to any agreement with Mr. Homeowner, either written or verbal. Easy Cash did not act in Mr.

Homeowners' best interests, but rather as agent for Street, in violation of G.L., c.271, 39.

TILA: Material Disclosure Violations

The conduct described above leading up to the consummation of the loan, in addition to the specific statutory violations cited, is rife with violations of c.93A. In addition, this conduct, as well as that which took place at the closing, violated TILA and gave rise to Mr. Homeowner's right to rescind this transaction. The independent bases on which this rescission right is based are detailed below.

1. Failure to Disclose Broker Fees as Finance Charges

One of the documents Mr. Lawyer required Mr. Homeowner to sign as a condition of obtaining the loan was a so-called "Consulting Agreement" purporting to authorize the payment of

almost ten percent of the loan proceeds, two thousand nine hundred fifty-four ($2,954.00) dollars, to Easy Cash. Mr. Homeowner had never seen this agreement before, and had no idea that Easy Cash was a broker, much less that it would charge this amount as a fee. (A copy of this "Consulting Agreement" is attached to this correspondence as Exhibit "A") [not reprinted infra]. Nevertheless, Mr. Homeowner signed the agreement because he was led to believe that execution of the "consulting" agreement authorizing Easy Cash's fee of almost ten points was a condition of obtaining the financing.

In accordance with the purported agreement, Mr. Lawyer subsequently paid a $2,954.00 broker's fee to Easy Cash. However, this fee was not disclosed to Mr. Homeowner as a finance charge. Only the additional one point which Street' charged was disclosed as a finance charge. This failure to disclose the broker's fee as a finance charge violates TILA. Where the lender requires the payment of a fee to a broker as a condition of or incident to the granting of a loan, the broker's fee must be included in the finance charge, and therefore also factored into the calculation of the annual percentage rate. 209 CMR 32.4(b)(3); Regulation Z, 226.4(b)(3). See, In re Dukes, 24 B.R. 404 (Bankr. E.D. Mich. 1982); Johnson v. Fleet Finance, Inc. 1992 WL 37648 (S.D. Ga., Feb. 21, 1992). See, e.g. G.L. c.255, 12F (where relative acts as conduit in credit transaction the creditor is subject to all claims and defenses borrower may assert against the related party "arranger" of credit). Street failed to so disclose the broker's fee as a finance charge and therefore understated both the finance charge and the APR in amounts exceeding TILA's error tolerance. In so doing Street also misstated the amount financed, which is overstated by the amount of the broker's fee.

2. Overstated Fees

Charges which would otherwise be excludable pursuant to Regulation Z must be disclosed as components of the finance charge if they are not bona fide and reasonable. By failing to disclose the following charges as components of the finance charge, Street has violated Regulation Z,

226.4(c)(7), and 209 CMR 32.4(c)(7). (All of the following charges are shown on the copy of Street' "Loan Accounting and Disbursement Authorization" attached to this correspondence as Exhibit "B")

Legal and associated fees paid to Larry Lawyer

Attorney's Fees Document Preparation Amortization Schedules Total

$1,040 $195 $25 $1,260

The $1,040 charge alone for attorney's fees for closing the loan far exceeds the range of charges normally imposed by experienced lender's counsel on loans of this type. As such, the excessive portion is an undisclosed finance charge. See R. Rohner, The Law of Truth in Lending 3.03(2)(a) (1984). In addition, the $195 charge for document preparation and $25 amortization schedules charge are merely disguised as separate costs in order to make the actual $1,260 legal fee appear lower. Mr. Homeowner, in fact, neither requested nor received the amortization schedules for which he was charged, nor is the $25 charge the bona fide and reasonable cost of producing such computer generated schedules on a two year note. Finally, to the extent that the attorney's fees charged actually conceal additional lender profit, they constitute an undisclosed finance charge. See Therrien v. Resource Financial Group, 704 F.Supp. 322 (D.N.H. 1989).

Title and Recording Fees

Full Title Examination Updating of Title; Recording of Documents $ 50 Mortgage Recording

$250

$ 25

Assignment of Mortgage Discharge of Mortgage and Liens N/A

$ 10

The two hundred fifty ($250.00) dollar charge for full title examination precludes any need to "update" the title. In addition, the only document recorded was the mortgage, for which a separate $25 fee was imposed. Nevertheless, Street charged Mr. Homeowner fifty dollars for its purported "Updating of Title; Recording of Documents." Some portion of the $50 fee was presumably allocated to the cost of the unnecessary "title update" and the remainder to the contrived cost of recording non-existent documents. To the extent that these "costs" were not fees paid to public officials as indicated, they are finance charges. Regulation Z, 226.4(e)(1); 209 CMR 32.4(e)(1); Abbey v. Columbus Dodge 607 F.2d 85 (5th Cir. 1979) (where, contrary to disclosures, creditor retained and did not pay to public officials an itemized $37.50 "filing fee," the fee was a finance charge).

Finally, the $10 fee for the "assignment of mortgage" is also a finance charge. Regulation Z, 226.4(b)(6); 209 CMR 32..4(b)(6); In re Brown, 106 B.R. 852, 858-859 (Bankr. E.D. Pa. 1989); Cheshire Mortgage Service v. Montes, 223 Conn. 80 (1992).

Inaccurate Material Disclosures

Accordingly, the Truth in Lending Disclosure Statement misstates at least three of the material disclosures mandated by law, by its:

!failure to accurately disclose the finance charge, in violation of Regulation Z, 226.18(d)

and 209 CMR 32.18(d);

!failure to accurately disclose the amount financed, in violation of Regulation Z, 226.18(b)

and 209 CMR 32.18(b); and

!failure to accurately disclose the annual percentage rate, in violation of Regulation Z,

226.18(e) and 209 CMR 32.18(e).

Street' failure to accurately make these material disclosures resulted in a misstated amount financed and an understated finance charge and APR in amounts exceeding TILA's error tolerance, all in violation of Regulation Z, 226.18(b)(d) and (e), and 209 CMR 32.18(b)(d) and (e).

Demand for Relief

The failure to accurately make the above-noted material disclosures tolls Mr. Homeowner's rescission right until the earlier of Street' provision of such rescission right notices and corrected material disclosures, or the passage of four years subsequent to consummation of the transaction. G.L. c.140D, 10, 209 CMR 32.23(a)(3). Cf., 15 USC 1635, Regulation Z, 226.23(a)(3).

Accordingly, please be advised that by this correspondence Mr. Homeowner rescinds Street' security interest in his property pursuant to c.140D, 10. As a result of this rescission notice Street' security interest is void (209 CMR 32.23(d)(1); Regulation Z, 226.23(d)(1)) and Street is bound to immediately terminate such security interest. 209 CMR 32.23(d)(2); Regulation Z, 226.23(d)(2). In addition, Street has twenty days from its receipt of this notice to return to my client all monies paid in connection with the terms of the mortgage loan which is the subject of this letter. Id. My client hereby requests an itemization of such monies. Upon Street' discharge of its statutory duties, my client will perform all necessary actions required by G.L. c. 140D, 10.

Failure to cancel the security interest and return to my client all monies due may subject

Street to actual and statutory damages, pursuant to G.L. c.140D, 32, as well as multiple damages for corresponding violations of c.93A. See, G.L. c.140D, 34.

Sincerely, Attorney for Homeowner

cc:

John Homeowner State Attorney General

8.2 Complaint in Bankruptcy Court Objecting to Secured Claim

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS EASTERN DIVISION In Re: John Homeowner Debtor John Homeowner Plaintiff [vs.] Street Financial Services, Inc. Defendant

Chapter 13 Case No. 93-XXXXX-ABC Adversary Proceeding No. 94-XXXX

VERIFIED COMPLAINT OBJECTING TO SECURED CLAIM Introduction

1. This adversary proceeding is brought by the plaintiff debtor pursuant to 11 U.S.C. 502 to object to the allowed secured claim of defendant Street Financial Services, Inc. ("Street") on the basis that the security interest held by Street has been properly rescinded pursuant to 1635 of the Truth-in-Lending Act, (TILA) 15 U.S.C. 1601 et seq. Plaintiff John Homeowner seeks injunctive relief and damages to enforce his rescission of a mortgage held by the defendant Street. The plaintiff seeks a preliminary injunction to restrain Street from refusing to honor his valid rescission of the transaction and by that unlawful refusal preventing a pending mortgage refinancing by US Trust Company which would lower his interest rate by approximately thirteen percent, from the nineteen percent charged by Street, to the six percent offered by US Trust. The plaintiff also seeks a determination on the merits that:

!he has properly rescinded the mortgage held by Street and that Street has no valid secured or unsecured claim; !that Street' refusal to honor his valid rescission notice in accordance with TILA's requirements eliminates any alleged indebtedness to Street: and !that Street is required to return to him all monies he has paid in connection with the mortgage loan transaction which is the subject of this lawsuit.
In addition, the plaintiff seeks statutory damages, costs, and attorney's fees for Street' failure to honor his valid rescission notice in conformity with the requirements of TILA. The plaintiff also asserts pendent claims pursuant to M.G.L. c. 140D, the state truth in lending act, which contains corollary provisions identical to the federal TILA, M.G.L. c.183, 63, and the state common law.

Jurisdiction

2. Jurisdiction of the Bankruptcy Court in this matter is provided by 28 U.S.C. 1334 and 157, as amended. This is a core proceeding. Parties

3. The Plaintiff, John Homeowner, is a natural person who resides at 10 Joseph Street, Boston, Massachusetts. Mr. Homeowner has occupied this home with his family of six for sixteen years. Mr. Homeowner is a debtor in this Court, having filed a petition pursuant to Chapter 13 of the Bankruptcy Code on October 27, l993.

4. Defendant, Street Financial Services, Inc. is a corporation with a principal place of business at 100 Natick Road, Worcester MA. Facts

5. In the fall of 1990, Mr. Homeowner responded to The Easy Cash, Inc. ("Easy Cash") television and print advertisements offering low interest rate loans by visiting the Easy Cash offices seeking information about obtaining a mortgage loan to consolidate his debts.

6. A Easy Cash representative informed Mr. Homeowner that he had poor credit and that this precluded Easy Cash from providing him with the long term, low interest rate loan advertised.

7. The Easy Cash representative then promised Mr. Homeowner that if he took out a two year loan with a balloon payment and made his payments on time, the Easy Cash would then provide long term, low interest refinancing as offered in its advertising.

8. These inducements persuaded Mr. Homeowner to apply to Easy Cash for such a loan.

9. The Easy Cash representative provided Mr. Homeowner with a blank mortgage application and procured his signature on it.

10. On information and belief, the Easy Cash representative completed the blank, signed application after Mr. Homeowner left and submitted it to Street.

11. Mr. Homeowner was never provided with a copy of either the blank application form he signed or the completed application.

12. Mr. had no further contact with Easy Cash until he was subsequently informed that he had been given a loan commitment. The loan terms were not disclosed to Mr. Homeowner until the loan closing.

13. Unbeknownst to Mr. Homeowner, the loan commitment was given by Street. Neither Easy Cash nor Street informed Mr. Homeowner of this fact, which he discovered only upon reading the documentation first provided to him at the loan closing.

14. On or about November 29, 1990, Street loaned Mr. Homeowner thirty one thousand ($31,000.00) dollars, secured by a second mortgage on his home.

15. The loan terms were as follows:

!Upwardly Adjustable Interest rate: The note rate was 15.99% per annum for the first three months of the loan, then was to be adjusted to the greater of 18% per annum or the Bank of New England prime rate plus ten percentage points. The loan could only be adjusted upward, the rate could not decrease, and had to increase by at least two points, to 18%, after the first three months. The loan did contain a 36% percent per annum rate ceiling. At the change date the rate was increased to nineteen (19%) per annum. The annual percentage rate was disclosed as 26.25%. !Monthly Payments: The loan was non-amortizing, payments were of interest only. Monthly payments for the first three months were four hundred thirteen dollars and eight cents ($413.08). Payments thereafter were of four hundred ninety dollars and eighty three cents ($490.83).

!Loan term: Two years. A balloon payment of the entire principal and any accrued interest was due November 28, l992. !Points: Street collected and retained an origination fee of one percentage point, three hundred ten ($310.00) dollars. !Rate Buydown: Street collected and retained two thousand nine hundred eighty one ($2,981.00) dollars as a "rate buydown." !Broker's Fees: Street collected two thousand nine hundred and fifty four ($2,954.00) dollars of the loan proceeds and disbursed them to Easy Cash, as a "Financial Consultant."
16.Easy Cash, now defunct, was in actuality a mortgage broker, which arranged financing for Street and other lenders, and collected a broker's fee drawn from the loan proceeds disbursed by the lender.

17. Street' sole shareholder, officer and director, Susan Black, is the sister of William Black, the sole shareholder, officer and director of Easy Cash during its existence. The siblings, at all times relative hereto, shared offices at 100 Natick Road, Worcester, Massachusetts.

18. At all times relevant hereto Street was a creditor within the meaning of TILA.

19. Mr. Homeowner's secured loan with Street is a consumer credit transaction within the meaning of TILA.

Count I: Misrepresentation

20. Neither Easy Cash nor Street disclosed the true nature of Easy Cash's role in the loan transaction, or the fact that it would impose a broker's fee for the purported service of arranging the Street loan.

21. Because of various misrepresentations made by Easy Cash, and based on the manner in which Easy Cash held itself out, Mr. Homeowner was led to believe that Easy Cash was the lender

from whom he would be obtaining his loan.

22. Neither Easy Cash nor Street ever provided Mr. Homeowner with any loan brokerage or commission agreement prior to the closing, nor did Mr. Homeowner at any point prior to the closing sign such an agreement.

23. Neither Easy Cash nor Street ever informed Mr. Homeowner that Easy Cash was not the direct lender who would be providing his loan.

24.

It was not until he was handed the loan papers at the closing that Mr. Homeowner

learned that Easy Cash was a broker and that Street was to be his lender.

25. Without Mr. Homeowner's consent or knowledge, and without any written or oral agreement with the plaintiff, Easy Cash acted as an agent for Street in arranging the loan.

Count II: Breach of Contract

26. Street charged Mr. Homeowner two thousand nine hundred eighty one ($2,981.00) dollars as a "rate buydown."

27. This payment was ostensibly made to reduce his interest rate or to reduce the monthly payments he was to make.

28. Street did not reduce the note rate.

29. Street intended for Mr. Homeowner to make the buydown payment in reliance on its representation about the reduced rate and payments, Mr. Homeowner did so rely, and Street

intentionally failed to reduce the rate and payments as represented. Count III: Violation of M.G.L. c. 183, 63

30. Massachusetts' points and fees statute, c.183, 63, prohibits lenders from charging more than two points on any consumer mortgage loan.

31. A "rate buydown" constitutes points within the meaning of the statute.

32. Street charged Mr. Homeowner more than ten points on his loan, in violation of c.183, 63.

Truth in Lending Act Violations Counts IV and V: Failure to Timely Provide the Truth in Lending Disclosure Statement and the Notice of Right to Rescind 33. At the closing, Street presented Mr. Homeowner with a document entitled "Disclosure Statement" and obtained his signature acknowledging receipt of a copy of the document. A copy of this document is attached and incorporated herein as Exhibit A. [Not reprinted infra.]

34. At the closing, Street presented Mr. Homeowner with a document entitled "Notice of Right to Cancel" and obtained his signature acknowledging receipt of two copies of the document. A copy of this document is attached and incorporated herein as Exhibit B. [Not reprinted infra.]

35. In fact, Street did not provide to Mr. Homeowner a copy of the Disclosure Statement, a copy of the Notice of Right to Cancel, or a copy of any other loan documents until more than three business days after the loan closing. Street instead informed Mr. Homeowner that all of his loan papers and his check would be mailed to him in a few days.

36. Street failure to provide Mr. Homeowner at the loan closing with a copy of his Disclosure Statement is a violation of 15 USC 1638(a) and (b)(1), and M.G.L. c. 140D, 12(a) and (b)(1), entitling Mr. Homeowner to rescind the transaction pursuant to 15 USC 1635(a) and M.G.L. c. 140D, 10(a).

37. Street' failure to provide Mr. Homeowner at the loan closing with a copy of his notice of the right to rescind the transaction is a violation of 15 USC 15 USC 1635(a) and M.G.L. c. 140D, 10(a) and 12(a), entitling Mr. Homeowner to rescind the transaction pursuant to 15 USC 1635(a) and M.G.L. c. 140D, 10(a). Failure to Disclose Finance Charges

38. At the closing, Street presented Mr. Homeowner with a document entitled "Loan Accounting and Disbursement Authorization." A copy of this document is attached and incorporated herein as Exhibit C. [Not reprinted infra.]

39. Comparison of Street' Disclosure Statement and Loan Accounting and Disbursement Authorization shows that it disclosed only its origination fee, odd days interest, and rate buydown as finance charges.

Count VI: Failure to Disclose Broker Fees as Finance Charges

40. Street required Mr. Homeowner to authorize the payment of two thousand nine hundred and fifty four ($2,954.00) dollars of the loan proceeds to Easy Cash as a condition of the loan being made. A copy of the Easy Cash "consulting" agreement purportedly authorizing this payment is attached and incorporated herein as Exhibit C1. [Not reprinted infra.]

41. Street informally required that borrowers be channelled to it through Easy Cash or other

brokers.

42. Street and Easy Cash acted in concert in this enterprise, and engaged in an ongoing pattern of similar misrepresentations with respect to substantial numbers. See Exhibit D, Complaint of the Attorney General in Commonwealth v. Easy Cash, Inc., Street Financial Services, Inc., and William Black, Suffolk Superior Court, Civil Action No. 91-xxxx, and accompanying consumer affidavits filed therewith.

43. Street's failure to disclose this "broker's fee" as a finance charge is a violation of 15 USC 1638(a)(3) and M.G.L. c. 140D, 12(a)(3), entitling Mr. Homeowner to rescind the transaction pursuant to 15 USC 1635(a) and M.G.L. c. 140D, 10(a).

Count VII: Failure to Disclose Appraisal Fee as Finance Charge 44. Easy Cash charged Mr. Homeowner two hundred fifty dollars ($250.00) for an appraisal of his home. See Exhibit E, Easy Cash letter re purchase of appraisal.

45. The Easy Cash letter describing the "agreement" to purchase the appraisal was presented to Mr. Homeowner at the closing by Street' closing attorney.

46. The two hundred fifty ($250.00) dollar charge was paid outside of the closing (POC) and reflected on Street's itemization of loan proceeds (Exhibit C).

47. M.G.L. c. 184, 17C requires first mortgage lenders to provide written notice to borrowers of their right to obtain upon request a free copy of the lender's appraisal of the borrower's home.

48. The charge for the appraisal is neither bona fide nor reasonable.

49. Mr. Homeowner neither requested nor received the appraisal for which he was charged.

50. Street's failure to disclose this fee as a finance charge is a violation of 15 USC 1638(a)(3) and M.G.L. c. 140D, 12(a)(3), entitling Mr. Homeowner to rescind the transaction pursuant to 15 USC 1635(a) and M.G.L. c. 140D, 10(a).

Count VIII: Failure to Disclose Amortization Schedule Charge as Finance Charge 51. Street charged Mr. Homeowner twenty five dollars ($25.00) for an amortization schedule.

52. As this is a non-amortizing loan, there is no need for an amortization schedule.

53. Mr. Homeowner neither requested nor received the amortization schedule for which he was charged.

54. Street' charge for an amortization schedule is neither bona fide nor reasonable.

55. Street' failure to disclose this fee as a finance charge is a violation of 15 USC 1638(a)(3) and M.G.L. c. 140D, 12(a)(3), entitling Mr. Homeowner to rescind the transaction pursuant to 15 USC 1635(a) and M.G.L. c. 140D, 10(a).

Count IX: Unreasonable and Non-Bona Fide Attorney's Fees

56. Street charged Mr. Homeowner one thousand and forty dollars ($1,040.00) in attorneys fees.

57. The one thousand and forty dollar amount exceeds the range of bona fide and reasonable charges normally imposed by experienced lender's counsel on loans similar to Mr. Homeowner's.

58. The attorney's fees are neither bona fide nor reasonable.

59. Street's failure to disclose the excessive portion of the attorney's fees as a finance charge is a violation of 15 USC 1638(a)(3) and M.G.L. c. 140D, 12(a)(3), entitling Mr. Homeowner to rescind the transaction pursuant to 15 USC 1635(a) and M.G.L. c. 140D, 10(a).

Count X: Unreasonable and Non-Bona Fide Document Preparation Charges

60. Street charged Mr. Homeowner one hundred ninety five ($195.00) dollars for document preparation.

61. This document preparation charge was neither bona fide nor reasonable.

62. Street's failure to disclose this fee as a finance charge is a violation of 15 USC 1638(a)(3) and M.G.L. c. 140D, 12(a)(3), entitling Mr. Homeowner to rescind the transaction pursuant to 15 USC 1635(a) and M.G.L. c. 140D, 10(a).

Counts XI and XII: Unreasonable and Non-Bona Fide Recording and Title Charges 63. Street imposed the following title and recording fee charges upon Mr.Homeowner. Full Title Examination Updating of Title; Recording of Documents $ 50 Mortgage Recording Assignment of Mortgage $250 $ 25 $ 10

64. Street's two hundred fifty ($250.00) dollar charge for full title examination precluded any need to "update" the title.

65. The only document recorded in connection with this transaction was the mortgage, for which a separate $25 fee was imposed by the Register of Deeds.

66. Street's failure to disclose as a finance charge the portion of the $50 fee allocated to the cost of the unnecessary "title update" is a violation of 15 USC 1638(a)(3), entitling Mr. Homeowner to rescind the transaction pursuant to 15 USC 1635(a).

67. Street's failure to disclose as a finance charge the portion of the $50 fee allocated to the cost of "recording of documents," where such "costs" were not fees paid to public officials, is a violation of 15 USC 1638(a)(3) and M.G.L. c. 140D, 12(a)(3), entitling Mr. Homeowner to rescind the transaction pursuant to 15 USC 1635(a) and M.G.L. c. 140D, 10(a). Count XIII: Failure to Disclose Assignment Recording Cost as Finance Charge 68. Street imposed a ten dollar ($10.00) fee upon Mr. Homeowner for the cost of recording an "assignment of mortgage" but did not record any such assignment. 69. Street's failure to disclose this fee as a finance charge is a violation of 15 USC 1638(a)(3) and M.G.L. c. 140D, 12(a)(3), entitling Mr. Homeowner to rescind the transaction pursuant to 15 USC 1635(a) and M.G.L. c. 140D, 10(a).

Counts XIV-XVI: Street' Inaccurate Material Disclosures

70. Street' failure to disclose the amounts described above in paragraphs 33 - 69 as finance charges pursuant to 15 U.S.C. 1638 and M.G.L. c. 140D, 12 correspondingly rendered the "finance charge," "annual percentage rate" and "amount financed" disclosures inaccurate in amounts exceeding TILA's error tolerance.

71. By failing to accurately disclose the finance charge, Street violated 15 U.S.C. 1638(a)(3) and M.G.L. c. 140D, 12(a)(3).

72. By failing to accurately disclose the amount financed, Street violated 15 U.S.C. 1638(a)(2)(A) and M.G.L. c. 140D, 12(a)(2)(A).

73. By failing to accurately disclose the annual percentage rate, Street violated 15 U.S.C. 1638(a)(4) and M.G.L. c. 140D, 12(a)(4).

Count XVII: Failure to Honor Mr. Homeowner's Rescission Notice

74. Mr. Homeowner made every payment on the loan on or before the due date.

75. In mid-summer, l992, with the two year balloon coming due, Mr. Homeowner sought to convert the Street loan to the low interest rate, long term loan the Easy Cash representative told him he could have if he made his payments on time.

76. Easy Cash informed him that they were no longer making or arranging such loans, and referred him to Street.

77. Street informed Mr. Homeowner that they would not make such a loan, emphasized that his balloon note was coming due in a few months and urged him to find alternative financing.

78. On or about January 22, 1993 Mr. Homeowner, through his attorney, notified the defendant that he was exercising his right to rescind the transaction pursuant to 15 U.S.C. 1635 and M.G.L. c. 140D, 10. A copy of the letter by which Mr. Homeowner exercised his rescission rights is attached and incorporated herein as Exhibit F [not reprinted infra.].

79. Street refused to honor Mr. Homeowner's rescission of the transaction, in violation of 15 U.S.C. 1635(b) and M.G.L. c. 140D, 10(b). A copy of the letter by which Street disavowed the rescission notice is attached and incorporated herein as Exhibit G [not reprinted infra.].

80. Street' failure to honor Mr. Homeowner's rescission notice eliminates Mr. Homeowner's obligation to tender the net proceeds of the loan. Pursuant to 15 U.S.C. 1635(b) and M.G.L. c. 140D, 10(b) Mr. Homeowner has no obligation to now tender that unpaid principal.

Counts XVIII and XIX: Breach of Contract and Unconscionable Conduct

81. US Trust Company issued Mr. Homeowner a loan commitment for forty five thousand ($45,000.00) dollars under a special hardship program with a fixed interest rate of six and one-eighth percent, to enable him to refinance his first mortgage as well as the Street second mortgage and preserve his home.

82. The US Trust loan closing was originally scheduled for October 20, l993, but was delayed for at least one day by Street' failure to provide a payoff figure. On October 21, 1993 Street demanded a payoff which included over ten thousand ($10,000.00) dollars of charges in addition to loan principal for accrued interest and legal fees. A copy of the Street payoff communication to US Trust is attached as Exhibit H [not reprinted infra.].

83. Street was not entitled to these fees under the terms of its loan agreement with Mr. Homeowner, nor could it demand such charges be paid after his valid rescission was made.

84. Street's attempt to obtain these additional monies prevented Mr. Homeowner from closing.

85. Street's conduct was unconscionable and a breach of its contract.

Circumstances Requiring Immediate Issuance of a Preliminary Injunction

86. Mr. Homeowner's US Trust loan commitment expired of its own terms after the aborted closing. 87. In light of the circumstances, US Trust has agreed to extend the loan commitment through January 20, l994. 88. Street's continuing refusal to honor Mr. Homeowner's rescission jeopardizes the prospective US Trust refinancing. 89. Unless the Court issues a preliminary injunction to allow Mr. Homeowner to close the US Trust loan on or before January 20, l994, his commitment will expire and there is a substantial likelihood that he will be unable to requalify for a mortgage refinancing under US Trust's special loan program or with any other lender. Requested Relief WHEREFORE, the plaintiff respectfully requests that this honorable Court: 90. Issue an order of notice ordering defendant to appear on or before January 18, 1994 and show cause why an injunction should not issue. 91. After a hearing, preliminarily enjoin the defendant from failing to: a. b. discharge the mortgage it holds on the plaintiff's home to allow the prospective US Trust refinancing to occur; accept from the prospective US Trust refinancing proceeds of thirty-one thousand ($31,000.00) dollars, the principal amount now allegedly owing under the defendant's second mortgage loan; and

c.

immediately upon receipt of these proceeds pay the entire amount into an escrow account established under the court's supervision and control, to be held until a judgment on the merits is rendered.

92. After a trial on the merits: a. b. declare that the plaintiff has validly rescinded the transaction, that the defendant's security interest is therefore void and the defendant's secured claim is disallowed; declare that the defendant's failure to honor the plaintiff 's valid rescission notice in accordance with the dictates of 15 USC 1635 and M.G.L. c. 140D 10 vests in the plaintiff the right to retain the net loan proceeds and that the defendant has no allowable unsecured claim; enter an order discharging the defendant's second mortgage; enter an order requiring the defendant to refund to the plaintiff all money paid to the defendant in connection with the transaction; award the plaintiff one thousand ($1,000) dollars in statutory damages for the defendant's failure to comply with 15 U.S.C. 1638 and c. 140D 12, and award the plaintiff an additional one thousand ($1,000) dollars in statutory damages for the defendant's failure to comply with 15 U.S.C. 1635(b) and c. 140D 10; award the plaintiff his reasonable attorney's fees and costs; and grant such other relief as the Court deems appropriate and just.

c. d. e.

f. g.

Respectfully submitted John Homeowner By his attorney Date: January 6, 1994 VERIFICATION COMMONWEALTH OF MASSACHUSETTS Suffolk, ss. January 5, 1994

I hereby certify that I have read the foregoing Complaint and that the facts contained therein are true. John Homeowner [Notarized]

8.3 Memorandum In Support of Preliminary Injunction

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS EASTERN DIVISION In Re: John Homeowner Debtor John Homeowner Plaintiff [vs.] Street Financial Services, Inc. Defendant

Chapter 13 Case No. 93-XXXXX-ABC Adversary Proceeding No. 94-XXXX

MEMORANDUM IN SUPPORT OF PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION

I. Introduction

Pursuant to the federal and state Truth in Lending Acts (15 USC 1601 et seq; M.G.L. c. 140D 1 et seq., hereinafter referred to as TILA) the plaintiff, John Homeowner, seeks to enforce his valid rescission of an unconscionable, high interest rate loan made by the defendant, Street Financial Services, Inc. ("Street"). Mr. Homeowner seeks injunctive relief so that he may avert Street' threatened foreclosure and close on a US Trust Company loan commitment which would save

his home. The proceeds of the US Trust loan, which carries an interest rate thirteen percent lower than that of the Street loan, would pay Street whatever, if anything, it is legally owed. On November 29, 1990, Street ostensibly loaned John Homeowner thirty one thousand ($31,000.00) dollars. However, of that thirty one thousand dollars, eight thousand and fifteen ($8,015.00) dollars was immediately retaken by Street, its attorney, and the mortgage broker which arranged the loan. Before Mr. Homeowner left the loan closing, twenty six percent of what he thought he was borrowing was recaptured by these three entities, who all shared the same address.

Mr. Homeowner only dealt with Street because he was assured that if he proved he was a good borrower by making payments on time for the two year term of the note, then instead of calling the note and demanding the immediate return of that thirty one thousand dollars, Street would make him a long term, low interest rate loan. Mr. Homeowner kept up his end of the bargain, making regular payments on time for two years. But Street refused to even discuss the promised new loan, called the note and is now attempting to foreclose to harvest the equity in Mr. Homeowner's home.

The Attorney General has alleged in a lawsuit that Street and its mortgage broker, Easy Cash, engaged in these types of lending practices on a regular basis, preying on substantial numbers of unsophisticated Massachusetts consumers by deceptively inducing them to enter into short term, high interest rate loans packed with exorbitant fees, most notably thousands of dollars paid to Easy Cash from the Street loan proceeds for alleged "consulting fees." See Exhibit D to the Adversary Complaint, Complaint of the Attorney General in Commonwealth v. Easy Cash, Inc., Street Financial Services, Inc., and William Black, Suffolk Superior Court, Civil Action No. 91-xxxx, and accompanying consumer affidavits filed therewith. It is for these reasons that Mr. Homeowner rescinded his Street loan and is now seeking injunctive relief from this court to enforce his rescission rights. Mr. Homeowner is entitled to that relief because Street has committed ten independent violations of TILA, any one of which entitled Mr. Homeowner to rescind his loan. The following fees, enumerated in items 1-5 and 8-10, below,

which Street required Mr. Homeowner to pay as a condition of closing the loan, are finance charges as defined by TILA. However, Street did not disclose them as such, thereby understating the finance charge, annual percentage rate, and amount financed, in violation of TILA. In addition, Street withheld from Mr. Homeowner all of the disclosures required by TILA until at least six days after the loan closing. When the documents were provided to Mr. Homeowner, the Notice of Right to Cancel indicated that his three day rescission period had already passed.

1. 2. 3. 4.

Street charged Mr. Homeowner a fee to purchase an amortization schedule for his loan. However, Mr. Homeowner's loan is non-amortizing. Street charged Mr. Homeowner a fee to record an assignment of the mortgage to a third party. Street charged Mr. Homeowner a fee to "update title" after it had already charged him a two hundred fifty ($250.00) dollar fee for "full title examination." Street charged Mr. Homeowner an undisclosed portion of a fifty ($50.00) dollar fee to record documents. But Street imposed separately itemized fees which fully covered the cost of recording the documents involved. Street failed to provide Mr. Homeowner with the Notice of Right to Cancel required by TILA until at least six days after the loan closing. Street failed to provide Mr. Homeowner with the Disclosure Statement required by TILA until at least six days after the loan closing. Street informally required Mr. Homeowner to pay a two thousand nine hundred fifty four ($2,954.00) dollar "consulting fee" to The Easy Cash, a mortgage broker which shared Street's address and which was run by the brother of Street president and sole shareholder. Street required Mr. Homeowner to pay an unreasonable and non-bona fide attorney's fee to its closing attorney, who also shared Street's address. Street required Mr. Homeowner to pay an unreasonable and non-bona fide "document preparation fee" to its attorney. Street charged Mr. Homeowner a two hundred fifty ($250.00) dollar fee to purchase his appraisal.

5. 6. 7.

8. 9. 10.

In this petition for preliminary relief, only items 1-5 above will be analyzed, as the facts concerning the first four are undisputed and pose purely legal questions, and as the circumstances surrounding the fifth item demonstrate that Mr. Homeowner is likely to prevail on this issue at trial.

The remaining items (6-10) require further discovery in order to demonstrate the requisite likelihood of success. However, as even a single violation of the Act's material disclosure provisions justifies rescission, the analysis of the first five items demonstrates not just a likelihood of success on the merits, but that a determination of the validity of Mr. Homeowner's rescission is almost inescapable.

II. Facts

In the fall of 1990, Mr. Homeowner responded to The Easy Cash Inc.'s ("Easy Cash") television and print advertisements offering low interest rate loans by visiting the Easy Cash offices seeking information about obtaining a mortgage loan to refinance his home. Mr. Homeowner met with Easy Cash representative Lisa Smith. Ms. Smith informed him that his poor credit precluded a long term, low interest rate loan, but that if he took out a two year loan with a balloon payment and made his payments on time, that the Easy Cash would then provide long term, low interest refinancing as offered in its advertising. Ms. Smith provided Mr. Homeowner with a blank mortgage application and procured his signature on it. Mr. Homeowner was never provided with a copy of either the application form he signed or the completed application. As such, Mr. Homeowner never received the statutorily required notice mandated by Mass. General Laws, c.184, 17B. Mr. Homeowner had no further contact with Easy Cash until he was subsequently informed that he had been given a loan commitment. Mr. Homeowner was led to believe and did believe that Easy Cash was a lender. In fact, Easy Cash does not provide financing, but instead arranges or "brokers" financing with Street and other lenders. Easy Cash did not inform Mr. Homeowner either that it was a broker and not a lender, or that it would impose a broker's fee for the purported service of arranging the Street loan. Easy Cash, now defunct, was owned, operated and controlled by William Black. Mr. Black was Easy Cash's sole shareholder, officer and director. Street is owned, operated and controlled by Susan Black, William Black's sister. Ms. Black is Street's sole shareholder, officer and director. At all times relevant to this matter, Easy Cash and Street shared the same office address, 100 Natick

Road, Worcester, Massachusetts. On November 29, 1990 Mr. Homeowner drove to the loan closing location, the office of attorney Larry Lawyer. Mr. Lawyer's office, like the offices of Street and Easy Cash, was also located at 100 Natick Road, Worcester, Massachusetts. Mr. Lawyer was the closing attorney for Street. However, it was not until Mr. Lawyer provided him with loan papers indicating that Street was the lender that Mr. Homeowner learned that Easy Cash was not directly providing the financing. Without Mr. Homeowner's consent or knowledge Easy Cash acted either through a correspondent lender contract, as broker, or as Street' agent. In any event, Easy Cash did not act pursuant to any agreement with Mr. Homeowner, either written or verbal.

One of the documents Mr. Lawyer required Mr. Homeowner to sign as a condition of closing the loan was a so-called "consulting" agreement purporting to authorize the payment of almost ten percent of the loan proceeds, two thousand nine hundred fifty-four ($2,954.00) dollars, to Easy Cash. Mr. Homeowner had never seen this agreement before, and had no idea that Easy Cash was a broker, much less that it would charge this amount as a fee. (A copy of this "Consulting Agreement" is attached to the Complaint as Exhibit "C1"). Nevertheless, Mr. Homeowner signed the agreement because he was led to believe that execution of the "consulting" agreement authorizing Easy Cash's fee of almost ten points was a condition of obtaining the financing. In addition to the broker's fee, Street, through its attorney Larry Lawyer, charged Mr. Homeowner a legal fee of one thousand and forty ($1,040.00) dollars, a one hundred ninety five ($195.00) dollar charge for document preparation and a twenty five ( $25) dollar charge for amortization schedules. Mr. Homeowner, in fact, neither requested nor received the amortization schedules for which he was charged, nor is the $25 charge the bona fide and reasonable cost of producing such computer generated schedules on a two year note. Most notably, as this was a non-amortizing loan, the amortization schedules were of no use to Mr. Homeowner. Street charged Mr. Homeowner two hundred fifty ($250.00) dollars for a "full title examination;" fifty ($50.00) dollars for "updating of title; recording of documents;" twenty five

($25.00) dollars for "mortgage recording;" and ten ($10.00) dollars for "assignment of mortgage." The only document recorded in connection with this transaction was the mortgage.1 Mr. Homeowner was completely unaware of any of the terms of the loan until he was presented with the loan documents at the closing. Neither Street nor his "consultant" Easy Cash had informed him of the terms prior to the closing. Those terms were both complicated and onerous:

!Upwardly Adjustable Interest rate: The note rate was 15.99% per annum for the first three months of the loan, then was to be adjusted to the greater of 18% per annum or the Bank of New England prime rate plus ten percentage points. The loan could only be adjusted upward, the rate could not decrease, and had to increase by at least two points, to 18%, after the first three months. The loan did contain a 36% percent per annum rate ceiling. At the change date the rate was increased to nineteen (19%) per annum. The annual percentage rate was disclosed as 26.25%. !Monthly Payments: The loan was non-amortizing, payments were of interest only. Monthly payments for the first three months were four hundred thirteen dollars and eight cents ($413.08). Payments thereafter were of four hundred ninety dollars and eighty three cents ($490.83). !Loan term: Two years. A balloon payment of the entire principal and any accrued interest was due November 28, l992. !Points: Street collected and retained an origination fee of one percentage point, three hundred ten ($310.00) dollars. !Rate Buydown: Street collected and retained two thousand nine hundred eighty one ($2,981.00) dollars as a "rate buydown." !Broker's Fees: Street collected two thousand nine hundred and fifty four ($2,954.00) dollars of the loan proceeds and disbursed them to Easy Cash, as a "Financial Consultant."
Neither attorney Lawyer nor Street provided Mr. Homeowner with any of the loan documents or the disclosures required by TILA when he left the closing. Mr. Homeowner left the loan closing without any papers whatsoever, having been told that the papers would be mailed to him "in a few days." Approximately six days later, Mr. Homeowner received the papers, including the TILA disclosures, in the mail.

Street also recorded an assignment of the mortgage to a third party, Blue Mortgage Corp., on December 27, 1990, but as noted infra, an assignment to a third party is a transaction independent of the loan closing, for which any charge imposed by the lender on the borrower must be disclosed as a finance charge.

Despite the onerous terms and the peremptory way in which they were made known to him, Mr. Homeowner made every payment on the loan on or before the due date. In mid-summer, l992, with the two year balloon coming due, Mr. Homeowner sought to convert the Street loan to the low interest rate, long term loan the Easy Cash representative told him he could have if he made his payments on time. Easy Cash informed him that they were no longer making or arranging such loans, and referred him to Street. Street informed Mr. Homeowner that they would not make such a loan, emphasized that his balloon note was coming due in a few months and urged him to find alternative financing. On or about January 22, 1993 Mr. Homeowner, through his attorney, notified the defendant that he was exercising his right to rescind the transaction pursuant to 15 U.S.C. 1635 and M.G.L. c. 140D, 10.2 A copy of the letter by which Mr. Homeowner exercised his rescission rights is attached to the Complaint as Exhibit F. Street categorically refused to honor the valid rescission. A copy of the letter by which Street disavowed the rescission notice is attached to the Complaint as Exhibit G. Attempts to reach a non-adversarial settlement of the plaintiff's rescission claim encompassed the following nine months, during which Mr. Homeowner sought alternative financing. During this time, Street commenced foreclosure proceedings. Mr. Homeowner was selected in a lottery held by US Trust Company as a prospective recipient of refinancing monies to be used to save his home from Street's threatened foreclosure.3 US Trust issued Mr. Homeowner a loan commitment for forty five thousand ($45,000.00) dollars under this special hardship program to enable him to pay off his first mortgage (of approximately As "[t]he relevant disclosure provisions of the state and federal statutes are apparently identical, and both federal and state courts have recognized that the policies underlying the two statutes are also identical...." Bizier v. Globe Financial Services, Inc., 654 F.2d 1, 2 (1st Cir. 1981), for the sake of simplicity and brevity, this memorandum will cite only the federal statute, regulation, and caselaw. US Trust and other institutional lenders had earlier reached agreements with the Attorney General to end the Attorney General's investigations into alleged unfair lending practices. The lenders agreed to provide approximately thirty million dollars of below market rate financing to victims of predatory lending practices and others who met certain demographic criteria and were selected in lotteries held under the Attorney General's auspices.
3 2

ten thousand ($10,000.00) dollars) as well as the Street second mortgage of thirty one thousand dollars, and thereby preserve his home. The loan commitment locked in a fixed interest rate of six and one-eighth (6.125%) percent. A loan closing was scheduled for October 20, l993. Despite US Trust's earlier request, Street did not provide a payoff figure until October 21, 1993, delaying the prospective closing for at least a day. When Street' payoff communication was transmitted through its lawyers, it contained a demand of almost forty two thousand ($42,000.00) dollars. This demand included over ten thousand ($10,000.00) dollars of charges in addition to loan principal for ostensibly accrued interest and legal fees. The demand was accompanied by a condition that Mr. Homeowner release his rescission claim and all other claims he had against Street. A copy of the Street payoff communication and demand for release, addressed to US Trust's settlement agent, is attached to the Complaint as Exhibit H. The Street demand exceeded by seven thousand ($7,000.00) dollars the US Trust proceeds which were to be available. Mr. Homeowner did not have the seven thousand ($7,000.00) dollars in cash which would have been necessary to allow a closing. When the closing was aborted, Street then sought to press ahead with a scheduled foreclosure auction sale of Mr. Homeowner's home, necessitating the emergency filing of a chapter 13 petition. Mr. Homeowner's US Trust loan commitment expired of its own terms after the aborted closing. In light of the circumstances, US Trust has agreed to extend the loan commitment through January 20, l994.

III. Argument

The Validity of the Plaintiff's Rescission on Any of Four Independent Bases is Evident from Undisputed Documents As noted, any of the first four violations itemized in the Introduction of this memorandum provide an independent, indisputable basis for rescission. Although these violations do not involve large amounts of money, "any understatement of the finance charge is material because any

understatement would be of some significance to a reasonable consumer." Steele v. Ford Motor Credit Co., 783 F.2d 1016 (11th Cir. 1986). The reasons why Congress created this extraordinary remedy of rescission and decided to enforce it through a strict liability standard are best understood in the context of the Act's creation and the Congressional policy it serves.

TILA is Designed to Protect Consumers by Providing the Information Necessary to Make Intelligent Decisions in the Credit Marketplace The purpose of TILA is to enable consumers to intelligently shop for credit (15 USC 1601(a)).4 In particular, TILA "was passed to aid the unsophisticated consumer so that he would not be easily misled as to the total costs of financing." Thomka v. A.Z. Chevrolet, Inc., 619 F.2d 246, 248 (3d. Cir. 1980); Shepeard v. Quality Siding & Window Factory, Inc., 730 F.Supp. 1295, 1299 (D.Del. 1990); Morris v. Lomas and Nettleton Co., 708 F.Supp. 1198, 1203 (D.Kan 1989); Goldberg v. Delaware Olds, Inc., 670 F.Supp. 125, 127 (D.Del. 1987). See also Mourning v. Family Publications Service, Inc., 411 U.S. 356, 363-69, 93 S.Ct. 1652, 1657-60, 36 L.Ed.2d 318 (1973). It was thought that "through TILA, Congress [could] remedy the [sq]divergent and often fraudulent practices by which credit customers were apprised of the terms of the credit extended to them.'" Smith v. Fidelity Consumer Discount Co., 898 F.2d 896, 898 (3d. Cir. 1988). "Congress designed the law to apply to all consumers, who are inherently at a disadvantage in loan and credit transactions." Jackson v. Grant, 890 F.2d 118, 122 (9th Cir. 1989); Semar v. Platte Valley Federal S & L Ass'n,791 F.2d 699, 705 (4th Cir. 1983). To achieve this purpose, TILA requires that the true "cost" of credit be stated as both an The House of Representatives report accompanying TILA noted how important the use of credit has become in the United States: "Consumer credit has become an essential feature of the American way of life. It permits families with secure and growing incomes to plan ahead and to enjoy fully and promptly the ownership of automobiles and modern household appliances. It finances higher education for many who otherwise could not afford it. To families struck by serious illness or other financial setbacks, the opportunity to borrow eases the burden by spreading the payments over time." H. Rep. No. 1040, 90th Cong., 1st Sess. 8-9, reprinted in 1968 U.S. Code Cong. & Admin. News 1965.
4

interest rate (annual percentage rate, or APR) and as a dollar amount (Finance Charge). The APR incorporates certain fees and charges imposed as part of the credit transaction, and which Congress has determined to be part of the "costs" of obtaining financing. As such, a note with a ten percent interest rate, executed as part of a transaction which imposes such additional "finance charges," may have an APR, or "true" interest rate, of twelve percent. Correspondingly, the finance charge discloses the net effect of such additional costs of credit as a dollar figure. Essentially, "...TILA requires a creditor to issue the debtor a disclosure statement summarizing certain information found in the loan documents." In re McCausland v. GMAC Mortgage Corp. of Pennsylvania, 63 B.R. 665, 667 (Bankr. E.D. Pa. 1986). These disclosures are to be set forth "...in writing and in a particular manner." Shepeard v. Quality Siding and Window Factory, Inc., supra. at 1299 (emphasis added).

The Rescission Remedy Protects Consumers and Provides Congress With a Self-Enforcement Mechanism to Ensure the Act's Viability

Only when a creditor makes accurate disclosure of the true cost of credit can a consumer compare different lenders' offerings and make an informed credit decision. The House of Representatives report accompanying TILA provides that "[y]our committee believes that . . . the credit disclosure features of [TILA] . . . [are] fundamental to its legislative purpose. This aspect

of the bill is designed to provide consumers with basic information in connection with their credit transactions so that they may effectively `comparison shop' for credit in order to obtain credit on the most favorable terms available in the market place." (Emphasis added.) H. Rep. No. 1040, 90th Cong., 1st Sess. 18, reprinted in 1968 U.S. Code Cong. & Admin. News 1975. Thus, TILA seeks to effectuate its public policy of promoting the informed use of credit by requiring lenders to disclose credit terms to consumers. The House of Representatives report further provides that "[f]or the relatively unsophisticated consumer, particularly those of modest means, [TILA] . . . will provide their only protection against unscrupulous merchants or lenders. . . . These provisions not only will protect the consumer, but will further protect the honest businessman from unethical forms of competition engaged in by some unscrupulous creditors who prey upon the poor through deceptive

credit practices." H. Rep. No. 1040, 90th Cong., 1st Sess. 18, reprinted in 1968 U.S. Code Cong. & Admin. News 1975-76. In addition, when a consumer loan is secured by a mortgage on the borrower's home, he or she has an unqualified right to cancel the transaction up to three business days after the closing. 15 USC 1635. This rescission right provides a borrower the time to examine the TILA disclosures at home, reflect on the prudence of the borrowing decision in light of those disclosures, and, if discretion seems advised, to cancel the transaction with impunity. To provide a self-enforcement mechanism which promotes such accurate disclosures, Congress provided that the failure of a creditor to comply with certain of TILA's disclosure requirements (the "material disclosures")5 gives the borrower an extended right to rescind the transaction. 15 USC 1635, Regulation Z, 226.23.6 The reason that the failure to provide these disclosures extends the rescission right is that Congress has determined that without accurate disclosure of these five components of the prospective consumer credit transaction, borrowers do not have all information material to their borrowing decision, and are therefore presumed unable to make an informed credit decision. As a corollary, the Act was amended to include this statutory definition of "material disclosures" in order to put creditors "in a better position to know whether a consumer may properly rescind a transaction." S. Rep. No. 368, 98th Cong. 2d Sess. at 29, reprinted in l980 U.S. Code Cong. and Admin. News 236, 264 (emphasis added).

TILA Achieves its Remedial Goals by A System of Strict Liability

To further this congressional policy TILA achieves its remedial goals by a system of strict

The "material disclosures" are the annual percentage rate, the finance charge, the amount financed, the total of payments, and the payment schedule. 15 USC 1602(u), Regulation Z, 226.23(a)(3), n.48. This right extends for three years under the federal statute (15 USC 1635), four years under the state law (G.L. c. 140D, 10).
6

liabilit in favor of consumers when mandated disclosures have not been made. 15 U.S.C. 1640(a) (emphasis added). The standard applied is considered "strict liability in the sense that absolute compliance is required and even technical violations will form the basis for liability." Shepeard v. Quality Siding & Window Factory, Inc., supra. at 1299; In re McElvany, 98 B.R. 237, 240 (Bankr. W.D. Pa. 1989). This means that "technical or minor7 violations of TILA, or Reg. Z, as well as major violations impose liability on the creditor and entitle the borrower to rescind [the loan]." Smith v. Wells Fargo Credit Corp., 713 F.Supp. 354, 355 (D.Ariz. 1989); Jackson v. Grant, 890 F.2d. 118, 120 (9th Cir. 1989); Semar v. Platte Valley Fed. S & L Assoc., supra. at 704.8 The first circuit court of appeals has unequivocally stated that any violation of TILA,

The error tolerance for finance charges is ten dollars (Regulation Z, 226.18(d), n. 41.

This rule is inviolate and is followed by courts in all jurisdictions. See, e.g., Smith v. Fidelity Consumer Discount Co., 989 F.2d 896, 898 (3rd Cir. 1990)(The federal Truth in Lending Act (TILA) achieves its remedial goals by a system of strict liability in favor of consumers when mandated disclosures have not been made); Lewis v. Dodge, 620 F.Supp. 135, 138 (D. Conn. 1985); In re Porter, 961 F.2d 1066 (3rd Cir. 1992); Rowland (John M., Carol S.) v. Magna Millikin Bank of Decatur, N.A., 812 F.Supp. 875 (C.D. Ill. 1992) ("even technical violations will form the basis for liability"); New Maine Nat. Bank v. Gendron, 780 F.Supp. 52 (D. Me. 1992); Dixon v. S & S Loan Service of Waycross, Inc., 754 F.Supp. 1567 (S.D. Ga. 1990); Woolfolk v. Van Ru Credit Corp., 783 F.Supp. 724 (D. Conn. 1990) (same with Unfair Debt Collection Practices Act); Morris v. Lomas and Nettleton Co., 708 F.Supp. 1198 (D. Kan. 1989); Jenkins v. Landmark Mortg. Corp. of Virginia, 696 F.Supp. 1089 (W.D. Va. 1988); Laubach v. Fidelity Consumer Discount Co., 686 F.Supp. 504 (E.D. Pa. 1988); Searles v. Clarion Mortg. Co., 1987 WL 61932 (E.D. Pa. 1987); "Liability will flow from even minute deviations from requirements of the statute and Regulation Z." Dixon v. S & S Loan Service of Waycross, Inc., 754 F.Supp. 1567, 1570 (S.D. Ga. 1990); Shroder v. Suburban Coastal Corp., supra. at 1380; Charles v. Krauss Co., Ltd., 572 F.2d 544 (5th Cir. 1978).Shroder v. Suburban Coastal Corp., 729 F.2d 1371, 1380 (11th Cir. 1984) ; Goldberg v. Delaware Olds, Inc., 670 F.Supp. 125 (D. Del. 1987); Curry v. Fidelity Consumer Discount Co., 656 F.Supp. 1129 (E.D. Pa. 1987); Laubach v. Fidelity Consumer Discount Co., 1986 WL 4464 (E.D. Pa. 1986); In re Wright, 133 B.R. 704 (E.D. Pa. 1991); Moore v. Mid-Penn Consumer Discount Co., 1991 WL 146241 (E.D. Pa. 1991); In re Marshall, 121 B.R. 814 (Bankr.C.D. Ill. 1990); In re Steinbrecher, 110 B.R. 155 (Bankr.E.D. Pa. 1990); Nichols v. Mid-Penn Consumer Discount Co., 1989 WL 46682 (E.D. Pa. 1989); In re McElvany, 98 B.R. 237 (Bankr.W.D. Pa. 1989); In re Johnson-Allen, 67 B.R. 968 (Bankr.E.D. Pa. 1986); In re Cervantes, 67 B.R. 816 (Bankr.E.D. Pa. 1986); In re McCausland, 63 B.R. 665, 55 U.S.L.W. 2214, 1 UCC Rep.Serv.2d 1372 (Bankr.E.D. Pa. 1986); In re Perry, 59 B.R. 947 (Bankr.E.D. Pa. 1986); In re Schultz, 58 B.R. 945 (Bankr,E.D. Pa. 1986); Solis v. Fidelity Consumer Discount Co., 58 B.R. 983 (E.D. Pa. 1986).

regardless of the technical nature of the violation, must result in a finding of liability against the lender. Bizier v. Globe Financial Services, Inc., 654 F.2d 1, 3 (lst Cir. 1981). TILA is a remedial statute which is designed to balance the scales "thought to be weighed in favor of lenders," and is therefore to be liberally construed in favor of borrowers. Id. A creditor who fails to comply with TILA in any respect is liable to the consumer under the statute, regardless of the nature of the violation or the creditor's intent. Thomka v. A.Z. Chevrolet Inc., 619 F.2d 246, 249-50 (3d Cir. 1980). Even if the borrower can demonstrate no actual damages, TILA's penalties are applied regardless of whether the borrower was misled or injured. See, Griggs v. Provident Consumer Discount Co., 680 F.2d 927, 932-33 (3d Cir.), vacated on other grnds, 459 U.S. 56, 103 S.Ct. 400, 74 L.Ed.2d 225 (1982). This strict compliance rule is what makes TILA so effective. "This strict interpretation of the TILA has largely been responsible for the TILA's success in achieving widespread compliance with its requirements." In re Brown, 106 B.R. 852, 857 (Bankr. E.D. Pa. 1989).

Street's Failure to Disclose as Finance Charges the Fees for the Amortization Schedule, Assignment Recording, Title Update and Document Recording Entitled Mr. Homeowner to Rescind the Loan As noted in the introduction to this memorandum, Street's failure to disclose the four enumerated fees as finance charges presents a purely legal question for the court: "Were any of these fees finance charges?" An affirmative answer requires a finding that Mr. Homeowner's rescission was valid. As such, Mr. Homeowner will not only have demonstrated a likelihood of success on the merits, but a certainty of it. Accordingly, summary disposition in Mr. Homeowner's favor should follow. As with the somewhat counterintuitive concept of rescission, the concept of the finance charge under TILA is also best understood in the context of the Act's aims and the methods by which Congress has sought to meet those aims.

Disclosure of the Finance Charge is at the Heart of TILA

Disclosure of the finance charge is at "the heart" of TILA. National Consumer Law Center, Truth in Lending 59 (2d. ed. l989). The finance charge and the APR are the most important disclosures in the entire Act, accordingly, they must be disclosed more conspicuously than even the other "material disclosures." 15 USC 1632(a); Regulation Z, 226.17(a)(2). "The most important information in a credit purchase is that which explains differing net charges and rates." Milhollin v. Ford Motor Credit Co., 444 US 555, 568-69, 100 S. Ct. 799, 63 L. Ed.2d 22 (l980). TILA's material disclosures "serve to provide an easy basis for comparison of the terms offered by competing creditors." Grey v. European Health Spas, Inc., 428 F. Supp. 841 (D. Conn. l987).

Regulation Z, 226.4(a) defines the term finance charge as:

...the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction. This definition is "all-inclusive", i.e., any charge which meets this broad definition is a "finance charge," unless specifically excluded from the rule's application by other provisions of TILA. See, Rohner, The Law of Truth in Lending, 3.02 (l984). Regulation Z 226.4(c)(7) sets forth special rules which apply only in secured real estate transactions to exclude certain bona fide and reasonable charges from classification as finance charges. The specific exclusions are:

(i) (ii) (iii) (iv)

Fees for title examination, abstract of title, title insurance, property survey, and similar purposes. Fees for preparing deeds, mortgages and reconveyance, settlement, and similar documents. Notary, appraisal, and credit report fees. Amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge.

It is well-established that "only those charges specifically exempted from inclusion in the [sq]finance charge' by statute or regulation may be excluded from it." Burford v. American Finance Co., 333 F.Supp. 1243, 1247 (N.D. Ga. 1971). See also Abbey v. Columbus Dodge, Inc., 607 F.2d 85, 86 (5th Cir. 1979); Campbell v. General Finance Co., 523 F.Supp. 989, 992 (W.D.Va. 1981); Dalton v. Bob Neill Pontiac, Inc., 476 F.Supp. 789, 794 (M.C.N.C. 1979); and Campbell v. Liberty Financial Planning, Inc., 422 F.Supp. 1386, 1388-89 (D.Neb. 1976). See, In re Celona, 90 B.R. 104, 112 (Bkrtcy.E.D.Pa. 1988). Therefore, only those specific exclusions enumerated in Regulation Z 226.4(c)(7) will be excluded from finance charges. The failure to disclose charges which, by the definitions set out in the statute and regulation, are clearly finance charges, misinforms the borrower as to the true cost of credit and frustrates the policy behind the Act. As outlined below, Street has failed to disclose as finance charges four separate charges which meet the law's definition as such and about which there is no factual dispute. 1. Street Failed to Disclose as a Finance Charge its Twenty Five Dollar Fee for an Unnecessary Amortization Schedule Street imposed a twenty five dollar fee on Mr. Homeowner for the ostensible purchase of an amortization schedule. However, as Street made Mr. Homeowner an interest only (i.e.,

non-amortizing) loan, in essence it charged him twenty five dollars for a useless piece of paper. Mr. Homeowner did not request the schedule, nor in fact did he receive it. The charge was simply contained on the loan documents which were presented to him at the closing as a fait accompli. Street cannot dispute that the loan is non-amortizing, nor that the twenty five dollar fee was imposed, but instead contends that it was independently assessed by its lawyer, and as such, cannot be attributed to the lender for purposes of TILA disclosure requirements. This position is completely at odds with the Act and Regulation Z. The concept of the term "finance charge" under TILA has been detailed above. With respect to this particular type of finance charge, the Federal Reserve Board Commentary to Regulation Z states, in relevant part: 226.4(a)(3). Charges by Third Parties.

...[C]harges imposed on the consumer by someone other than the creditor are finance charges (unless otherwise excluded) if the creditor requires the services of the third party. Street also cannot dispute that it required Mr. Homeowner to pay for attorney Lawyer's fees for services he performed on Street' behalf. As the regulation makes clear, the amortization schedule charge imposed by Mr. Lawyer is a finance charge "unless otherwise excluded." This charge could only be otherwise excluded if enumerated in the specific exclusions to Regulation Z, 22.4(c)7, which it clearly is not. Even if it were, it would also have to be bona fide and reasonable. Clearly, a fee for a useless document is not bona fide and reasonable.9 See Commonwealth v. DeCotis, 366 Mass. 234 (1974)(imposing charge for no useful service is unfair and deceptive practice in violation of c. 93A). The amortization schedule charge is a finance charge. This violation alone is sufficient to demonstrate that Mr. Homeowner's rescission was valid. As such, there is no legal or practical reason for further analysis -- Mr. Homeowner is not only entitled to injunctive relief, but to a summary disposition in his favor on his rescission claim. The following violations only serve to further illustrate the validity of his claim.

2. Street Failed to Disclose as a Finance Charge A Future Mortgage Assignment Recording Fee of Ten Dollars Street imposed a ten dollar fee on Mr. Homeowner to pay for the cost of recording its

In drafting Regulation Z to implement the Truth in Lending Act, the Board was concerned that the exclusion of closing costs from the finance charge might be used by unscrupulous creditors to circumvent the requirements of the Act. Accordingly, the phrase "reasonable in amount" was inserted in paragraph (e) of section 226.4 in order to serve as a warning and barrier to those who otherwise might entertain thoughts of evading disclosure requirements by inflating the closing costs. We have been informed that closing costs vary widely in different parts of the country, and it was our intention that reasonableness would be determined by comparing charges of a particular creditor with the prevailing practices of the industry in his locality. In this way, it will be possible to find those creditors who are failing to make proper disclosures.

Excerpts from FRB Letter of March 27, l969 by William C. McMartin, Jr., CCH Consumer Credit Guide, 30,009, Report 27-160 (February 6, l970).

assignment of the mortgage to a third party. This fee is also a finance charge. Regulation Z, 226.4(b)(6). See In re Brown, 106 B.R. 852, 858-859 (Bankr. E.D. Pa. 1989); Cheshire Mortgage Service v. Montes, 223 Conn. 80 (1992). Regulation Z, 226.4(b)(6) states that a finance charge includes "[c]harges imposed on a creditor by another person for purchasing...a consumer's obligation, if the consumer is required to pay the charges in cash as an addition to the obligation...". In the present case, Street required Mr. Homeowner to pay in cash from the loan proceeds a "[charge] imposed on [Street] by another person [namely, an assignee,] for purchasing...[Mr. Homeowner's] obligation...". The Connecticut Supreme Court recently articulated the reasoning and policy supporting the characterization of an assignment recording fee as a finance charge under TILA. In Cheshire Mortgage Service v. Montes, 223 Conn. 80 (1992), the court examined a similar, high interest, short term loan, in which approximately fifteen percent10 of the proceeds were retained by the lender as prepaid charges. The loan was for $43,500 at nineteen percent interest. The lender retained $6,801 in points and closing costs. The loan term was three years, with a balloon payment of $44,075.03 due at the end of the term. Id., at 86. The lender charged the borrowers a thirty two dollar fee for recording a future assignment of the mortgage. Id., at 96.11 As the borrower had asserted its right to rescind, and was appealing a lower court foreclosure judgment, the court engaged in a thoughtful analysis of the issue, concluding that the lender's failure to disclose a mortgage assignment recording fee (whether the assignment was made or not) as a finance charge violated TILA's material disclosure requirements and entitled the borrowers to rescind the loan. The relevant portions of the court's analysis are contained below.
10

As contrasted with the twenty six percent retained here.

Although the mortgage was never, in fact, assigned. Cf. Shroder v. Suburban Coastal Corp., 729 F.2d 1371 (11th Cir. 1984)(court held that failure to include assignment recording fee in finance charge was not a violation of TILA. Unlike this case, Cheshire and Brown, Shroder was an appeal of denial of class action certification, in which the court decried the game of gotcha it intimated the plaintiffs were playing in seeking to hold the lender liable to an entire class for extremely technical violations of the Act, without any apparent damages having been suffered. Id., at 1385.

11

Regulation Z, 226.4(a) defines a finance charge as "the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit." Based on this definition, a fee charged to a borrower to record the future assignment of a mortgage is a finance charge because it certainly is a charge payable directly by the consumer and imposed directly by the creditor as an incident to the extension of credit. This conclusion is bolstered by Regulation Z, 226.4(b)(6) which states that a finance charge includes "[c]harges imposed on a creditor by another person for purchasing . . . a consumer's obligation, if the consumer is required to pay the charges in cash as an addition to the obligation . . . ." In the present case, the plaintiff required the defendants to pay in cash a "[charge] imposed on [the plaintiff] by another person [namely, an assignee,] for purchasing . . . [the defendants'] obligation . . . ." Id., at 97, 98. ...A fee for recording a future assignment of the mortgage does not relate to a perfection of the security interest created by the mortgage. That security interest was perfected when the mortgage itself was recorded....In the present case, the potential assignment of the mortgage to another person would have been unrelated to the loan made to the defendants, but would have related to a separate future transaction between the plaintiff and a buyer of the mortgage loan. Our conclusion is supported by 15 U.S.C. 1605(d) and (e), which exclude certain fees from the definition of finance charge if they are fees "with respect to that transaction." (Court's emphasis.) We conclude, therefore, that a fee charged to a borrower to record the future assignment of a mortgage is a finance charge and that since, in the present case, the charge was paid at the consummation of the transaction, it was a prepaid finance charge. Id., at 99, 100. Having found that the fee should have been disclosed as a finance charge, the court noted that although the amount of money involved was perhaps "minuscule," rescission was nevertheless mandated by TILA's strict liability standard. Thus, the plaintiff failed accurately to disclose and include the future mortgage assignment recording fee in the prepaid finance charge. Since this charge was not included in the prepaid finance charge, the overall finance charge was also underdisclosed. This resulted in a material nondisclosure in violation of TILA and, therefore, the defendants had the right to rescind the May, 1988 loan transaction. We recognize that non-disclosure of a $55 fee may seem minuscule in the context of a $43,500 loan transaction. "However, once the court finds a violation, no matter how technical, it has no discretion with respect to the imposition of liability." Id., at 101-102, quoting Grant v. Imperial Motors, 539 F.2d 506, 510 (5th Cir. 1976). The same rationale applies here. Street violated the Act and failed to honor Mr.

Homeowner's rescission notice informing it of those violations. This is another independent basis for rescission. 3. Street Failed to Disclose Non-excludable Title Fees as Finance Charges

Street charged Mr. Homeowner two hundred fifty ($250.00) dollars for a "full title examination." This fee is excluded from the finance charges and Mr. Homeowner does not contest it. However, Street also charged Mr. Homeowner an additional fifty ($50.00) dollar fee for "updating of title, recording of documents." Street did not disclose which portion of this fee was allocated to the title update and which was allocated to the recording of documents. Street charged Mr. Homeowner for a "full title examination." Having defined the task as such, it is logically estopped from now claiming that the "full" examination had to be "updated" at additional cost. The undisclosed portion of the fee for "updating the title" is not excludable. This is the third independent basis on which Mr. Homeowner's rescission was justified. 4. Street Failed to Disclose Non-excludable Recording Fees as Finance Charges Even, assuming arguendo, that the Court found the title update fee to be excludable under Regulation Z, 226.4(c)(7)(i), the portion of the fifty dollar lump sum fee allocated to the cost of "recording of documents" must be determined to be a finance charge, as Street did not incur any non-reimbursed recording costs. The Federal Reserve Board Official Staff Commentary to Regulation Z prescribes the rule for allocating non-excludable portions of lump sum charges to the finance charge. Regulation Z, 226.4(c)(7) states that:

If a lump sum is charged for several services and includes a charge that is not excludable (from the finance charge under Regulation Z, 226.4(c)(7)), a portion of the total should be allocated to that service and included in the finance charge. The only document recorded in connection with this transaction (see 15 USC 1605(d) and (e), and Cheshire, supra, at 99-100) was the Street mortgage, for which Street imposed a separately itemized twenty five dollar fee.12 As no other documents were recorded, the portion of the fifty dollar lump sum fee allocable to recording of documents cannot be valid, and as such, should have Of course, Street also imposed a separately itemized ten dollar fee for recording the mortgage assignment.
12

been disclosed as a finance charge. Only amounts actually paid to public officials are excludable from the finance charge. Regulation Z, 226.4(e)(1); Abbey v. Columbus Dodge 607 F.2d 85 (5th Cir. 1979) (where, contrary to disclosures, creditor retained and did not pay to public officials an itemized $37.50 "filing fee," the fee was a finance charge). The Federal Reserve Board Official Staff Commentary on Regulation Z, 226.4(a)(3) is unequivocal on this point: Charges imposed on the consumer by someone other than the creditor for services not required by the creditor are not finance charges as long as the creditor does not retain the charges. For example: ... A tax imposed by a state or other governmental body . . . that is payable by the consumer (even if the tax is collected by the creditor) (emphasis added). This is yet another basis upon which Mr. Homeowner's rescission was valid.

5. Street Failed to Disclose the "Consulting Fee" Paid to Easy Cash as a Finance Charges The previous four issues are not susceptible of factual dispute. This fifth issue is subject to such dispute. However, although Street does dispute that there was a de facto requirement that borrowers come to it through Easy Cash or other brokers, the circumstances under which Street paid Easy Cash its "consulting" fee out of the loan proceeds demonstrate that it cannot prevail on this issue. Mr. Homeowner was led to believe from the outset that Easy Cash was the lender. Easy Cash did not inform Mr. Homeowner either that it was a broker and not a lender, or that it would impose a broker's fee for the purported service of arranging the Street loan. Mr. Homeowner had no contact with or even knowledge of Street until he arrived at the closing. There, attorney Lawyer presented Mr. Homeowner with a welter of previously prepared documents, including the so-called "consulting" agreement with Easy Cash. Mr. Homeowner had never seen this agreement before, and had no idea that Easy Cash was a broker and not a lender. He also did not know that Easy Cash would be imposing a fee for its work. Since this loan was made, the Attorney has promulgated mortgage broker and lender regulations which prohibit this type of surprise" "agreement" being foisted on an unwitting borrower

in the confusing midst of a loan closing. 940 CMR 8.05 requires mortgage brokers to fully disclose what they are and how much they will be paid, on a form prescribed by the Attorney General, within three days of the first substantive contact with the consumer, weeks or months before any loan closing will occur. As neither Easy Cash nor Street made equivalent voluntary disclosures to Mr. Homeowner, he signed the agreement because he was led to believe that execution of this "consulting" agreement authorizing Easy Cash's fee of almost ten points was a condition of obtaining the financing. In accordance with the purported agreement, Mr. Lawyer subsequently paid a $2,954.00 broker's fee to Easy Cash. However, this fee was not disclosed to Mr. Homeowner as a finance charge. This failure to disclose the broker's fee as a finance charge violates TILA. Where the lender formally or informally requires the payment of a fee to a broker as a condition of or incident to the granting of a loan, the broker's fee must be included in the finance charge, and therefore also factored into the calculation of the annual percentage rate. 209 CMR 32.4(b)(3); Regulation Z, 226.4(b)(3). As illustrated by the consumer affidavits attached to the Attorney General's Complaint against Street and Easy Cash, it is apparent that this was the regular, de facto practice of these two entities. If "the creditor in the transaction (i.e., the lender) actually imposes and collects the broker's fees, or requires that the broker's services be utilized..." the fee is a finance charge. In re Grigsby, 119 B.R. 479, 486 (Bkrtycy. E.D.Pa. 1990), citing R. Rohner, The Law of Truth in Lending, 3.02[1][c], at 3-12. Here, Easy Cash's consulting services consisted of placing Mr. Homeowner with a lending operation run by a sibling, sharing the same address,13 which provided such onerous financing terms and conditions that it would be difficult to find a more disadvantageous loan. Easy Cash did not perform any service for Mr. Homeowner, rather it did him a substantial disservice. In a similar case, As previously noted, Easy Cash was owned, operated and controlled by William Black, the brother of Susan Black, Street's sole shareholder, officer and director. At all times relevant to this matter, Easy Cash and Street shared the same office address. This relationship is not without legal significance. See, e.g. G.L. c.255, 12F (where relative acts as conduit in credit transaction the creditor is subject to all claims and defenses borrower may assert against the related party "arranger" of credit).
13

In re Dukes, 24 B.R. 404, 407-408, 410-13 (Bkrtcy. E.D. Mich 1982), the court held that, "where an alleged broker performed no services for the borrower and had a very large volume of business with the lender, its fees must be included in the finance charge in that transaction." The broker's fee here is an undisclosed finance charge.

This Case Meets All the Criteria for the Issuance of an Injunction Mr. Homeowner seeks a preliminary injunction to bar Street's threatened foreclosure sale of his home. The standard for the issuance of a preliminary injunction is well-known. The Court must find: (1) (2) (3) (4) that plaintiff will suffer irreparable injury if the injunction is not granted; that such injury outweighs any harm which granting injunctive relief would inflict on the defendant; that plaintiff has exhibited a likelihood of success on the merits; and that the public interest will not be adversely affected by the granting of the injunction.

Planned Parenthood League of Mass. v. Bellotti, 641 F.2d 1006, 1009 (1st Cir. 1981) citing Women's Community Health Ctr., Inc. v. Cohen, 477 F.Supp. 542, 544 (D.Me. 1979); Coastal Fuels v. Carribean Petroleum, 990 F.2d 25, 26 (1st Cir. 1993); Williams v. Poulos, 801 F.Supp. 867 (D.Me. 1992); Project B.A.S.I.C. v. Kemp, 721 F.Supp. 1501 (D.R.I. 1989). The plaintiff has met all these criteria.

Irreparable Harm -- without the injunction Mr. Homeowner may lose his US Trust loan commitment and with it the only realistic chance he has of saving his home. Likelihood of Success on the Merits -- the foregoing analysis demonstrates a substantial likelihood of success on the merits. "[O]nce the court finds a violation, no matter how technical, it has no discretion with respect to liability." In re Wright, supra. at 708; In re Porter v. Mid-Penn Consumer Discount Co., 961 F.2d 1066, 1078 (3d. Cir. 1992); Smith v. Fidelity Consumer Discount Co., supra. at 898. "Any misgivings creditors may have about the technical nature of the requirements should be addressed to Congress or the Federal Reserve Board, not the courts. A strict

interpretation furthers the congressional goal of standardizing terminology and procedures in credit transactions." April v. Union Mortgage Co., 709 F.Supp. 809, 811 (N.D. Ill. 1989); Smith v. No. 2 Galesburg Crown Furnace Corp., 615 F.2d 407, 416 (7th Cir. 1980). Balance of Harms -- if the injunction is not issued, Mr. Homeowner may lose his home. If the injunction is issued, Street is still assured of recouping its principal, it still keeps the already collected two years of payments from Mr. Homeowner at eighteen and nineteen percent interest, and it still keeps the twenty six percent of the original loan principal of $31,000 which it took at the loan closing itself. If Street wins a judgment against Mr. Homeowner for any excess over what it has already taken or is secured in escrow by the injunction, it can still attach his house, so it is fully secured. Public Interest -- the public interest is clearly served by the protection of the borrower's home and the judicial correction of the wrongs perpetrated by Street. The Injunctive Relief Sought in this Case is a Mandatory Result of a Finding That Mr. Homeowner's Rescission Was Valid When a consumer validly rescinds a mortgage pursuant to 15 USC 1635 the mortgage is automatically voided by operation of law. When Mr. Homeowner served Street with his rescission notice, as a matter of statutory law Street's mortgage became void (15 USC 1635(b)) and Street became bound to immediately take the appropriate steps to reflect that fact. Regulation Z, 226.23(d)(2). Specifically, 15 USC 1635(b) provides, in relevant part:

When an obligor exercises his right to rescind under subsection (a): -- He is not liable for any finance or other charge, any security interest given by the obligor becomes void upon such a rescission. -- Within twenty (20) days after receipt of a notice of rescission, the creditor shall return to the obligor any money or property given as earnest money or down payment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction. -- If the creditor has delivered any property on the obligor, the obligor may retain possession of it. Upon the performance of the creditor's obligation under this section, the obligor shall tender the property to the debtor (emphasis added). The procedures prescribed by this subsection shall apply except when otherwise ordered

by a court. Mr. Homeowner's rescission was valid for any of the numerous reasons detailed in the above memorandum. As a consequence of the automatic voiding of Street' mortgage, it has no basis for the threatened foreclosure auction sale, nor for preventing the prospective US Trust refinancing. 15 USC 1635(b), Regulation Z, 226.23(d)(1)).

IV.Conclusion

Given the undisputed violations of the TILA material disclosure requirements shown on the face of the documents before the court, there is more than ample evidence on the record for the court to make a summary determination that the rescission is valid. As a matter of law, the strict liability rule of TILA compels a finding that the rescission was valid and that Street has no secured interest in the Homeowner home. Accordingly, the plaintiff respectfully requests that the court enter a preliminary injunction in the form contained in the Complaint. Respectfully submitted John Homeowner By his attorney Date: January 5, 1993

8.4

Plaintiff's Motion for Partial Summary Judgement

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS EASTERN DIVISION

In Re: John Homeowner Debtor John Homeowner Plaintiff [vs.] Street Financial Services, Inc. Defendant Chapter 13 Case No. 93-XXXXX-ABC Adversary Proceeding No. 94-XXXX PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT The plaintiff, John Homeowner moves for Partial Summary Judgment on his claim that the defendant, Street Financial Services, Inc., violated the federal and state truth in lending acts, 15 USC 1601 et seq, and M.G. L. c. 140D, 1 et seq., (hereinafter TILA) by failing to accurately disclose the finance charges in a November 29, 1990 mortgage loan transaction and by failing to honor Mr. Homeowner's rescission notice.

1. The plaintiff moves for partial summary judgment on five counts of the Verified Complaint. Each of the following counts concerns a charge imposed by Street which was not disclosed as a finance charge, in violation of TILA. a. Street required Mr. Homeowner to pay a two thousand nine hundred fifty four ($2,954.00) dollar brokerage commission to The Easy Cash, Inc., a mortgage broker which shared Street' address and which was run by the brother of Street's president and sole shareholder. (Count VI). Street charged Mr. Homeowner a fee to purchase an amortization schedule for his non-amortizing loan. (Count VIII). Street charged Mr. Homeowner a fee to record an assignment of the mortgage to a third party. (Count XIII).

b. c.

d.

Street charged Mr. Homeowner a fee to "update title after it had already charged him a two hundred fifty ($250.00) dollar fee for "full title examination." (Count XI). Street charged Mr. Homeowner an undisclosed portion of a fifty ($50.00) dollar fee to record documents even though Street imposed separately itemized fees which fully covered all its recording costs. (Count XII).

e.

2. That these fees were imposed on Mr. Homeowner as a condition of or an incident to the extension of the loan at issue is not capable of dispute. All of the fees imposed and the conditions under which they were assessed are shown on Street' own correspondence and loan documents, attached hereto as Exhibits B through E [not reprinted infra].

3. These fees are finance charges as defined by TILA. Failure to accurately disclose the finance charge in a refinancing transaction in which a security interest is taken in the consumer's home entitles the borrower to rescind the loan. 15 USC 1635.

4. Mr. Homeowner rescinded the transaction at issue via correspondence dated January 22, 1993. A copy of Mr. Homeowner's rescission notice is attached to this motion as Exhibit F [not reprinted infra].

5. Street refused to honor Mr. Homeowner's rescission notice. A copy of Street' disavowal of Mr. Homeowner's rescission notice is attached to this motion as Exhibit G [not reprinted infra].

6. To prevail on this motion the plaintiff need only show that the above described charges were finance charges as defined by TILA, that they were not disclosed as such on the required disclosure statement, and that he rescinded the transaction.

The plaintiff has submitted an affidavit in support of his motion, attached hereto as Exhibit A [not reprinted infra]. In addition, the plaintiff has submitted a memorandum in

support of his motion, and an affidavit of counsel regarding the authenticity of other documents submitted herewith as Exhibits.

Wherefore, the plaintiff respectfully requests that this court enter summary judgment in his favor, and award the relief requested in the Verified Complaint, in the form of proposed judgment attached hereto.

Respectfully submitted

John Homeowner By his attorneys

Date: September 6, 1994

8.5

Memorandum in Support of Plaintiff's Motion for Summary Judgement

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS EASTERN DIVISION

In Re: John Homeowner Debtor John Homeowner Plaintiff [vs.] Street Financial Services, Inc. Defendant

Chapter 13 Case No. 93-XXXXX-ABC Adversary Proceeding No. 94-XXXX

PLAINTIFF'S MEMORANDUM IN SUPPORT OF MOTION FOR PARTIAL SUMMARY JUDGMENT

Introduction

Pursuant to the federal and state Truth in Lending Acts (15 USC 1601 et seq; M.G.L. c. 140D 1 et seq., hereinafter referred to as TILA)14, the plaintiff, John Homeowner, seeks summary judgment on his claim that he validly rescinded a second mortgage loan made by the defendant, Street Financial Services, Inc. ("Street"). The defendant Street filed a chapter 7 bankruptcy petition on April 7, 1994. The Trustee has employed the firm of Sharp and Sharp as special counsel to defend this action. Summary judgment is appropriate because the TILA violations which gave rise to at least five of Mr. Homeowner's nine independent grounds for rescission are contained on the face of Street' own correspondence and loan documents. As such these documents are not subject to genuine dispute, and the material facts they contain establish The Massachusetts version of TILA, the Consumer Credit Cost Disclosure Act ("CCCDA"), is virtually identical to the federal law with respect to required disclosures and remedies. As such, the Court of Appeals in Bizier v. Globe Financial Services, Inc., 654 F.2d 1, 2 (1st Cir. 1981) treated the two laws (and the body of case law interpreting them) essentially as one, concluding that "this interplay [between the state and federal acts] will with minor exceptions not require separate analysis of the two acts and we will rely where they do not differ on prior analysis of the more widely considered federal act." Accordingly, for brevity and clarity, the two acts will be treated as one throughout this brief, and simply referred to as TILA, except where the context requires otherwise. For the same reasons, citations will be limited to the federal act, its implementing Regulation Z (12 CFR 226.1 et seq.), and Official Staff Commentary of the Federal Reserve Board, which further interprets the Act. An addendum outlining the parallel citations of the federal and state laws and regulations is attached to this memorandum.
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that Mr. Homeowner's rescission was valid as a matter of law. Each of the five charges enumerated below, which Street required Mr. Homeowner to pay as a condition of closing the loan, are finance charges as defined by TILA. However, Street did not disclose them as such, thereby inaccurately disclosing to Mr. Homeowner the true cost of his loan.

1.

Street required Mr. Homeowner to pay a two thousand nine hundred fifty four ($2,954.00) dollar brokerage commission to The Easy Cash, Inc., a mortgage broker which shared Street' address and which was run by the brother of Street' president and sole shareholder. (Count VI). Street charged Mr. Homeowner a fee to purchase an amortization schedule for his non-amortizing loan. (Count VIII). Street charged Mr. Homeowner a fee to record an assignment of the mortgage to a third party. (Count XIII). Street charged Mr. Homeowner a fee to "update title after it had already charged him a two hundred fifty ($250.00) dollar fee for "full title examination." (Count XI). Street charged Mr. Homeowner an undisclosed portion of a fifty ($50.00) dollar fee to record documents even though Street imposed separately itemized fees which fully covered all its recording costs.15 (Count XII).

2. 3. 4.

5.

A finding that Mr. Homeowner's rescission was valid correspondingly means that Street violated TILA by failing to honor that rescission notice. (Count XVII) 15 USC 1635. Street also committed the following violations of TILA, which are not apparent on the face of the documents and so are disputed by Street. Accordingly, they are not subject to determination on summary judgment. Street failed to provide Mr. Homeowner with the Notice of Right to Cancel required by TILA until at least six days after the loan closing. Affidavit of John Homeowner, 13, attached to the Motion for Summary Judgment as Exhibit A. Street failed to provide Mr. Homeowner with the Disclosure Statement required by TILA until at least six days after the loan closing. Exhibit A, Homeowner Affidavit, 13. Street required Mr. Homeowner to pay an unreasonable and non-bona fide attorney's fee to its closing attorney, who also shared Street' address. Street required Mr. Homeowner to pay an unreasonable and non-bona fide "document preparation fee" to its attorney.
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Accordingly, on summary judgment Mr. Homeowner also prospectively seeks an order directing Street' forfeiture of its conditional entitlement to tender of the net loan proceeds in accordance with TILA's express creditor forfeiture provision. 15 USC 1635(b).

Statement of the Case On November 29, 1990, Street ostensibly loaned John Homeowner thirty-one thousand ($31,000.00) dollars. However, of that thirty one thousand dollars, eight thousand and fifteen ($8,015.00) dollars was immediately retaken by Street, its attorney, and the Easy Cash. Before Mr. Homeowner left the loan closing, twenty-six percent of what he thought he was borrowing was recaptured by these three entities, who all shared the same address. Mr. Homeowner only dealt with Street because he was assured that if he proved he was a good borrower by making payments on time for the two year term of his note, then instead of calling the note and demanding the immediate return of that thirty one thousand dollars, Street would make him a long term, low interest rate loan. Mr. Homeowner kept up his end of the bargain, making regular payments on time for two years. But Street refused to even discuss the promised new loan, called the note and attempted to foreclose on Mr. Homeowner's home. Exhibit A, Homeowner Affidavit. The Attorney General has alleged in a lawsuit that Street and its mortgage broker, Easy Cash, engaged in these types of lending practices on a regular basis, preying on substantial numbers of unsophisticated Massachusetts consumers by deceptively inducing them to enter into short term, high interest rate loans packed with exorbitant fees, most notably thousands of dollars paid to Easy Cash from the Street loan proceeds for alleged "consulting fees." See Exhibit D to the Adversary Complaint, Complaint of the Attorney General in Commonwealth v. Easy Cash, Inc., Street Financial Services, Inc., and William Black, Suffolk Superior Court, Civil Action No. 91-xxxx, and accompanying consumer affidavits filed therewith. It is for these reasons that Mr. Homeowner rescinded his Street loan and is now seeking final relief from this court to enforce his rescission rights.

Statement of Facts as to Which there is No Genuine Dispute 1. The Plaintiff, John Homeowner, is a natural person who resides at 10 Joseph Street, Boston, Massachusetts. Verified Complaint, 3. 2. Mr. Homeowner has occupied this home with his family of six for sixteen years. Verified Complaint, 3. 3. Mr. Homeowner is a debtor in this Court, having filed a petition pursuant to Chapter 13 of the Bankruptcy Code on October 27, l993. 4. Defendant, Street Financial Services, Inc. is a corporation with a principal place of business at 100 Natick Road, Worcester, MA. Answer, 4. 5. Mr. Homeowner applied through The Easy Cash Inc. ("Easy Cash") for a second mortgage loan on his home. Exhibit A, Homeowner Affidavit, 3; Verified Complaint, 8,9. 6. Easy Cash submitted Mr. Homeowner's loan application to Street. Exhibit A, Homeowner Affidavit, 4, 7; Verified Complaint, 10-13. 7. Easy Cash, now defunct, was a mortgage broker, which collected a broker's fee or "consulting fee" drawn from the proceeds of a loan Street made to Mr. Homeowner on November 29, 1990. Exhibit D, Truth in Lending Disclosure Statement. 8. Street' sole shareholder, officer and director, Susan Black is the sister of William Black, the sole shareholder, officer and director of Easy Cash during its existence. The siblings, at all times relevant hereto, had the same address, 100 Natick Road, Worcester, Massachusetts. Answer, 17. 9. Mr. Homeowner did not sign any loan brokerage or commission agreement with Easy Cash at any date prior to the closing. Exhibit A, Homeowner Affidavit, 8. 10. On or about November 29, 1990, Street loaned Mr. Homeowner thirty-one thousand ($31,000.00) dollars, secured by a second mortgage on his home. Answer, 14. 11. The loan terms were as follows: a. Upwardly Adjustable Interest rate: The note rate was 15.99% per annum for the first three months of the loan, then was to be adjusted to the greater of 18% per annum or the Bank of New England prime rate plus ten percentage points. The

loan could only be adjusted upward at the first change date. The rate could not decrease, and had to increase by at least two points, to 18%, after the first three months. The loan did contain a 36% percent per annum rate ceiling. At the change date the rate was increased to nineteen (19%) per annum. The annual percentage rate was disclosed as 26.25%.16 A copy of the Note is attached to the Motion for Summary Judgment as Exhibit B. b. Monthly Payments: The loan was non-amortizing, payments were of interest only. Monthly payments for the first three months were four hundred thirteen dollars and eight cents ($413.08). Payments thereafter were of four hundred ninety dollars and eighty three cents ($490.83). Loan term: Two years. A balloon payment of the entire principal and any accrued interest was due November 28, l992. Points: Street collected and retained an origination fee of one percentage point, three hundred ten ($310.00) dollars. Rate Buydown: Street collected and retained two thousand nine hundred eighty one ($2,981.00) dollars as a "rate buydown." Broker's Fees: Street required that Mr. Homeowner pay Easy Cash a brokerage fee as a term and condition of making this loan to him. A copy of a November 6, 1990 letter from Susan Black to John Homeowner, setting out this condition, is attached to the Motion for Summary Judgment as Exhibit C. Street collected two thousand nine hundred and fifty four ($2,954.00) dollars of the loan proceeds and disbursed them to Easy Cash, as a "Financial Consultant."

c. d. e. f.

12. Street made more than six mortgage loans to consumers in 1990. 13. Mr. Homeowner used the funds from the Street loan to pay off some consumer debt and to make repairs to his house. Exhibit A, Homeowner Affidavit, 12; Exhibit E, Loan Accounting and Disbursement Authorization. 14. At the closing, Street had Mr. Homeowner sign a document entitled "Disclosure Statement." Answer, 33. A copy of this document is attached to the Motion for Summary Judgment as Exhibit D. 15. At the closing, Street had Mr. Homeowner sign a document entitled "Loan Accounting and Disbursement Authorization." A copy of this document is attached to the Motion for Summary Judgment as Exhibit E.

Since the interest rate was increased by three points after only three months, the effective APR for all but the first three months of the loan was in excess of 29%.

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16. Street also imposed the following charges upon Mr. Homeowner at the closing, deducting each from the loan proceeds:

a. b. c. d. e.

twenty five ($25.00) dollars for "Amortization Schedules;" ten ($10.00) dollars for the cost of recording an "Assignment of Mortgage;" two hundred fifty ($250.00) dollars for a "Full Title Examination;" fifty ($50.00) dollars upon Mr. Homeowner for "Updating of Title; Recording of Documents;" and twenty five ($25.00) dollars for recording its mortgage.

All of these charges are shown on Exhibit E.

17. On November 30, 1990, Street recorded its mortgage on Mr. Homeowner's home. 18. Street recorded an Assignment of this mortgage on December 27, 1990. The obligation was assigned to Third Mortgage Corp. 19. The only document recorded in connection with this transaction to perfect Street security interest was the mortgage, for which a separate $25 fee was imposed by the Register of Deeds. G.L. c. 262, 38. 20. Mr. Homeowner regularly made all payments on the loan. Exhibit A, Homeowner Affidavit, 14. 21. In mid-summer, l992, with the two year balloon coming due, Mr. Homeowner sought to convert the Street loan to a long term loan. Exhibit A, Homeowner Affidavit, 14. 22. Street informed Mr. Homeowner that it would not make such a loan. Exhibit A, Homeowner Affidavit, 14; see also Answer 75. 23. On or about January 22, 1993 Mr. Homeowner, through his attorney, notified Street that he was exercising his right to rescind the transaction pursuant to 15 U.S.C. 1635 and M.G.L. c. 140D, 10. A copy of the letter by which Mr. Homeowner exercised his rescission rights is attached to the Motion for Summary Judgment as Exhibit F. See Answer, 78.

24. Street refused to honor Mr. Homeowner's rescission notice. A copy of the letter by which Street disavowed the rescission notice is attached to the Motion for Summary Judgment as Exhibit G. 25. Attempts to reach a non-adversarial settlement of the rescission claim encompassed the following nine months, during which Mr. Homeowner sought alternative financing. During this time, Street commenced foreclosure proceedings. 26. In May, 1993, Mr. Homeowner was selected in a lottery held by USTrust Company as a prospective recipient of refinancing monies to be used to save his home from Street' threatened foreclosure. Exhibit A, Homeowner Affidavit, 15, 16. 27. On August 12, 1993 USTrust issued Mr. Homeowner a loan commitment for forty five thousand ($45,000.00) dollars. A copy of this letter is attached to the Motion for Summary Judgment as Exhibit H. 28. This USTrust loan was sufficient to pay off Mr. Homeowner's first mortgage (of approximately ten thousand ($10,000.00) dollars) as well as the principal amount of the Street second mortgage of thirty one thousand dollars. Exhibit A, Homeowner Affidavit, 18. 29. The USTrust loan commitment locked in a fixed interest rate of six and one-eighth (6.125%) percent. Exhibit H. 30. Mr. Homeowner proposed to pay Street $31,000 out of the prospective USTrust loan proceeds. Exhibit A, Homeowner Affidavit. Exhibit A, Homeowner Affidavit, 19, 20. 31. A loan closing was scheduled to take place on or about October 20, l993. Exhibit A, Homeowner Affidavit, 21. 32. When Street' payoff communication was transmitted to USTrust it contained a demand of almost forty two thousand ($42,000.00) dollars. This demand included over ten thousand ($10,000.00) dollars of charges in addition to loan principal for ostensibly accrued interest and legal fees. The demand was accompanied by a condition that Mr. Homeowner release his rescission claim and all other claims he had against Street. Answer, 82. A copy of the Street payoff communication and demand for release, addressed to USTrust's settlement

agent, is attached to the Motion for Summary Judgment as Exhibit I. 33. The Street demand exceeded by seven thousand ($7,000.00) dollars the USTrust proceeds which were to be available. Exhibit A, Homeowner Affidavit, 23. 34. Mr. Homeowner did not have the seven thousand ($7,000.00) dollars in cash which would have been necessary to allow a closing. Exhibit A, Homeowner Affidavit, 2. 35. When the closing was aborted, Street then sought to press ahead with a foreclosure auction sale of Mr. Homeowner's home, scheduled for October 28, 1993. 36. On October 27, 1993 Mr. Homeowner filed this chapter 13 proceeding, on an emergency basis, to save his home. Prior Proceedings This adversary proceeding was filed on January 6, 1994. On January 14, 1994 the Court issued a preliminary injunction requiring the discharge of Street's second mortgage to allow the closing of the prospective USTrust first mortgage loan. Pursuant to the Court's order, the parties entered into a Stipulation and Escrow Agreement filed with and approved by the Court, the terms of which required that the net proceeds of the USTrust closing be held in escrow pending a final determination by the Court of the adversary proceeding. Copies of the Court's Order, the Stipulation and the Escrow Agreement are attached to the Motion for Summary Judgment as Exhibits J, K, and L respectively. The USTrust refinancing occurred on March 17, 1994. The sum of $34,847.73 was placed in escrow. On April 7, 1994, Street filed its Chapter 7 bankruptcy petition.17 On August 11, 1994 Judge Boroff granted Mr. Homeowner's motion for relief from stay in order to conclude this adversary proceeding.

For inexplicable reasons, Street listed Mr. Homeowner without an address on its creditor matrix. As a consequence, Mr. Homeowner never received any notice of the chapter seven filing from Street until his counsel specifically requested Street's bankruptcy schedules. Mr. Homeowner learned of the Street chapter seven filing only through courtesy correspondence provided to his counsel.

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Argument Summary Judgment Is Proper In This Case The debtor is entitled to summary judgment where the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c) (made applicable to adversary proceedings in the Bankruptcy Court by Rule 7056 of the Federal Rules of Bankruptcy Procedure). Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986); Committee for the First Amendment v. Campbell, 962 F.2d 1517 (10th Cir. 1992); U.S. v. Nanlo Inc., 519 F.2d 723 (1st Cir. 1981). A motion for summary judgment may be granted in whole or in part as to the various issues in the case. Weva Oil Corp. v. Belco Petroleum Corp., 68 F.R.D. 663 (D. W.Va. 1975). Based on the undisputed facts set forth above, Mr. Homeowner is entitled to judgment as a matter of law on his truth in lending claims.

The Truth in Lending Act is Designed to Protect Consumers and Achieves its Remedial Purpose Through a System of Strict Liability The federal Truth in Lending Act was enacted in 1968 to regulate the disclosure of the terms of consumer credit transactions and to "aid the unsophisticated consumer so that he would not be easily misled as to the total costs of financing." Thomka v. A.Z. Chevrolet, Inc., 619 F.2d 246, 248 (3d Cir. 1980); Mourning v. Family Publications Service, Inc., 411 U.S. 356, 363-69, 93 S.Ct. 1652, 1657-60, 36 L.Ed.2d 318 (1973). By requiring a set of uniform disclosures of credit terms, the Act allows consumers to compare different financing options and their costs. 15 U.S.C. 1601; Ford Motor Credit v. Millhollin, 444 U.S. 555, 559 (1980). Prior to its enactment, consumers had no easy way to compare various credit options because creditors were not required to use a uniform method of calculating interest. TILA is a remedial statute designed to protect consumers, who are not on an equal footing with creditors, either in bargaining for credit terms or in knowledge of credit provisions. Bizier v. Globe Financial Services, Inc., 654 F.2d 1 (lst Cir. 1981); Mechanics Bank of Worcester v.

Killeen, 377 Mass. 100 (1979); Shepard v. Finance Associates of Auburn, Inc., 355 Mass. 182 (1974). It was thought that "through TILA, Congress [could] remedy the 'divergent and often fraudulent practices by which credit customers were apprised of the terms of the credit extended to them.'" Smith v. Fidelity Consumer Discount Co., 898 F.2d 896, 898 (3d. Cir. 1988). As such, it is to be liberally construed in favor of consumers. Shepard, 355 Mass. 182; citing N.C. Freed Co. Inc. v. Governors of Fed. Reserve Sys., 473 F.2d 1210, 1214 (2d Cir. 1973), cert. denied, 414 U.S. 827 (1973); Thomka v. A.Z. Chevrolet, Inc., 619 F.2d 246, 248 (3d Cir. 1980). To encourage compliance, TILA violations are measured by a strict liability standard "strict liability in the sense that absolute compliance is required and even technical violations will form the basis for liability." Shepeard v. Quality Siding & Window Factory, Inc., 730 F. Supp. 1295, 1299 (D. Del. 1990); In re McElvany, 98 B.R. 237, 240 (Bankr. W.D. Pa. 1989). This means that "technical or minor violations of TILA, or Reg. Z, as well as major violations impose liability on the creditor and entitle the borrower to rescind [the loan]." Smith v. Wells Fargo Credit Corp., 713 F. Supp. 354, 355 (D. Ariz. 1989); Jackson v. Grant, 890 F.2d. 118, 120 (9th Cir. 1989); Semar v. Platte Valley Fed. S & L Assoc., 791 F.2d 699, 704 (9th Cir. 1986). A creditor who fails to comply with TILA in any respect is liable to the consumer under the statute, regardless of the nature of the violation or the creditor's intent. Thomka v. A.Z. Chevrolet Inc., 619 F.2d 246, 249-50 (3d Cir. 1980). The first circuit court of appeals has unequivocally stated that any violation of TILA, regardless of the technical nature of the violation, must result in a finding of liability against the lender. Bizier v. Globe Financial Services, Inc., 654 F.2d 1, 3 (lst Cir. 1981). Because TILA is a strict liability statute, it is no defense to TILA that the consumer was not misled or deceived by the violation, did not rely on the violation, or was not injured. Griggs v. Provident Consumer Discount Co., 680 F.2d 927, 932-33 (3d Cir.), vacated on other grnds, 459 U.S. 56, 103 S.Ct. 400, 74 L.Ed.2d 225 (1982). See also Porter v. Mid-Penn Consumer Discount, 961 F. 2d 1066 (3rd Cir. 1992); In re Norris, 138 B.R. 467 (E.D. Pa. 1992). This strict compliance rule is what makes TILA so effective. "This strict interpretation of

the TILA has largely been responsible for the TILA's success in achieving widespread compliance with its requirements." In re Brown, 106 B.R. 852, 857 (Bankr. E.D. Pa. 1989).

The Rescission Remedy Protects Consumers and Provides Congress With a Self-Enforcement Mechanism to Ensure the Act's Viabilit TILA subjects violators to claims for statutory damages, actual damages18 and attorneys' fees for disclosure violations. 15 U.S.C. 1640. In addition, where a non-purchase money security interest is taken in the borrower's home, the borrower has the unqualified right to "rescind," or cancel the loan for three days after the transaction. A creditor's failure to accurately make any of the five "material disclosures" gives the borrower an extended19 right to rescind the transaction. 15 USC 1635. The "material disclosures" are the annual percentage rate (APR), the finance charge, the amount financed, the total of payments, and the payment schedule. 15 USC 1602(u), Regulation Z, 226.23(a)(3), n.48. When a consumer rescinds a loan, TILA requires the creditor to perform its statutory obligation (i.e., discharge the mortgage and return all monies paid on the loan) before the borrower's duty to return the net proceeds of the loan is engaged. As a result, "because rescission is such a painless remedy under the statute, placing all burdens on the creditor, it acts as an important enforcement tool, insuring creditor compliance with TILA disclosure requirements." Williams v. Homestake Mortgage Company, 968 F. 2d 1137, 1140 (11th Cir. 1992). The strength of this protection reflects the strength of Congress' desire to ensure that homeowners are informed of the true cost of their mortgage loans. The House of Representatives report accompanying TILA provides that:

Actual damages include undisclosed finance charges. In Re Russell, 72 B.R. 855, 864 (Bkrtcy. E.D. Pa. 1987). This right extends for three years under the federal statute (15 USC 1635), four years under the state law (G.L. c. 140D, 10).
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... [f]or the relatively unsophisticated consumer, particularly those of modest means, [TILA] . . . will provide their only protection against unscrupulous merchants or lenders. . . . These provisions not only will protect the consumer, but will further protect the honest businessman from unethical forms of competition engaged in by some unscrupulous creditors who prey upon the poor through deceptive credit practices." H. Rep. No. 1040, 90th Cong., 1st Sess. 18, reprinted in 1968 U.S. Code Cong. & Admin. News 1975-76. TILA was amended in 1980, at least partially in response to creditor complaints that it was unfair to apply a strict liability standard, especially to rescindable transactions, without some tolerance for error and clear guidance as to what was and was not a rescindable violation. The "material disclosures" were added to the Act as part of TILA's 1980 amendment in order to put creditors "in a better position to know whether a consumer may properly rescind a transaction." S. Rep. No. 368, 98th Cong. 2d Sess. at 29, reprinted in 1980 U.S. Code Cong. and Admin. News 236, 264. Here, each of the five bases for rescission involve undisclosed finance charges. One of the ways in which the amended Act helped creditors evaluate whether a loan could be rescinded was Regulation Z's addition of an error tolerance for finance charge disclosures. The old Regulation Z contained no tolerances within which a creditor could safely err in computing a finance charge, and many courts took the view that any understatement of the finance charge was a material nondisclosure. The amended Regulation Z provides a ten dollar error tolerance. Reg. Z 226.18(d), n. 4120 Accordingly, "[a]ny discrepancy of more than $10 above or below the true finance charge is considered inaccurate in a transaction involving more than $1,000..." and entitles the borrower to rescind. Abel v. Knicherbocker Realty Trust, 1994 U.S. Dist. LEXIS 2946 *5 (D.Md. 1994).

Any Finance Charge Disclosure Error of More than Ten Dollars Entitles the Borrower to Rescind the Loan The Supreme Court has directed the courts to unwaveringly follow the direction There is a similar tolerance of one eighth of one percent for the APR. Regulation Z, 226.22(a)(2).
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contained in Regulation Z. Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 100 S. Ct. 789, 63 L.Ed.2d 22 (1980)(Courts should give high degree of deference to Federal Reserve Board interpretation of TILA as contained in Regulation Z and the Official Staff Commentary. This interpretation is dispositive unless "demonstrably irrational."). Accordingly, in cases involving the non-disclosure of finance charges the courts have uniformly held that the misdisclosure of even nominal fees, "like any technical but clear violation of TILA,... trigger[s] the full panoply of remedies available to the consumer under TILA when a creditor understates the finance charge." In re Brown, 106 B.R. 852, 861 (Bankr. E.D. Pa. 1989).21 The most recent federal articulation of this rule of law is contained in Rodash v. AIB Mortgage Co., 16 F. 3d 1142 (11th Cir. 1994). In Rodash, the 11th Circuit Court of Appeals held that the failure to disclose a twenty-two ($22.00) dollar Federal Express fee as part of the finance charge violated TILA as a matter of law and thereby entitled the plaintiff to rescind the loan. The court explained that the Federal Express fee was "undoubtedly part of the finance charge" because it met Regulation Z's definition and did not meet any of its exclusions. The court noted that its finding was "buttressed" by the public policy behind TILA, which is to prevent lenders from burying "an costs of credit" and thereby hindering "consumers in comparing

Similarly, the Courts of the various jurisdictions have consistently held that debtors are entitled to rescind their loans when other material disclosures are not made properly, regardless of the dollar amount of the inaccuracy or the ostensibly technical nature of the offense. The caselaw on the right to rescind for seemingly minor violations is too great to be included in the body of this brief. See, e.g., Shepeard v. Quality Siding & Window Factory, Inc., 730 F. Supp. at 1304 (rescission based on lender's failure to disclose payment schedule in writing upheld despite admission of oral disclosure); Smith v. Wells Fargo Credit Corp., 713 F. Supp. at 356 (creditor failed to provide debtor with a new notice of right to rescind when the original loan documents were amended to correct clerical error); Semar v. Platte Valley Fed. S & L Assoc., 791 F.2d 699, 704, (9th Cir. 1986)(debtor could rescind loan because the notice of right to rescind did not list the actual date of expiration, but read "three business days after July 16" instead); Reynolds v. D & N Bank, 792 F.Supp. 1035, 1038 (E.D. Mich. 1992); New Maine Nat. Bank v. Gendron, 780 F.Supp. 52, 55 (D.Me. 1991); Mayfield v. Vanguard Sav. & Loan Ass'n, 710 F.Supp. 143, 145 (E.D. Pa 1989)(The Courts in each allowed rescission because the expiration date for the Notice of Right to Rescind was left blank); Nichols v. Mid-Penn Consumer Discount Co., 1989 U.S. Dist. Lexis 4796 at 6; Mayfield v. Vanguard, supra. at 146; In re Abele, 77 B.R. 460, 465 (Bankr. E.D. Pa. 1987)(Security interests held by creditors in the property of debtors were not adequately disclosed). See also Memorandum in Support of Motion for Preliminary Injunction, at p. 15, for further citations.

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credit terms and making the best informed decision on the use of credit." Id. at 1148 (emphasis added).

The following cases illustrate uniform application of this rule of law. In all of these cases, the debtor was held entitled to rescind the loan based on the undisclosed finance charge. Plaintiff's counsel are aware of no relevant cases to the contrary.

!Brodo v. Bankers Trust Co., 847 F. Supp. 353,358 (E.D. Pa. 1994). Lender charged
recording fee of $35 to borrower, although actual recording fee was only $25. "The $10 overcharge in the amount financed therefore constitutes a material TILA violation which, standing alone, entitled plaintiff to rescind the transaction."

!Steele v. Ford Motor Credit Company, 783 F.2d 1016, 1018 (11th Cir. 1986). Lender
failed to disclose unearned interest of $24 as a finance charge.

!In re Brown, 106 B.R. 852, 859 (Bankr. E.D. Pa. 1989). Lender failed to disclose a $25
mortgage assignment fee as a finance charge.

!Cheshire Mortgage Service, Inc. v. Montes, 223 Conn. 80, 99-100 (1992). Lender
failed to disclose a $32.50 mortgage assignment fee as a finance charge.

!Therrien v. Resource Financial Group, Inc, 704 F. Supp. 322, 327 (D.N.H. 1989).
Lender failed to disclose double charge of $56 for recording and discharge fees.

!Harris v. Tower Loan of Mississippi, Inc., 609 F.2d 120, 122 (5th Cir. 1980). Lender
failed to disclose a $68 fire insurance fee as a finance charge.

!In re Steinbrecher, 110 B.R. 155, 162 (Bankr. E.D. Pa. 1990). Lender failed to disclose
a $165 fee for fire insurance as a finance charge.22 Cf. Malfa v. Household Bank, FSB, 825 F. Supp. 1018 (S.D. Fla. 1993)( no rescindable violation where lender itemized and disclosed fees which were prescribed by law, but on the wrong form. The lender itemized the fees on the HUD - 1 Settlement Statement but not on the TILA disclosure statement. The court found that disclosure on the wrong form in this case amounted to only a technical violation of TILA. Although the Malfa court did not specifically cite them, this holding is supported by two TILA provisions: Regulation Z 226.17, n. 38 which states that recording fees may be disclosed separately from other disclosures, and Commentary
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This inviolate rule of law was most recently applied in Massachusetts in Mayo v. Key Financial Services, Inc., No. 92-6441-D, slip op. (Suffolk Superior Court June 22, 1994). A copy of the Mayo decision is attached as an addendum to this memorandum [not reprinted infra]. In Mayo the Superior Court granted summary judgment on the plaintiffs' rescission claims, based in part on the lender's failure to disclose $28.00 in assignment fees and overcharged recording fees as a finance charge. This most recent decision is simply the latest and most local reiteration of the unanimous and unequivocal rule of law on which TILA rescission claims for finance charge misdisclosure is based: the failure to disclose a finance charge of more than ten dollars entitles the borrower to rescind as a matter of law.23 See also Ford Motor Credit Co. v. Milhollin, 444 U.S. 555 (1980). "There is no such thing as substantial compliance with the Truth in Lending Act, either you are or you aren't." Ranck v. Fulton Bank, 1994 WL 37744 *3 (E.D. Pa. 1994).

Street Violated TILA By Failing To Disclose All Finance Charges To Mr. Homeowner As set out by the Rodash court, the finance charge analysis is very simple. First, determine whether the charged fee fits into the general definition of a finance charge set forth in Reg. Z, 226.4(a). If it does, then determine whether it is nevertheless specifically excluded from the finance charge. Reg. Z, 226.4 (c), (d), and (e). If the charge does not fall under any listed exclusion, it is a finance charge. Rodash, 16 F. 3d at 1148-49.

226.18 (o)-1 which provides that such information is sufficiently disclosed if it is included on a RESPA statement such as the HUD -1 form used in this case. See discussion in Mayo v. Key Financial Services, slip op. at 14-15. This result is also compelled by elementary rules of statutory construction. Since the regulation specifically sets forth margins for error in disclosing the finance charge and APR, these explicit directives cannot be altered by any implied intent to the contrary. Expressio unius est exclusio alterius (expression of one thing is the exclusion of another). Sutherland, Statutory Construction 47.23 (4th Ed.).
23

Regulation Z, 226.4(a) defines the term finance charge as: ...the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction. Charges imposed on the borrower by parties other than the lender must also be disclosed as part of the finance charge so long as they fit this definition. Rodash, 16 F. 3d at 1147-48 (Federal Express charges); Brodo v. Bankers Trust Co., 847 F. Supp. 353,357 (E.D. Pa. 1994)(lawyer's fees); First Acadiana Bank v. FDIC, 833 F. 2d 548, 550-51 (5th Cir. 1987)(lawyers' fees). Regulation Z 226.4(c)(7) sets forth special rules which apply only in secured real estate transactions to exclude certain charges from classification as finance charges. Only charges which are bona fide and reasonable in amount may be excluded. The specific exclusions are:

(i) (ii) (iii) (iv)

Fees for title examination, abstract of title, title insurance, property survey, and similar purposes. Fees for preparing deeds, mortgages and reconveyance, settlement, and similar documents. Notary, appraisal, and credit report fees. Amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge.24 Any exclusions from the finance charge should be narrowly construed. Equity

Plus Consumer Finance and Mortgage Company Ltd. v. Howes, 861 P. 2d 214, 217 (N.M. 1993). See also In re Celona, 90 B.R. 104 (Bankr. E.D. Pa. 1988). It is well-established that "only those charges specifically exempted from inclusion in the 'finance charge' by statute or regulation may be excluded from it." Buford v. American Finance Co., 333 F. Supp. 1243, 1247 (N.D. Ga. 1971). See also, Abbey v. Columbus Dodge, Inc., 607 F.2d 85, 86 (5th Cir. 1979); Campbell v. General Finance Co., 523 F. Supp. 989, 992 (W.D.Va. 1981); Dalton v. Bob Neill Other specific exclusions are detailed in Reg. Z, 226.4(c), (d) and (e). These include, inter alia, application fees, late fees, sellers' points, certain insurance premiums and security interest taxes and fees prescribed by law and actually paid.
24

Pontiac, Inc., 476 F. Supp. 789, 794 (M.D.N.C. 1979); and Campbell v. Liberty Financial Planning, Inc., 422 F. Supp. 1386, 1388-89 (D. Neb. 1976). Applying this analysis to the five enumerated charges which this motion challenges shows that they are each finance charges. Accordingly, Mr. Homeowner was entitled to rescind the loan on at least five discrete grounds, as described below.

Street Required that Mr. Homeowner Pay a Broker's Fee to Easy Cash as a Term and Condition of the Loan; Therefore, Its Failure to Disclose this Fee as a Finance Charge Violates TILA Street made payment of the Easy Cash broker's fee a term and condition of the loan. Exhibit C, November 6, 1990 letter.25 As such, it is a finance charge. Fees imposed on the borrower by the lender as an incident to or a condition of the extension of credit ... are finance charges. Reg. Z 226.4(a). The Official Staff Commentary (226.4(b)-3) uses broker's fees as an illustrative example: . . . charges imposed by someone other than the creditor are finance charges (unless otherwise excluded) if the creditor requires the services of the third party. For example: A fee charged by a loan broker if the consumer cannot obtain the same credit terms from the creditor without using the broker. Required broker's fees are not contained in any of Regulation Z's specific exclusions. As such, the Easy Cash broker's fee is a finance charge. When "the creditor in the transaction actually imposes and collects the broker's fees, or requires that the broker's services be utilized," the fee becomes a finance charge. In re Grigsby, 119 B.R. 479, 486 (Bankr. E.D.Pa. 1990), citing R. Rohner, The Law of Truth in Lending, 3.02[1][c], at 3-12. See also Hunter v. Richmond Equity, 1987 WL 109703 at 3 (N.D. Ala.) ("the broker's fee was a charge which was paid by the consumer and which was imposed by the creditor as an incident to the extension of credit"); In re

Although Mr. Homeowner disputes having ever seen or received this letter prior to this litigation, as Street has submitted the document in opposition to Mr. Homeowner's rescission claim, for the purposes of this proceeding Street is estopped from denying its authenticity.

25

Dukes, 24 B.R. 404, 407-408 (Bankr. E.D. Mich 1982)("where an alleged broker performed no services for the borrower and had a very large volume of business with the lender, its fees must be included in the finance charge in that transaction."26

Street's failure to disclose the broker's fee as a finance charge entitled Mr. Homeowner to rescind the loan. This violation alone is sufficient to demonstrate that Mr. Homeowner's rescission was valid. As such, there is no legal or practical reason for further analysis -- Mr. Homeowner is entitled to a summary disposition in his favor on his rescission claim. The following violations only serve to further illustrate the validity of his claim.

Street Failed to Disclose as a Finance Charge its Twenty-Five Dollar Fee for an Unnecessary Amortization Schedule Street imposed a twenty-five dollar fee on Mr. Homeowner for the ostensible purchase of an amortization schedule. However, as Street made Mr. Homeowner an interest only (i.e., non-amortizing) loan, an amortization schedule would be at worst deceptive, and at best of absolutely no use to him. Mr. Homeowner did not request the schedule, nor in fact did he receive it. Exhibit A, Homeowner Affidavit. The charge was simply contained on the loan documents which were presented to him at the closing as a fait accompli. Street cannot dispute that the loan is non-amortizing, nor that the twenty-five dollar fee was imposed, but instead has contended that it was independently assessed by its lawyer, and as such, cannot be attributed to the lender for purposes of TILA disclosure requirements. This position is completely at odds with the Act and Regulation Z. The concept of the term "finance charge" under TILA has been detailed above. With respect to this particular type of finance charge, the same Federal Reserve Board Commentary

Cf. Johnson v. Fleet Finance, Inc., 4 F.3d 946, 949-950 (11th Cir. 1993)(fee held not finance charge because debtor sought assistance of broker and creditor did not require that services of the broker be utilized).

26

section which applied to the broker's fee demonstrates that this fee is a finance charge as well: 226.4(a)(3). Charges by Third Parties. ...[C]harges imposed on the consumer by someone other than the creditor are finance charges (unless otherwise excluded) if the creditor requires the services of the third party. Like any other fees, fees charged by an attorney must be disclosed as part of the finance charge unless the fee falls under a specific statutory exclusion. Equity Plus, 861 P.2d at 21727; Mayo, slip op. at 5; Brodo, 847 F. Supp. at 357 (portion of lawyer's fees attributable to non-excludable work is finance charge); First Acadiana Bank v. FDIC, 833 F. 2d 548, 550-51 (5th Cir. 1987) (required lawyers' fees). Street cannot dispute that it required Mr. Homeowner to pay for attorney Lawyer's fees for services he performed on Street' behalf. As the regulation makes clear, the amortization schedule charge imposed by Mr. Lawyer is a finance charge "unless otherwise excluded," which it clearly is not. Even, assuming arguendo, that the fee were excluded, it would still have to be bona fide and reasonable. Without question, a fee for a useless document is not bona fide and reasonable.28 See Commonwealth v. DeCotis, 366 Mass. 234 (1974)(imposing charge for no useful service is unfair and deceptive practice in violation of c. 93A). Even if Street had given Mr. Homeowner an amortizing loan, the cost of an amortization

The Equity Plus court held that because the evidence in that case did not establish that all of the attorney's fees were properly excludable from the finance charge, a TILA violation had occurred. Equity Plus, 861 P. 2d at 217.
28

27

In drafting Regulation Z to implement the Truth in Lending Act, the Board was concerned that the exclusion of closing costs from the finance charge might be used by unscrupulous creditors to circumvent the requirements of the Act. Accordingly, the phrase "reasonable in amount" was inserted in paragraph (e) of section 226.4 in order to serve as a warning and barrier to those who otherwise might entertain thoughts of evading disclosure requirements by inflating the closing costs .... In this way, it will be possible to find those creditors who are failing to make proper disclosures.

Excerpts from FRB Letter of March 27, l969 by William C. McMartin, Jr., CCH Consumer Credit Guide, 30,009, Report 27-160 (February 6, l970).

schedule would still be a finance charge. In addition to the list of exclusions, TILA also includes a list of examples of finance charges. Reg. Z, 226.4(b). An amortization schedule falls squarely into the category of "costs of doing business" which the Commentary explicitly deems a finance charge "if the creditor separately imposes a charge on the consumer to cover [the] costs." Commentary 226.4(a)(2). The fee could also be construed to be a "service, transaction, activity [or] carrying charge" all defined as finance charges by TILA. 15 U.S.C. 1605(a)(2); 12 C.F.R. 226.4(b)(2). See Rodash, supra, at 114-48 Finally, on an amortizing loan, an amortization or other payment schedule would provide Street with information for use in its preparation of the disclosure statement. The Commentary to Regulation Z of TILA expressly states that "[f]ees for preparing a TILA disclosure statement" must be included in the finance charge. Commentary, 226.4(c)(7); Brodo, 847 F. Supp. at 357. A fee for an amortization schedule, which on an amortizing loan is "inextricably related to the preparation of the disclosure statement" is part of the finance charge. Cohen v. Regal Funding Corporation, No. 94-1158, slip op. (Bankr. E.D. Mass. August 22, 1994). Street Failed to Disclose as a Finance Charge A Future Mortgage Assignment Recording Fee of Ten Dollars Street imposed a ten ($10.00) dollar fee on Mr. Homeowner to pay for the cost of recording its assignment of his mortgage to a third party. This fee is also a finance charge. Regulation Z, 226.4(b)(6). See Mayo v. Key Financial Services, Inc., No. 92-6441-D, slip op. (Suffolk Superior Court June 22, 1994); In re Brown, 106 B.R. 852, 858-859 (Bankr. E.D. Pa. 1989); Cheshire Mortgage Service v. Montes, 223 Conn. 80 (1992). Regulation Z, 226.4(b)(6) provides that the finance charge must include:

Charges imposed on a creditor by another person for purchasing or accepting a consumer's obligation, if the consumer is required to pay the charges in cash, as an addition to the obligation, or as a deduction from the proceeds of the obligation. In addition to the plain language of the regulation, the policy behind TILA compels the

conclusion that an assignment fee is a finance charge. In Cheshire Mortgage Service v. Montes, 223 Conn. 80 (1992), the Supreme Court of Connecticut analyzed this policy in its examination of a high interest, short term loan, similar to Mr. Homeowner's loan, in which approximately fifteen (15%) percent29 of the proceeds were retained by the lender as prepaid charges. The lender charged the borrowers a thirty-two ($32.00) dollar fee for recording a future assignment of the mortgage which was not disclosed as a finance charge. Id. at 96. Engaging in a thoughtful analysis of the issue, the Court concluded that the lender's failure to disclose a mortgage assignment recording fee (whether the assignment was made or not) as a finance charge violated TILA's material disclosure requirements and entitled the borrowers to rescind the loan. In addition to citing the controlling language of Regulation Z, 226.4(a) and 226.4(b)(6), the Court reasoned that, ...A fee for recording a future assignment of the mortgage does not relate to a perfection of the security interest created by the mortgage. That security interest was perfected when the mortgage itself was recorded....In the present case, the potential assignment of the mortgage to another person would have been unrelated to the loan made to the defendants, but would have related to a separate future transaction between the plaintiff and a buyer of the mortgage loan. Our conclusion is supported by 15 U.S.C. 1605(d) and (e), which exclude certain fees from the definition of finance charge if they are fees "with respect to that transaction." (Court's emphasis.) We conclude, therefore, that a fee charged to a borrower to record the future assignment of a mortgage is a finance charge and that since, in the present case, the charge was paid at the consummation of the transaction, it was a prepaid finance charge. Id. at 99, 100. Having found that the fee should have been disclosed as a finance charge, the court noted that although the amount of money involved was perhaps "minuscule," rescission was nevertheless mandated by TILA's strict liability standard. Since this [mortgage assignment] charge was not included in the prepaid finance charge, the overall finance charge was also underdisclosed. This resulted in a material nondisclosure in violation of TILA and, therefore, the defendants had the right to rescind the May, 1988 loan transaction. We recognize that non-disclosure of a $55 fee may seem minuscule in the context of a $43,500 loan
29

As contrasted with the twenty six percent retained here.

transaction. "However, once the court finds a violation, no matter how technical, it has no discretion with respect to the imposition of liability." Id., at 101-102, quoting Grant v. Imperial Motors, 539 F.2d 506, 510 (5th Cir. 1976). Similarly, in Mayo v. Key Financial Services, Inc. , supra, the Massachusetts Superior Court unequivocally held that a ten ($10.00) dollar assignment recording fee is a finance charge as a matter of law. Adopting the reasoning of In re Brown and Cheshire, the Mayo court concluded that the plain language of the statute and commentary compels a finding that assignment fees are finance charges.30

The same conclusion is compelled in this case. Street required Mr. Homeowner to pay in cash from the loan proceeds a "[charge] imposed on [Street] by another person [namely, an assignee,] for purchasing...[Mr. Homeowner's] obligation...." Street thereby violated the Act by failing to include the ten dollar fee in the disclosed finance charge. This is another independent basis for rescission.

Street Failed to Disclose Non-excludable Title Fees and Recording Fees as Finance Charges In addition to separate charges for title examination and mortgage recording fees, Street also charged Mr. Homeowner a combined fifty ($50.00) dollar fee for "updating of title, recording of documents." Street did not disclose which portion of this fee was allocated to the title update and which was allocated to the recording of documents and excluded the entire amount from the finance charge. The Federal Reserve Board Official Staff Commentary to Regulation Z prescribes the rule for allocating non-excludable portions of lump sum charges to

Cf. Shroder v. Suburban Coastal Corp., 729 F.2d 1371 (11th Cir. 1984)(court held that failure to include assignment recording fee in finance charge was not a violation of TILA.). Brown, Cheshire and Mayo specifically reject Shroder's reasoning. One explanation for Shroder's result, if not its reasoning, is that the case was an appeal of denial of class action certification, in which the court decried the game of "gotcha" it intimated the plaintiffs were playing in seeking to hold the lender liable to an entire class for extremely technical violations of the Act, without any apparent damages having been suffered. Id., at 1385.

30

the finance charge. Commentary 226.4(c)(7) states that:

If a lump sum is charged for several services and includes a charge that is not excludable (from the finance charge under Regulation Z, 226.4(c)(7)), a portion of the total should be allocated to that service and included in the finance charge. See, e.g., Brodo, 847 F. Supp. at 356-357(portion of lawyer's fee attributable to preparation of TILA documents should have been disclosed as finance charge).

In this case neither the portion of the fifty dollar fee used for "updating of title" nor the portion used for "recording of documents" should have been excluded from the finance charge. Therefore, by excluding the full amount of the fee from the finance charge, Street committed two material violations of TILA.

A "Full" Title Exam Does Not Need to be Updated

Street charged Mr. Homeowner $250.00 separately for a "full title examination." Having defined the task as such, it is logically estopped from now claiming that the "full" examination had to be "updated" at additional cost. The undisclosed portion of the fee for "updating the title" is therefore, not a bona fide and reasonable charge. As such, this amount should have been disclosed as part of the finance charge. See, e.g., Mayo, slip op. at 6. This is the fourth independent basis on which Mr. Homeowner's rescission was justified.

Double Charged Recording Costs Are Finance Charges Even assuming, arguendo, that this Court were to find the title update fee to be excludable under Regulation Z, 226.4(c)(7)(i), the portion of the fifty dollar lump sum fee allocated to the cost of "recording of documents" must be determined to be a finance charge, as Street did not incur any non-reimbursed recording costs.

The only excludable recording fee in this transaction (see, Cheshire, supra, at 99-100) was the Street mortgage, for which Street imposed a separately itemized twenty-five ($25.00) dollar fee. As previously noted, Street was also reimbursed for the $10 dollar cost of recording its future mortgage assignment. Street was not required to pay any other recording costs, as no other documents were recorded. As such, the portion of the fifty dollar lump sum fee allocated to recording of documents cannot be bona fide and reasonable, and should have been disclosed as a finance charge. Therrien v. Resource Financial Group, Inc, 704 F. Supp. 322, 327 (D.N.H. 1989)(double charge of $56 for recording and discharge fees hidden in lawyer's fee was undisclosed finance charge. "[D]ouble charges are neither bona fide nor reasonable."). Although certain security interest fees may be excluded from the finance charge, only amounts prescribed by law which are actually paid to public officials are excludable from the finance charge. Regulation Z, 226.4(e)(1); Abbey v. Columbus Dodge 607 F.2d 85 (5th Cir. 1979) (where, contrary to disclosures, creditor retained and did not pay to public officials an itemized $37.50 "filing fee," the fee was a finance charge). This is yet another basis upon which Mr. Homeowner's rescission was valid.

Street' Refusal to Comply with TILA's Mandated Rescission Procedure Requires that it Forfeit its Conditional Entitlement toof the Net Loan Proceeds Return Street' Refusal to Accept Mr. Homeowner's Tender Via the October, 1993 USTrust Loan Closing Explicitly Vests Ownership of the Loan Proceeds in Mr. Homeowner The foregoing analysis demonstrates Mr. Homeowner's entitlement to the entry of summary judgment on his TILA rescission claims. Although TILA is a strict liability statute, and although a finance charge disclosure error of more than ten dollars entitles the borrower to rescind the loan, it is important to note that here Street' violations were anything but technical. Including only the finance charges challenged in this motion for summary judgment, Street failed to disclose finance charges totaling $3,039. "It is difficult to imagine a more blatant and fundamental violation of the TILA ...." In re Russell, supra, at 864 (characterizing failure to disclose total of $1,490 in broker's fee and points).

In addition, because Street refused to accept Mr. Homeowner's offer to tender the entire principal amount of the loan at his scheduled October, 1993 USTrust loan closing, TILA dictates that Street forfeit all loan proceeds pursuant to its explicit vesting provision. Rescission under TILA calls for a sequential set of events. 15 USC 1635(b) provides, in relevant part: When an obligor exercises his right to rescind under subsection (a): [Step 1] -- He is not liable for any finance or other charge, and any security interest given by the obligor ... becomes void upon such a rescission. [Step 2] -- Within twenty (20) days after receipt of a notice of rescission, the creditor shall return to the obligor any money or property given as earnest money or down payment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction. [Step 3] -- If the creditor has delivered any property on the obligor, the obligor may retain possession of it. Upon the performance of the creditor's obligation under this section, the obligor shall tender the property to the creditor ... . If the creditor does not take possession of the property within twenty days after tender by the obligor, ownership of the property vests in the obligor without obligation on his part to pay for it. The procedures prescribed by this subsection shall apply except when otherwise ordered by a court. (Emphases added).31

TILA makes the consumer's obligation to tender the net proceeds of the loan (Step 3) expressly conditioned upon the creditor's performance of its duty to honor the rescission notice pursuant to Steps 1 and 2. If and when the creditor does so, the consumer is then obligated to return to the creditor the original principal balance, or, if the creditor merely sets off the monies paid on the loan against that principal, the consumer would tender the net balance. As the Act makes explicitly clear, if the consumer offers to pay the net balance, but the creditor refuses to accept it within twenty days of the tender, the creditor forfeits its entitlement to the remainder of the proceeds. 15 USC 1635(b). Here, Mr. Homeowner tendered the entire principal amount of the Street loan when he scheduled the October, 1993 USTrust closing so that Street would obtain its tender from the loan Regulation Z, 226.23(d)(4) makes clear that a court may modify only Steps 2 and 3, and not Step 1.
31

proceeds. This tender far exceeded what TILA would have required of Mr. Homeowner, for two reasons: 1.) his tender obligation had not yet arisen, because Street had not met its statutory duties; and 2.) even if Street had complied with the statute, at most Mr. Homeowner's tender obligation would have been approximately $13,000 ($31,000 loan principal minus approximately $18,000 paid on the loan and as transaction fees). 15 USC 1635(b). Even though Street disavowed Mr. Homeowner's rescission notice, in order to save his home he was willing to pay Street $31,000 rather than risk losing his USTrust loan commitment. However, Street not only disavowed his rescission notice, it also refused his $31,000 tender by demanding instead even more money than it knew Mr. Homeowner had to give. Street deliberately subverted every requirement and protection of TILA, making it impossible for Mr. Homeowner to enforce his right to rescind and close on his USTrust loan without seeking this court's intervention. As 1635(b) makes clear, upon rescission Mr. Homeowner was no longer "liable for any finance or other charge ...." Therefore, at best, Street was entitled to the $31,000 in principal, subject, of course, to its returning to Mr. Homeowner the approximately $18,000 he had paid on the loan. Its demand for $42,000 was in flagrant contravention of the statute, as this figure far exceeded the amount Street was even conditionally entitled to under TILA. Accordingly, in these circumstances, TILA explicitly dictates that Street forfeit the entire loan amount. This mandated forfeiture can only be averted or modified if this Court deems it inequitable. The equities however, are all in Mr. Homeowner's favor, and so the Court should let the statutory forfeiture provision stand. As Judge David Scholl, perhaps the most prolific author of bankruptcy court decisions interpreting TILA has stated in a similar case:

In its initial response to the notice of rescission, the lender is obliged to return "any money . . . given as earnest money, downpayment, or otherwise" (emphasis in original) which would require repayment to the borrower of all installments made. Furthermore, if the lender fails to properly accept a tender made by the borrower, "ownership of the property [of the obligor offered to the creditor in the tender] vests in the obligor without obligation on his part to pay for it." These harsh directives of 1635(b) are tempered only by the last sentence which gives a court a power to "otherwise order" if it believes that the equities justify a different

result. However, as we stated in Tucker, 74 B.R. at 933, to read this sentence and the companion regulation, 12 C.F.R. 226.23(d)(4), too broadly would constitute "an overprotective attitude towards creditors [which] would fly in the face of the clear language of 1635(b) and eliminate any incentive to creditors to utilize the self-enforcing aspects of 1635(b) by voluntarily agreeing to tender the performance contemplated by the first sentence of 1635(b)." In re Celona, 90 B.R. 104, 114 (Bkrtcy.E.D.Pa. 1988). Street' Refusal to Honor Mr. Homeowner's Rescission Notice Eliminates Mr. Homeowner's Tender Obligation, Entitling Him to Keep the Proceeds of the Loan Pursuant to TILA's Implicit Vesting Provision TILA explicitly mandates forfeiture of the loan proceeds when the creditor refuses to accept the borrower's tender of the net loan proceeds. In addition, it implicitly mandates that same forfeiture where, as here, the creditor refuses to properly respond to a rescission notice. If the creditor does not comply with the statute (Steps 1 and 2), the consumer's obligation to tender (Step 3) is never triggered. In such cases, courts have held that the creditor's recalcitrance creates a presumptive right in the consumer to retain the net loan proceeds. See, e.g., Shepeard v. Quality Siding & Window Factory, Inc., 730 F. Supp. 1295, 1306 (D. Del. 1990)(creditor's failure to respond may eliminate obligation to tender); In re Gurst, 79 B.R. 969, 979 (Bankr. E. D. Pa. 1987)(debtor's obligation to creditor eliminated entirely by creditor's failure to properly respond to rescission notice). This implicit vesting right is consistent with longstanding Federal Reserve Board Interpretation of TILA, and so, consistent with the US Supreme Court's interpretation of TILA, Ford Motor Credit Co. v. Milhollin, 444 U.S. 555 (1980), that administrative interpretation of the Act should be followed unless "demonstrably irrational." On this issue, in response to a letter requesting guidance on a rescinded transaction, an FRB staff letter provides, in relevant part:

Where the creditor has delivered property to the customer, 226.9(d) [now 226.23(d)] provides that he may retain possession of it; only upon the creditor fulfilling his obligations under the subsection is the customer required to make tender of the property to the creditor. If the creditor fails within ten days [now 20 days] to terminate any security interest and return the payments which he has received from the customer, he has by definition not fulfilled the requirements of

the subsection, and staff is of the opinion that the customer need make no tender of the proceeds to the creditor, retaining them without further obligation. FRB Staff Letter of May 29, 1975 [1974-1977 Transfer Binder] Consumer Credit Guide (CCH) 31,230 (emphasis added). This implicit vesting right contained in the "creditor-forfeiture" provision of the Act provides a distinct disincentive for lenders to back borrowers into a corner by disavowing a clearly valid rescission notice. Consistent with the FRB's interpretation of TILA, the controlling precedent within the jurisdiction of the First Circuit on this issue is French v. Wilson, 446 F.Supp. 216 (D.R.I. 1978), which unequivocally requires such forfeiture under the implicit vesting provision. "Congress' intended operation of the statute, as evidenced by the 1635(b) creditor-forfeiture provision, clearly calls for a debtor windfall' if the creditor does not . . . " respond to a valid rescission notice by following the statutory dictates. Id., at 220. "Such a result helps to assure self-enforcement and ultimately promotes uniform compliance by creditors with the Truth in Lending Act." Id. Accord Sosa v. Fite, 498 F.2d 114 (5th Cir. 1974); In re Gurst, 79 B.R. 969, 978 (Bkrtcy.E.D.Pa. 1987); Gill v. Mid-Penn Consumer Discount Company, 671 F.Supp. 1021, 1026 (E.D.Pa. 1987); Aquino v. Public Finance Consumer Discount Company, 606 F.Supp. 504, 508 (E.D. Pa. 1985); ; Strader v. Beneficial Finance Company of Aurora, 551 P.2d 720, 726 (Colo. 1976). As is the case here, in French, the borrower rescinded the loan but the creditor did not honor the rescission notice, instead attempting to foreclose. Id., at 219. Having failed to comply with the statutory dictates, the lender "bec[ame] amenable to the rather harsh legislative remedy which the Truth in Lending Act imposes upon errant creditors." French, supra, at 220.

Under the aforementioned statutory guidelines for rescinded transactions, defendant ..., having continued in its "untoward ways" in this case by failing to give effect to plaintiffs' notice of rescission, must therefore cancel the October 1, 1973 mortgage, as well as return the note to plaintiffs together with all monies paid by them under such note." Id. Street refused to honor Mr. Homeowner's clearly valid rescission notice, refused to allow

his proffered tender, and purported to hold its coercive auction sale under color of law, even though it knew or should have known that the sale was legally improper. If Street had legitimate questions about the validity of the rescission notice, it could simply have filed a declaratory judgment action and asked a court to enter appropriate orders. Aquino v. Public Finance Consumer Discount., 606 F.Supp. 504, 508 (E.D.Pa. 1985). Instead, it chose to play hardball in an attempt to chill the exercise of Mr. Homeowner's rights.32 This Court should invoke TILA's self-enforcement mechanism by declaring the tender requirement eliminated and enter an order consistent with the precedent of French v. Wilson and the relief requested by the plaintiff. "Where the nature of an act is remedial, as here, it should be construed liberally in an attempt to provide the remedy, not avoid it." French, supra, at 220, quoting Starks v. Orleans Motors, Inc., 372 F. Supp. 928, 932 (E.D. La. 1974), aff'd mem., 500 F. 2d 1182 (5th Cir. 1974).

Conclusion The violations of the material disclosures outlined above are clear on the face of the documents. As a matter of law, the strict liability rule of TILA compels a finding that the rescission was valid.33 "[W]here, as here, the confusing, misleading, and inaccurate character of Despite the obvious validity of Mr. Homeowner's rescission notice, Street' counsel made implicit threats that it would seek Rule 11 and other sanctions against plaintiff's counsel for pursuing his rescission claims. See, Exhibit G, p. 4. These totally inappropriate bullying tactics serve only to harm Street's cause. Where a debtor rescinds within the context of a bankruptcy, courts have held that the rescission effectively voids the security interest, rendering the debt, if any, unsecured. See, e.g., In re Perkins, 106 B.R. 863, 874 (Bankr. E.D.Pa. 1989). See also, In re Brown, 134 B.R. 134 (Bankr. E.D.Pa. 1991); In re Moore, 117 B.R. 135 (Bankr.E.D. Pa. 1990); In re Brown, 106 B.R. 852, 862 (Bankr.E.D. Pa. 1989). The creditor would then be entitled to payment upon the same terms as other unsecured creditors. "[O]nce the court finds a violation, no matter how technical, it has no discretion with respect to liability." In re Wright, supra. at 708; In re Porter v. Mid-Penn Consumer Discount Co., 961 F.2d 1066, 1078 (3d. Cir. 1992); Smith v. Fidelity Consumer Discount Co., supra. at 898. "Any misgivings creditors may have about the technical nature of the requirements should be addressed to Congress or the Federal Reserve Board, not the courts. A strict interpretation furthers the congressional goal of standardizing terminology and procedures in credit transactions." April v. Union Mortgage Co., 709 F.Supp. 809, 811 (N.D. Ill. 1989); Smith v. No.
33 32

the disputed disclosure is so clear that it cannot reasonably be disputed, summary judgment for the plaintiff is appropriate." Griggs v. Provident Consumer Discount Co., supra, 503 F. Supp. at 250; Hemauer v. ITT Financial Services, 751 F. Supp. 1241, 1244 (W.D. Ky. 1990). Further, given Street's recalcitrance in refusing to honor this clearly valid assertion of federally mandated rights, it is appropriate in this instance to give effect to the clear language of 1635(b), and declare that the tender obligation has been vitiated by the lender's violation of TILA, requiring the intervention of this court in a matter which is clearly not subject to either factual or legal dispute.

Respectfully submitted John Homeowner By his attorneys

Date: September 6, 1994

8.6

Plaintiff's Affidavit In Support of Summary Judgment

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS EASTERN DIVISION

In Re: John Homeowner Debtor John Homeowner Plaintiff [vs.]

2 Galesburg Crown Furnace Corp., 615 F.2d 407, 416 (7th Cir. 1980).

Street Financial Services, Inc. Defendant Chapter 13 Case No. 93-XXXXX-ABC Adversary Proceeding No. 94-XXXX

AFFIDAVIT OF John Homeowner I, John Homeowner, hereby depose and state as follows:

1. In the fall of 1990, I responded to The Easy Cash Inc. ("Easy Cash") television and print advertisements offering low interest rate loans by visiting the Easy Cash offices seeking information about obtaining a mortgage loan to refinance my home. 2. I met with Easy Cash representative Lisa Smith. Ms. Smith informed me that my poor credit precluded a long term, low interest rate loan, but that if I took out a two year loan with a balloon payment and made my payments on time, that the Easy Cash would then provide long term, low interest refinancing as offered in its advertising.

3. Ms. Smith had me sign a blank mortgage application. I was never provided with a copy of either the application form I signed or the completed application.

4. I had no further contact with Easy Cash until I was subsequently informed that I had been given a loan commitment.

5. On November 29, 1990 I drove to the loan closing location, the office of attorney Larry Lawyer, located at 100 Natick Road, Worcester Massachusetts.

6. The offices of Street Financial Services, Inc. ("Street") and Easy Cash were also

located at 100 Natick Road, Worcester, Massachusetts.

7. Mr. Lawyer told me that he was the closing attorney for Street. Until he told me this, however, I had thought that Easy Cash was going to be making the loan. It was not until Mr. Lawyer told me, as he provided me with loan papers indicating that Street was the lender, that I learned that Easy Cash was not directly providing the financing.

8. One of the documents Mr. Lawyer had me sign was a so-called "consulting" agreement purporting to authorize the payment of two thousand nine hundred fifty-four ($2,954.00) dollars, to Easy Cash. I had never seen this agreement before, and had no idea that Easy Cash was a broker, much less that it would charge this amount as a fee. I signed the agreement because I thought it was a condition of obtaining the financing. 9. Street charged me a $25 dollar fee for amortization schedules. At the time of this loan closing I did not know what an amortization schedule was. For this reason alone I did not request that Street provide me with one. I also never received an amortization schedule.

10. I was completely unaware of any of the terms of the loan until I was presented with the loan documents at the closing. Neither Street nor Easy Cash had informed me of the terms prior to the closing.

11. In particular, I never saw or received the letter dated November 6, 1990 from Susan Black (which is attached to the Motion for Partial Summary Judgment as Exhibit C), until it was shown to me at the preliminary injunction hearing. If I had seen that letter prior to my Street loan closing I would have questioned why Street was making the loan instead of Easy Cash, objected strongly to the insulting tone used in the third paragraph, and, if I decided to take the loan from Street, would only have done so if Street honored the promise made by Easy Cash when I first applied for my loan. I would not have taken this loan if Street had disclosed to me at

the outset that it would not extend the loan term even if I made all my payments on time for two years.

12. I used the funds from the Street loan to pay off some consumer debt and to make needed repairs to my house.

13. Neither attorney Lawyer nor Street provided me with any of the loan documents or truth in lending disclosures at the closing. I left the loan closing without any papers whatsoever, as I was told been told that the papers would be mailed to me "in a few days." Approximately six days later, I received the papers, including the truth in lending disclosures, in the mail. 14. I made every payment on the loan. In mid-summer, l992, with the two year balloon coming due, I sought to convert the Street loan to the low interest rate, long term loan the Easy Cash representative told me I could have if I made all my payments on time. Easy Cash informed me that they were no longer making or arranging such loans, and referred me to Street. Street informed me that they would not make such a loan, emphasized that my balloon note was coming due in a few months and urged me to find alternative financing.

15. It was at this point that I sought out legal counsel and was subsequently placed in the Attorney General's refinancing lottery.

16. In May, 1993, we received a call from USTrust Company informing us that we had been picked in the Attorney General's refinancing program lottery and that within 6-8 weeks we would be informed whether we qualified for enough money to save our home from Street' threatened foreclosure.

17. On August 12, 1993 USTrust issued me a loan commitment for forty five thousand ($45,000.00) dollars.

18. This USTrust loan was sufficient to pay off our first mortgage (of approximately ten thousand ($10,000.00) dollars) to Crestar Mortgage Corp., as well as the principal amount of the Street second mortgage of thirty-one thousand dollars.

19. When we did not seem to making progress in negotiating a settlement with Street I asked John Roddy whether I could take the USTrust loan and pay off Street in order to insure that I would keep my home, and then after USTrust held the mortgage on my house instead of Street still pursue my truth in lending claims against Street. He told me that this plan was feasible.

20. I told USTrust that I would pay Street their $31,000 in order to not to lose the loan.

21. A loan closing was scheduled to take place on or about October 21, l993.

22. The closing couldn't go through because Street' payoff demand was almost forty two thousand ($42,000.00) dollars. This demand included a condition that I release all my claims against Street.

23. The Street demand exceeded by seven thousand ($7,000.00) dollars the USTrust proceeds which were to be available.

24. I did not have nor could I have obtained the seven thousand ($7,000.00) dollars in cash which would have been necessary to allow a closing, even if I had wanted to release my claims against Street, which I did not.

25. The following documents attached to the Motion for Partial Summary Judgment are true and accurate copies of documents which I received from Street Financial Services, Inc., at or after the closing on my second mortgage loan with Street:

Exhibit A - Street Promissory Note Exhibit D - Disclosure Statement Exhibit E - Loan Accounting and Disbursement Authorization Exhibit F - Notice of Right to Cancel

Signed under the pains and penalties of perjury this 3rd day of September, 1994. John Homeowner [Notarized]

8.7

Proposed Order for Partial Summary Judgment for the Plaintiff

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS EASTERN DIVISION

In Re: John Homeowner Debtor John Homeowner Plaintiff [vs.] Street Financial Services, Inc. Defendant

Chapter 13 Case No. 93-XXXXX-ABC Adversary Proceeding No. 94-XXXX

(Proposed) ORDER

This matter having come before me for hearing on the plaintiff's motion for partial summary judgment, after notice and a hearing, and upon consideration of the respective submissions of the parties, and for good cause appearing, it is hereby ORDERED AND DECREED that: 1. Judgment is entered in favor of the plaintiff-Debtor, John Homeowner (hereinafter "the Debtor") on Counts VI, VIII, XI, XII and XIII set forth in his Verified Complaint against the Defendant, Street Financial Services, Inc. (hereinafter referred to as "Defendant"). 2. It is DECLARED that the Debtor properly exercised his right to rescind the November 29, 1990 mortgage loan transaction between the parties pursuant to the TILA and that therefore this contract is deemed RESCINDED. 3. The Defendant has no allowable secured or unsecured claim and the Proof of Claim filed by Defendant in the Debtor's main bankruptcy case is disallowed in its entirety. 4. Defendant is directed to satisfy and discharge any and all remaining mortgages which it has against the Debtor's residential real estate at 10 Joseph Street, Dorchester, Massachusetts, within fifteen (15) days from the date of this Order. 5. Defendant's failure to honor the plaintiff 's valid rescission notice in accordance with 15 USC 1635 and M.G.L. c. 140D 10 vests in the Debtor the right to retain the net loan proceeds and all interest accrued thereon now held in escrow pursuant to the Stipulation and Escrow Agreement previously filed with the Court. The signatories to the Stipulation and Escrow Agreement are directed to release all funds in the Escrow Account and pay them over to the Chapter 13 Trustee, within fifteen (15) days from the date of this Order. The said Trustee shall determine whether these sums or any part thereof may be claimed as part of the Debtor's

exemptions, and, if they are, he shall forward the sums which are includable in his exemptions to the Debtor forthwith. 6. In accordance with the constraints of its Chapter 7 proceeding, Defendant is directed to:

a. b.

refund to the Debtor all money paid to the Defendant in connection with the November 29, 1990 mortgage loan transaction; pay to the Debtor one thousand ($1,000) dollars in statutory damages pursuant to 15 U.S.C. 1640(a)(2)(A)(i) for the Defendant's failure to comply with 15 U.S.C. 1638 and c. 140D 12, and an additional one thousand ($1,000) dollars in statutory damages for the Defendant's failure to comply with 15 U.S.C. 1635(b) and c. 140D 10; and pay to the Debtor the sum of three thousand thirty nine ($3,039.00) dollars as actual damages pursuant to 15 U.S.C. 1640(a)(1).

c.

These funds are to be paid over to the Chapter 13 Trustee if the Debtor's Chapter 13 proceeding is still pending when such funds become available, otherwise the funds are to be paid over to Mr. Homeowner pro-rata in accordance with the Chapter 7 Trustee's distribution of assets.

7. The parties are urged to attempt to agree upon reasonable attorneys' fees and costs which are due to the Debtor's counsel pursuant to 15 U.S.C. 1640(a)(3). If this matter is not resolved within fifteen (15) days, the Debtor's counsel may, within thirty (30) days of this Order, file a Motion requesting such fees. If the Debtor's counsel has made a reasonable request for such fees which is refused, said counsel may recover compensation for time spent on the fee application as well. By the Court United States Bankruptcy Judge Dated: