New TILA Section Expands Disclosure Requirements

by Baker Donelson

The Truth in Lending Act (TILA) is a consumer protection statute that imposes mandatory disclosure requirements on creditors who extend consumer credit to borrowers.  Brodo v. Bankers Trust Co., 847 F. Supp. 353 (D. Penn E.D. 1994); Butler v. Fairbanks Capital, 2005 U.S. Dist. LEXIS 44537 (D. D.C. 2005).  TILA has dual purposes: "to facilitate the consumer’s acquisition of the best credit terms available; and to protect the consumer from divergent and at times fraudulent practices stemming from the uninformed use of credit."  Yaldu v. Bank of America Corp., 700 F. Supp. 2d 832, 840 (D. Mich. E.D. 2010); see also 15 U.S.C. § 1601(a).

In May of 2009, a new section of TILA was enacted, 15 U.S.C. § 1641(g), which requires certain disclosures to be provided to borrowers when there is a change in the ownership of their loan.  The new requirements indicate that TILA was intended to provide consumers with information about the identity of the owner of their loan for a variety of purposes, and specifically so that consumers have the ability to assert an extended right to rescind the loan under TILA Section 125.  See Restatement of Federal Consumer Financial Law Regulations.

Notably, however, Section 1641(g) "was not intended to require notice when a transaction 'does not involve a change in the ownership of the physical note.'"  Id.  (citing 155 Cong. Rec. S5099).

The new requirements require that consumers be provided notice of a new creditor, and that within 30 days of buying or being assigned the loan, the new creditor must notify the borrower in writing the following information:

  • The identity, address and telephone number of the new creditor
  • The date of transfer
  • How to reach an agent or party having authority to act on behalf of the new creditor
  • The location of the place where transfer of ownership of the debt is recorded
  • Any other relevant information regarding the new creditor

The disclosure requirements, however, only apply if a party is a "covered person" as defined by 12 C.F.R. Section 226, also known as "Regulation Z."  Regulation Z explains that a covered person:

…means any person, as defined in § 226.2(a)(22), that becomes the owner of an existing mortgage loan by acquiring legal title to the debt obligation, whether through a purchase, assignment or other transfer, and who acquires more than one mortgage loan in any twelve-month period.

To further clarify, Regulation Z provides that under Section 1641(g), "a party servicing the mortgage loan is not treated as the owner of the obligation if the obligation was assigned to the servicer solely for administrative convenience."  Restatement of Federal Consumer Financial Law Regulations, at 8. Thus, the disclosure requirements "do not apply to a loan servicer if the servicer holds legal title to the loan solely for administrative convenience."  Id.

In the Summer of 2011, a new claim under Section 1641(g) was asserted by borrowers who were also involved in foreclosure litigation with a variety of different servicers.  The borrowers alleged that because the servicer of their loan was "assigned" the mortgage in preparation to conduct the foreclosure of the property securing the promissory note and mortgage on the loan, that they were an "owner" of the loan under TILA and subject to the disclosure requirements under Section 1641(g).  A series of recently issued decisions from the United States District Court for the Southern District of Alabama, however, have found that servicers are exempt from Section 1641(g).

In each of the cases, the servicer was assigned the mortgage prior to the foreclosure sale because the servicer's contractual agreement with a government-sponsored entity (GSE) – the actual owner of the loan – required the assignment so that the foreclosure could be conducted in the servicer's name.  Thus, the absence of any evidence demonstrating that the assignment occurred for any other reason than to allow the servicer to fulfill its obligations as servicer placed them within the "administrative convenience" exception.  The servicers were entitled to a dismissal via summary judgment of the borrowers claims against them as a result.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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