The following article is reprinted from Basis Points® , Vol. 2, Issue 6, Copyright © 2003, with the permission of CounselorLibrary.com, LLC. All Rights Reserved. Further reproduction is prohibited without permission.

Although the plaintiffs raised TILA, RESPA and Pennsylvania UDAP violations, the only issue finally decided in this opinion was the TILA claim - and it was not decided favorably to the mortgage lender, Homeside Lending, Inc.

Facts. Kenneth Apgar received a telephone call from IFG, a mortgage broker, to discuss refinancing the mortgage debt that was on the home he owned with his wife, Janet. At the time, the Apgars were current on the two mortgages on their home but were in arrears on their local, state and federal taxes. However, the Apgars had worked out a payment arrangement with the local government, and neither the state nor federal tax authorities had instituted an enforcement action. Mr. Apgar completed a loan application and submitted financial information to the broker. Homeside approved the loan to Mr. Apgar, secured by a mortgage on the Apgars' home. Less than two years after the closing, the Apgars filed for bankruptcy and commenced this suit against Homeside and IFG.

TILA. As the basis for their TILA claim, the Apgars alleged that they were not given notice of their right to rescind the transaction because the notice was directed only to Mr. Apgar. Homeside countered that it was not required to give Mrs. Apgar notice because, as a signatory to the mortgage only and not an applicant for or receiver of credit, she had no rescission rights. Alternatively, Homeside claimed that the notice it gave informed both Mr. and Mrs. Apgar of their right to rescind the transaction. The Notice of Right to Cancel listed Kenneth D. Apgar as the borrower. In addition, at the bottom of the notice, was the following:

I WISH TO CANCEL
________________________________________________________
KENNETH D. APGAR               Date

ON THIS DATE THE UNDERSIGNED EACH RECEIVED TWO (2) COMPLETED COPIES OF THE NOTICE OF OPPURTUNITY TO CANCEL.

[signature of Mr. Apagar and date appear in original]

_________________________________________________________
KENNETH D. APAGAR               Date

[signature of Mrs. Apagar and date appear in original]

___________________________________________________________

Homeside was relying on TILA § 1631(a), which provides: "In a transaction involving more than one obligor, a creditor or lessor, except in a transaction under section 1635 of this title, need not disclose to more than one of such obligors if the obligor given disclosure is a primary obligor." The U.S. Bankruptcy Court for the Eastern District of Pennsylvania did not point out that this section was not even applicable because the Apgars' mortgage loan was a transaction under section 1635, as a transaction subject to rescission.

Instead, it cautioned that relying upon TILA alone, without consulting Regulation Z, was fatal to Homeside's argument. 12.C.F.R. § 226.17(d) provides that where a transaction involves the right to rescind under § 226.23, the disclosures must be made "to each consumer who has the right to rescind."

The court had to decide whether Mrs. Apgar was a "consumer" for purposes of this regulation. Section 226.2(a)(11) provides that "consumer" includes a person whose ownership interest in the dwelling will be subject to the security interest, so the court concluded that Mrs. Apgar, as a joint owner of the property, was a consumer for purposes of rescission. Moreover, Section 226.23(a) provides that each consumer whose ownership interest in the principal dwelling is or will be subject to the security interest shall have the right to rescind, so, therefore, Mrs. Apgar was entitled to receive a rescission notice. The notice the Apgars received was directed to Mr. Apgar and contained a signature line for rescission in his name only. However, Mrs. Apgar signed the notice at the bottom acknowledging receipt of two copies.

The court concluded that under Section 1635(a), the notice of right to rescind had to clearly and conspicuously disclose the rescission right and provide forms to enable the obligor to exercise this right. The court thought that the notice was subject to four plausible readings - that Mr. Apgar had veto power over Mrs. Apgar's right to rescind, because there was a signature line for him only, that Mrs. Apgar had no right to rescind because there was no signature line for her, that she had the right to rescind but could only do so by changing the form to delete Mr. Apgar's name and add hers, or that both signatures were required to rescind the transaction. The court found that the existence of multiple, reasonable readings of the notice rendered the notice unclear as to Mrs. Apgar's rights and required extension of the rescission period to three years after the date of the transaction.

RESPA. The Apgars cried foul over the yield spread premium Homeside paid to IFG. IFG received $4,796 at closing for loan origination, processing and application fees, as well as a $3,187 yield spread premium from Homeside. The Apgars argued that the yield spread premium violated HUD's two-prong test for broker compensation - the yield spread premium was not in payment of services actually performed, and the broker was grossly overcompensated given the amount it received at closing.

As support for the argument that IFG was overcompensated, the Apgars cited an article, entitled "Kickbacks or Compensation: The Case of Yield Spread Premiums," that determined that the typical broker compensation in above par loans, including a yield spread premium, is 2.312% of the loan amount but noted that in this case, IFG received more than that, 2.375% of the loan amount, from the origination fee alone. The court refused to grant either side summary judgment on the YSP issue because there was an issue of fact as to whether IMG earned the yield spread premium. The court found that all but one of the tasks performed by IMG fell within HUD's examples of origination services set forth in its Policy Statement I, and those origination services were paid for by the $4,796 collected from the Apgars at closing. As for the one task IMG performed that was not on HUD's examples of origination services - allegedly helping the Apgars avoid foreclosure and consolidating their two mortgages - the court found that there was a question as to the necessity of these services. Mr. Apgar testified that there was no imminent threat of foreclosure by the taxing authorities, and the Homeside mortgage was not sufficient to satisfy the second mortgage.

UDAP. Homeside sought summary judgment on the Apgars' UDAP claim. Homeside alleged that the Pennsylvania UDAP statute does not apply to mortgage transactions. Relying on a 1989 case from the U.S. Court of Appeals for the Third Circuit, which concluded that a mortgage transaction constitutes the sale of a service within the ambit of the UDAP, the court refused to grant Homeside summary judgment on this claim.

Lesson Learned - Don't Forget the Wife!

For more information, look for In re Apgar (Apgar v. Homeside Lending, Inc.), 2003 WL 1878278 (Bankr. E.D. Pa. April 8, 2003).

To view all other Basis Points Articles, click here.