Unfortunate truth-in-lending developments

Two recent decisions by federal courts have further restricted the rights of Massachusetts consumers in connection with rescinding home mortgages under federal and state truth-in-lending statutes.

In Wells Fargo Bank v. Jaaskelainen, 2009 WL 1606522, Judge Rya Zobel of the U.S. District Court, District of Massachusetts, reversed a judgment rendered by Bankruptcy Judge William C. Hillman that the loan balance which remains following a successful rescission by a chapter 13 debtor becomes unsecured debt. Judge Zobel ruled that the debtor must "tender" back the loan balance as a condition of rescission despite the clear language of both federal and state law that upon an effective rescission the security interest becomes void. Judge Zobel did confirm, however, that on remand of the case the bankruptcy judge will have substantial discretion to determine terms of tender which would be equitable under the circumstances.

In Melfi v. WMC Mortgage Corp., the First Circuit Court of Appeals ruled that a creditor's failure to include the transaction date and rescission expiration date in the notice of right to cancel, as both federal and state law require, is not a violation which extends the right to rescind beyond the 3-business day period. The Court's rationale was essentially that a reasonably intelligent consumer is capable of ascertaining this information, and therefore the violation was not "material." This decision follows a prior ruling by the same Court in Palmer v. Champion Mortgage that an incorrect expiration date in the notice does not extend the rescission period. These decisions mean that at least with respect to contents of the right-to-cancel notice, and at least in the First Circuit, truth-in-lending is no longer truly a strict liability statute, as both Congress and the Massachusetts legislature intended.