This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (1998).
IN COURT OF APPEALS
Aames Capital Corporation,
Steven A. Sather, et al.,
Equity Lending, Inc., et al.,
Hennepin County District Court
File No. 98-3257
Eric D. Cook, Leonard, O’Brien, Wilford, Spencer & Gale, Ltd., 100 South 5th Street, Suite 1200, Minneapolis, MN 55402 (for respondent)
Eric L. Crandall, 275 South 3rd Street, Suite 101, Stillwater, MN 55082 (for appellants)
Considered and decided by Kalitowski, Presiding Judge, Willis, Judge, and Halbrooks, Judge.
Appellants Steven and Kathleen Sather obtained a loan secured by a mortgage from respondent Aames Capital Corporation’s predecessor-in-interest, Republic Mortgage. Truth in Lending Act, 15 U.S.C. §§ 1601-67 (1994), violations occurred in the mortgage process and the Sathers requested rescission and refused to pay on the mortgage. Aames sued on the mortgage and brought a motion for summary judgment seeking rescission of the loan agreement conditioned on the Sathers’ payment of the principal, interest, and late fees. The district court granted the motion. The Sathers argue they are not liable for the interest and late charges, and the district court erred in granting summary judgment on their counterclaims for damages. We affirm.
In early July 1995, appellants Steven and Kathleen Sather contacted Heigl Mortgage Corporation to obtain funds to refinance the debt secured by their homestead. They also sought to pay off prior mortgages and delinquent property taxes.
The Sathers’ prior first mortgage with TCF Mortgage Corporation was threatened with foreclosure in 1993. In 1995, the TCF mortgage was again in foreclosure with a sale date set for October 10, 1995. The Sathers were also in default under a second mortgage with First Bank Systems that carried a balance of $59,193.44. The Sathers were able to negotiate a reduced payoff of $25,000 with First Bank Systems, but were required to close before the end of September 1995 to take advantage of the significant discount. The Sathers were also delinquent on their property taxes for the years 1992, 1993, 1994, and the first half of 1995.
On July 19, 1995, the Sathers entered into a broker agreement with Heigl Mortgage. Heigl Mortgage prepared a loan application for the Sathers and arranged for a loan in the amount of $254,800 with Republic Mortgage Corporation. The loan was secured by a mortgage against the Sathers’ homestead.
On September 19, 1995, Heigl Mortgage provided the Sathers with a good-faith estimate of closing and costs related to the refinancing. The good-faith estimate, signed by both Sathers, offered a loan for $254,800, interest rate of 13.25%, and closing costs of $8,825.
On September 22, 1995, Steven Sather wrote a letter to Heigl Mortgage describing the “hardship” necessitating a quick closing in order to pay off previous lenders and waiving the Truth In Lending Act (TILA), 15 U.S.C. §§ 1601-67 (1994), three-day rescission right. Kathleen Sather did not sign this letter or otherwise waive her right to rescission. In response to Steven Sather’s letter, Republic Mortgage proceeded to close on its loan to the Sathers on September 28, 1995, funding the loan that day, rather than waiting until the three-day rescission period had run.
The Sathers signed the note and mortgage in favor of Republic Mortgage at the closing. Northern Title Insurance Company handled the closing and disbursed the loan proceeds in accordance with the signed settlement statement. TCF Mortgage Corporation was paid $197,887.49; First Bank National Association received $25,000; and the Hennepin County Treasurer received payment for taxes for 1992, 1993, and 1994 totaling $19,130.71. Northern Title also disbursed a check to Hennepin County for $7,213.68 for the first and second half of the 1995 taxes. The remainder of the loan proceeds were applied to closing costs. The Sathers were required to bring certified funds to the closing in the amount of $3,257.45. All of the loan proceeds were disbursed according to the settlement statement except for the second half of the property taxes for 1995.
On October 2, 1995, the Sathers rescinded the note and mortgage. The Sathers immediately placed a stop payment on their check to Northern Title. In response, Northern Title paid only the first half of the 1995 property taxes and refunded $221.42 to the Sathers, making them responsible for payment of the second half of 1995. To date, the Sathers have never made any payments under the note and mortgage to any holder or servicing agent authorized to accept payment.
After receiving the notice of rescission, Republic Mortgage did not release the mortgage from the property. Respondent Aames Capital Corporation subsequently purchased the mortgage from Republic Mortgage and on October 6, 1995, Aames received assignment of Republic Mortgage’s interest in the Sathers’ loan. Aames had no knowledge of the alleged TILA violations at the time.
On April 25, 1996, a quality-control manager at Aames identified problems regarding the Sathers’ rescission rights. Aames then attempted to have Republic Mortgage repurchase the loan. When this was unsuccessful and Republic Mortgage went bankrupt, Aames attempted to resolve the case with the Sathers, who have consistently claimed that they do not owe any money under the note and that the mortgage is null and void. Aames filed its assignment of the deed of trust/mortgage on September 29, 1997.
On March 2, 1998, Aames commenced an action against the Sathers for rescission and a decree of foreclosure. The Sathers defended these claims pro se, alleging violations of the TILA committed by Republic Mortgage and by Aames as its assignee. Aames contended that it did not commit TILA violations and that its sole involvement was limited to its purchase of the mortgage in the secondary loan market after the September 28, 1995 closing was complete. According to Aames, neither the disclosure statement nor other documents itemizing the amount financed contained any TILA violations apparent on their face that would have provided notice to Aames of any of the Sathers’ allegations.
Aames moved for partial summary judgment on its claims for rescission and foreclosure. The district court granted Aames’s motion and ordered rescission of the loans and a decree of foreclosure if the Sathers failed to repay the principal of $254,800 with interest and late charges to Aames within 60 days of the order. The Sathers made no payments to Aames before the 60-day deadline, and the district court issued an order granting Aames a decree of foreclosure and determined that the amount due from the Sathers to Aames as of November 12, 1999, was $362,570.31. A sheriff’s foreclosure sale was held on September 10, 1999, and the six-month redemption period will expire on April 7, 2000. The Sathers subsequently appealed from the district court’s order granting Aames’s summary judgment motion.
D E C I S I O N
1. Summary Judgment Standard
On appeal from summary judgment, this court determines whether there are any genuine issues of material fact and whether the district court erred in its application of the law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990); see also Minn. R. Civ. P. 56.03. We view the evidence in the light most favorable to the party opposing the motion. Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn. 1993).
2. Rescission Rights
The Sathers argue that the district court erred as a matter of law in conditioning rescission on the repayment of the interest accrued on the loan and late charges in addition to the loan principal.
The Sathers’ claims are governed by TILA, 15 U.S.C. §§ 1601-67 (1994), and Regulation Z, 12 C.F.R. 226 (1999), interpreting TILA. TILA was enacted to
assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.
15 U.S.C. § 1601. The Act also provides the consumer with the absolute right to rescind a credit transaction by notifying the creditor within three business days after the transaction. 15 U.S.C. § 1635(a). Once the consumer exercises his right to rescind, the effect of the rescission is governed by 15 U.S.C. § 1635(b), which states in part:
(b) Return of money or property following rescission
When an obligor exercises his right to rescind under subsection (a) of this section, he is not liable for any finance or other charge, and any security interest given by the obligor * * * becomes void upon such rescission. Within 20 days after receipt of the notice of rescission, the creditor shall return to the obligor any money or property given as earnest money, down payment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction. * * * Upon the performance of the creditor’s obligations under this section, the obligor shall tender the property to the creditor * * * . The procedures prescribed by this subsection shall apply except when otherwise ordered by a court.
While the Act and regulations generally require the creditor to perform first, TILA “gives courts discretion to devise other procedures.” 15 U.S.C. § 1635(b); Federal Deposit Ins. Corp. v. Hughes Develop. Co., 938 F.2d 889, 890 (8th Cir. 1991) (citations omitted). Courts may, therefore, condition an obligor’s right of rescission on tender of the loan principal to the creditor. Id.; Williams v. Homestake Mort. Co., 968 F.2d 1137, 1142 (11th Cir. 1992).
In the instant case, the Sathers concede that the district court had authority to condition their right of rescission on the return of the loan principal. However, they contend the court erred as a matter of law in also requiring them to pay interest and late fees. In response, Aames argues that the court’s equitable and statutory authority to modify the rescission procedures empowers it to condition rescission on payment of interest and late fees as well as the principal. Under the circumstances of this case, we agree with Aames.
We acknowledge that TILA states that a borrower who rescinds “is not liable for any finance or other charge,” 15 U.S.C. § 1635(b), and that section 1605(a) of the Act defines interest as a finance charge. But, in light of the facts in this case, we conclude the district court properly exercised its discretion under section 1635(b) to devise other procedures. Id.; see also 12 C.F.R. § 226.15(d)(4) (stating statutory rescission procedures “may be modified by court order”).
One goal of section 1635(b) is to “return the parties most nearly to the position they held prior to entering into the transaction.” Williams, 968 F.2d at 1140. The statute’s grant of equitable power to the courts to modify the statutory rescission procedures is a reflection of this goal. Id. Additionally,
Congress, through its legislative history, has made it quite clear that “the courts, at any time during the rescission process, may impose equitable conditions to insure that the consumer meets his obligations after the creditor has performed his obligations as required by the act.”
Id. at 1142 (quoting S. Rep. No. 368, 96th Cong. 2d Sess. 29 (1980)).
Thus, a court
may impose conditions that run with the voiding of a creditor’s security interest upon terms that would be equitable and just to the parties in view of the surrounding circumstances.
Id. at 1142.
In the instant case, Mr. Sather is not unsophisticated with respect to real estate lending practices. He owns a construction company and has both assisted clients in obtaining financing for their home improvement projects and attended their closings. Here, the Sathers utilized the proceeds of the $254,800 loan to pay off delinquent property taxes, take advantage of a $35,000 discount on the repayment of their second mortgage with First Bank, and avoid foreclosure on the TCF mortgage. Since their rescission of this loan in October 1995, the Sathers have continued to live in their home for five years while repeatedly refusing to return the principal to Aames. It is clear from the record that the Sathers never intended to comply with section 1635(b) by tendering the principal after rescission and only admitted their obligation to do so on appeal.
Accordingly, we conclude equity requires the Sathers to repay the interest on the loan as a condition of rescission. Allowing the Sathers to use the $254,800 without making interest payments would violate the statutory intent to return the parties to the pre-rescission status quo and result in a significant windfall to the Sathers.
b. Late-payment charges
Similarly, we hold the district court properly exercised its equitable power in requiring the Sathers to pay the late-payment charges. Late-payment charges are generally held not to be finance charges under 15 U.S.C. § 1605(a) and borrowers may, therefore, be responsible for them. James Lockhart, What Constitutes “Finance Charge” Under § 106(a) of the Truth in Lending Act (15 U.S.C.A. § 1605(a)) or Applicable Regulations, 154 ALR Fed. 431, 496-500 (1999). 12 C.F.R. § 226.4(c) distinguishes between late payment and finance charges. It states a late payment, delinquency, default, reinstatement, or other similar charge is not a finance charge if imposed for an actual, unanticipated late payment. Id. In order to clarify the difference between a “late-payment charge” and a “finance charge,” the Federal Reserve Board issued an official staff interpretation. 12 C.F.R. § 226, Supp. I at 311 (1999). It indicates that:
In determining whether a charge is for actual unanticipated late payment * * * factors to be considered include:
The terms of the account. For example, is the consumer required by the account terms to pay the account balance in full each month? If not, the charge may be a finance charge.
The practices of the creditor in handling the accounts. For example, regardless of the terms of the account, does the creditor allow consumers to pay the accounts over a period of time without demanding payment in full or taking other action to collect? If no effort is made to collect the full amount due, the charge may be a finance charge.
Id. Whether or not the creditor considers its customers’ accounts delinquent must be considered in light of the entirety of its actions. Bright v. Ball Mem. Hosp. Assoc. Inc., 616 F.2d 328, 337 (7th Cir. 1980).
[C]ontinued imposition of late charges, without taking positive action to collect the account, including eventual termination of additional credit privileges, may result in the late charges being viewed as finance charges.
Vega v. First Fed. Sav. & Loan Ass’n, 622 F.2d 918, 922 (6th Cir. 1980). The nature of the charge is to be determined based on an objective review of the course of conduct between the parties. Bright, 616 F.2d at 337.
In the instant case, the correspondence from Aames to the Sathers indicates Aames assessed late charges of six percent of the monthly payment amount ten days after the payment was due. Aames also sent the Sathers notices that they were in default on their loan and eventually took steps to foreclose the mortgage. Thus, the late charges were not “finance charges,” and the district court did not err in determining that the Sathers were responsible for payment of the late charges before rescission of Aames’s security interest in their home. See, e.g., Bright, 616 F.2d at 338-39 (holding a hospital’s 3/4% monthly charge imposed on in-patient bills not paid within a 48-day period was a bona fide late charge where the hospital considered its patient accounts not paid within 48 days to be delinquent and took steps to collect those accounts).
3. Counterclaims for Damages from Alleged TILA Violations
The Sathers next contend the district court erred in dismissing their counterclaims against Aames for TILA violations. The Sathers allege that Aames funded their loan within the three-day rescission period without receiving a waiver from Kathleen Sather, and Aames did not take the actions required by section 1635 to terminate its security interest after the Sathers’ filed notice of rescission.
The Sathers’ counterclaims are governed by TILA sections 1640 and 1641. Section 1640 provides for civil liability and states in part:
Except as otherwise provided in this section, any creditor who fails to comply with any requirement imposed under this part, including any requirement under section 1635 of this title, * * * with respect to any person is liable to such person.
This section permits only “creditors” to be held liable for monetary penalties or an award of attorney fees for a TILA violation. Id. Aames contends, and the Sathers appear to recognize, that Aames is not a creditor as defined by TILA section 1602(f). Aames is not the original lender whose name is on the face of the note. It purchased the note on the secondary mortgage market and is an assignee of Republic Mortgage, the original creditor.
Although Aames’s status as an assignee rather than a creditor limits its liability, it does not extinguish it. Section 1641 deals specifically with the liability of assignees and states in part:
Except as otherwise specifically provided in this subchapter, any civil action for a violation of this subchapter * * * which may be brought against a creditor may be maintained against any assignee of such creditor only if the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement, except where the assignment was involuntary. For the purpose of this section, a violation apparent on the face of the disclosure statement includes, but is not limited to (1) a disclosure which can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents assigned, or (2) a disclosure which does not use the terms required to be used by this subchapter.
* * * *
(c) Right of rescission by consumer unaffected
Any consumer who has the right to rescind a transaction under section 1635 of this title may rescind the transaction against any assignee of the obligation.
* * * *
(e) Liability of assignee for consumer credit transactions secured by real property
Except as otherwise specifically provided in this subchapter any civil action against a creditor for violation of this subchapter * * * with respect to a consumer credit transaction secured by real property may be maintained against any assignee of such creditor only if —
(A) the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement provided in connection with such transaction pursuant to this subchapter;
15 U.S.C. § 1641(a), (c), (e) (1994 & Supp. 1995). The Sathers contend section 1641(c) exempts rescission transactions from the limitation of assignee liability and Aames is, therefore, liable for statutory damages. We disagree.
In Rowland v. Novus Fin. Corp., 949 F. Supp. 1447, 1458 (D. Haw. 1996), and Brodo v. Bankers Trust Co., 847 F. Supp. 353, 359 (E.D. Pa. 1994), federal courts considered the question presented by the Sathers and reached a conclusion contrary to that urged by the Sathers. They held that a borrower can pursue a rescission remedy from an assignee whether or not the TILA violation is apparent on the face of the disclosure statement. Id. But a borrower cannot hold an assignee liable for damages if the TILA violation is not apparent on the face of the disclosure statement. Id. Thus, contrary to the Sathers’ claim, section 1641(c) does not open assignees to civil liability in the form of damages where a borrower has given notice of rescission on the basis of an alleged TILA violation unless the violation is “apparent on the face of the disclosure statement.” This section only protects a borrower’s right to rescind his or her transaction after the obligation has been assigned to another lender.
In the instant case, the Sathers have not alleged any TILA violations that would be apparent on the face of the disclosure statement. They have also made no allegations that the disclosure statement is not in the standard statutory form authorized by the federal regulations or that the information in the disclosure statement is inaccurate.
Moreover, in light of the holdings in Brodo and Rowland, Aames cannot be held liable for damages for Republic Mortgage’s funding of the loan without receiving a waiver from Kathleen Sather, or any failure to promptly rescind its security interest in the Sathers’ home. Accordingly, the district court properly granted summary judgment on the Sathers’ counterclaims for damages.
 15 U.S.C. § 1602(f) reads, in part:
The term creditor refers only to a person who both (1) regularly extends, whether in connection with loans, sales of property or services, or otherwise, consumer credit which is payable by agreement in more than four installments or for which the payment of a finance charge is or may be required, and (2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness * * * .