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SAGAN v. OPTION ONE MORTGAGE CORP.

July 26, 2004.

CANDE SAGAN and SHERRY SAGAN, Plaintiffs,
v.
OPTION ONE MORTGAGE CORP. and WACHOVIA BANK, N.A., f/k/a FIRST UNION NATIONAL BANK, Defendants.



The opinion of the court was delivered by: MATHEW KENNELLY, District Judge

MEMORANDUM OPINION AND ORDER

Candy and Sherry Sagan, who live in Hammond, Indiana in a home they inherited, obtained a mortgage loan from BNC Mortgage, Inc. in 1999 to finance repairs on their home and payment of back taxes. BNC assigned the servicing of the loan to Option One Mortgage Corp. See Pltfs' Summ. Judg. Ex. A, "Notice of Assignment, Sale or Transfer of Servicing Rights." The Sagans defaulted on their loan payments and went to a mortgage broker to attempt to refinance. An application was submitted to Option One, which made a $66,500 mortgage loan to the Sagans in June 2000. The loan was closed by Indiana Title Network Company. The loan proceeds were disbursed as follows:
Disbursed to others
$49,939.38 Payoff former loan 636.21 Property taxes 445.69 Held for last payment owed on former loan __________ $51,021.28 Total disbursed Settlement charges*fn1
$ 4,529.00 Broker's fee (to Illiana Mortgage) 275.00 Appraisal fee 70.00 Tax service fee (to Option One) 50.00 Funding fee (to Option One) 12.00 Flood certification fee (to Option One) 412.30 Interest on loan for June 2000 210.00 Closing fee (to Indiana Title Network Co.) 50.00 Title search (to Indiana Title Network Co.) 376.00 Title insurance (to Indiana Title Network Co.) 140.00 "EPA, LOC, COMP & ARM END" (to Indiana Title Network Co.) 45.00 Overnight courier fee (3 x $15.00) (to Indiana Title Network Co.) 23.00 Wire fee (to Indiana Title Network Co.) 55.00 Recording fees __________ $ 6,247.30 Total settlement charges
The remainder of the loan proceeds, $9,231.42, was disbursed to the Sagans. See Dfdts' Summ. Judg. Ex. F (RESPA statement).

  The loan was assigned to a trust for which Wachovia Bank serves as trustee. The Sagans made only one payment on the Option One loan and then defaulted. Wachovia Bank filed a foreclosure suit in Indiana state court in December 2000, and a judgment of foreclosure was entered on April 23, 2001.

  On March 22, 2002, the Sagans, acting through counsel, sent Option One a letter purporting to rescind the loan transaction pursuant to the Truth in Lending Act, 15 U.S.C. § 1635. The letter stated that the points and fees on the loan had exceeded 8% of the total loan amount, and thus the Sagans were entitled to have received the additional disclosures required by the Home Owners Equity Protection Act, 15 U.S.C. § 1639(a)(1). Because these disclosures had not been given, the Sagans' letter said, their right to rescind the loan transaction, which otherwise would have expired three days after the transaction, remained open. See 15 U.S.C. § 1639(j). The letter also stated that the Sagans were "poor and unsophisticated consumers" with a $700 per month income and that the loan had been made without regard to their ability to pay, purportedly in violation of 15 U.S.C. § 1639(h), which prohibits lenders from engaging in a practice of making HOEPA-covered mortgages without regard to the borrowers' ability to repay. Counsel asserted in the letter that the security interest granted by the mortgage was rendered void by the rescission, and he requested that Option One "return to [the Sagans] all monies paid and to take action necessary or appropriate to reflect termination of the security interest." Dfdts' Summ. Judg. Ex. J.

  Option One responded with a letter dated April 11, 2002 stating that the points and fees on the loan had not exceeded 8% of the total loan amount. Dfdts' Summ. Judg. Ex. K. The calculation by which Option One reached this conclusion was set out in the letter. The letter also stated that contrary to the claim in the Sagans' letter, their loan application had disclosed an income of $3500 per month.

  On February 21, 2003, the Sagans' home caught fire, resulting in extensive damage. (The record does not disclose how the Sagans were still living in the house so long after entry of the foreclosure judgment, but that does not affect the matters the Court must decide in this case.) They remained in the house and tried to raise money for repairs. A claim was made under their homeowner's insurance policy. As the mortgagee, Option One was designated on the policy as co-insured, and it was entitled to apply the proceeds of the insurance claim to the outstanding balance on the loan. Option One obtained a check for just over $34,000 in settlement of the insurance claim and notified the Sagans that this would be applied to the loan balance unless the Sagans contacted Option One. They did not do so, and Option One applied the proceeds to the loan balance.

  The Sagans filed this suit in late June 2003. Their complaint alleged that they were entitled to rescind the loan because they did not receive the disclosures required by HOEPA. Both sides have moved for summary judgment. For the reasons stated below, the Court denies plaintiffs' motion for summary judgment and grants defendants' motion for summary judgment.

  Discussion

  HOEPA sets out special requirements for "high-cost" mortgage loans. See 15 U.S.C. § 1602(aa) & 1639. A HOEPA loan is a mortgage loan secured by a consumer's principal dwelling, other than a loan made to finance the dwelling's original construction or acquisition, in which the loan's annual percentage rate of interest exceeds ten percent, or the "total points and fees" payable by the consumer at or before the closing exceeds the greater of eight percent of the total loan amount or $400. 15 U.S.C. § 1602(aa)(1)(A) & (B). A lender that makes such a loan is required to provide several specific disclosures not less than three business days before the transaction is consummated. 15 U.S.C. § 1639(a) & (b). The statute contains several other requirements and prohibitions that are not at issue in this case.

  A lender that fails to make the required disclosures faces an extended period in which the borrower can rescind the loan transaction under TILA. See 15 U.S.C. § 1639(j) & 1635(a). Under normal circumstances, the rescission period is three days after the transaction is consummated. But if the lender fails to make the required disclosures, the period extends until three days after the disclosures are made, up to a maximum of three years. 15 U.S.C. § 1635(a) & (f).

  The Sagans contend the longer period applies to them because Option One failed to make the disclosures required under HOEPA. It is undisputed that Option One did not provide HOEPA disclosures, and thus the issue is whether it was required to do so. Because the annual percentage rate on the loan did not exceed ten percent, the case turns on whether the points and fees exceeded eight percent of the total loan amount.

  In evaluating each side's motion for summary judgment, the Court views the facts in the light most favorable to the non-moving party, drawing reasonable inferences in that party's favor, and inquires whether the moving party has shown that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986); Fed.R.Civ.P. 56(c).

  Option One loaned the Sagans $66,500. The "total loan amount" is determined by deducting prepaid interest and "total points and fees" from the principal amount of the loan. See 12 C.F.R. Pt. 226, Supp. I, par. 32(a)(1)(ii). The term "points and fees" is defined as follows in the regulations governing HOEPA:
(1) [P]oints and fees means:
(i) All items required to be disclosed under § 226.4(a) and 226.4(b), except interest or the time-price differential;
(ii) All compensation paid to mortgage brokers;
(iii) All items listed in § 226.4(c)(7) (other than amounts held for future payment of taxes) unless the charge is reasonable, the creditor receives no direct or indirect compensation in connection with the charge, and the charge is not paid to an affiliate of the creditor; and
(iv) Premiums or other charges for credit life, accident, health, or loss-ofincome insurance, or debt-cancellation coverage (whether or not the debt-cancellation coverage is insurance under applicable law) that provides for cancellation of all or part of the consumer's liability in the event of the loss of life, health, or income or in the case of accident, written in connection with the credit transaction.
12 C.F.R. § 226.32(b)(1). The "items required to be disclosed under § 226.4(a) and 226.4(b)," as referenced in § 226.32(a)(1)(i), consist of the various components of what § 226.4 includes in the "finance charge." See 12 C.F.R. § 226.4(a) & (b). The "items listed in § 226.4(c)(7)," as referenced in § 226.32(b)(1)(iii), are described as follows:
(7) Real-estate related fees. The following fees in a transaction secured by real property or in a residential mortgage transaction, if the fees are bona fide and reasonable in amount:
(i) Fees for title examination, abstract of title, title insurance, property survey, and similar purposes.
(ii) Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents.
(iii) Notary and credit report fees.
(iv) Property appraisal fees or fees for inspections to assess the value or condition of the property if the service is performed prior to closing, including fees related to pest infestation or flood hazard determinations.
(v) Amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge.
12 C.F.R. § 226.4(c)(7).

  Prepaid interest totaling $412.20 was withheld from the Sagans' loan. It is undisputed that this amount is deducted from the loan proceeds ...


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