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Sultan v. M&T Bank

United States District Court, N.D. Illinois, Eastern Division

April 7, 2017



          John J. Tharp, Jr. United States District Judge.

         Plaintiff Samina Sultan claims that the defendants added over $20, 000 in “phantom financing” when she modified her home's mortgage, causing her to make higher principal payments and to pay additional finance charges. She sued the lender and the loan servicer under the Truth in Lending Act, the Illinois Consumer Fraud and Deceptive Business Practices Act, and the Fair Debt Collection Practices Act. Both defendants have moved to dismiss the complaint. For the reasons explained below, the motion is granted as to the TILA claim, but denied as to the ICFA and FDCPA claims.


         Samina Sultan owns her home in Downers Grove, Illinois. Compl. ¶ 8. On January 22, 2016, she received a letter from Defendant Bayview Loan Servicing LLC forwarding a proposed permanent modification of her mortgage loan (upon which she had defaulted) with Defendant M&T Bank. Id. at ¶ 9. The cover sheet to the loan modification stated the new unpaid principal balance of the loan was $387, 365.86. Id. at ¶ 11. The categories comprising the unpaid principal balance, however, added up to only $366, 065.86. Id. at ¶ 12. The inconsistency was partially carried into the loan modification agreement itself, where one paragraph stated that accrued charges in the amount of $102, 687.69 had been added to the existing (pre-modification) balance, but elsewhere the “taxable” addition to the original unpaid balance was listed as $119, 665.86. See Def.'s Ex. 1, ECF No. 10-1. Sultan did not catch the error in the arithmetic and executed the proposed permanent loan modification on January 22, 2016. Compl. ¶ 9.

         Thus, Sultan alleges the loan modification overstated her new balance by $21, 300. Compl. ¶ 14. This “phantom financing” resulted in her paying an additional $92.36 per month which would result in payment of $44, 332.80 in additional finance charges over the term of the loan. Id. at ¶ 15-16. Sultan was not provided with a Truth in Lending Act disclosure statement, which would have laid out the costs of her new loan. Id. at ¶ 17. Sultan has experienced increased stress and anxiety as a result of the issues with her loan. Id. at ¶ 18. On September 8, 2106, Sultan filed this lawsuit against M&T Bank as well as loan servicer Bayview Loan Servicing, claiming violations of the Truth in Lending Act (“TILA”), Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”), and the Fair Debt Collection Practices Act (“FDCPA”). The defendants have jointly moved to dismiss the complaint for failure to state a claim.


         To survive a motion to dismiss premised on Rule 12(b)(6), Sultan need only state claims that are plausible and raise her right to relief above a speculative level. See Arnett v. Webster, 658 F.3d 742, 751-52 (7th Cir. 2011). Her claims under the FDCPA and ICFA clear this threshold, but her effort to invoke the requirements of TILA fails because loan modifications (as distinguished from refinancings) are not subject to TILA's disclosure requirements.

         I. TILA

         The Truth in Lending Act (“TILA”) promotes the “informed use of credit” by requiring certain disclosures during “the extension of consumer credit.” 15 U.S.C. § 1601(a). By regulation, a “refinancing” is “a new transaction requiring new disclosures to the consumer.” 12 C.F.R. § 226.20(a). A refinancing occurs “when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer.” Id. There are also several exceptions, which are not treated as refinancing, including: “A change in the payment schedule or a change in collateral requirements as a result of the consumer's default or delinquency, unless the rate is increased, or the new amount financed exceeds the unpaid balance plus earned finance charge and premiums for continuation of insurance.” Id. at § 226.20(a)(4).

         The defendants argue that they could not have violated TILA because the loan modification agreement (and accompanying letter) was just a modification of an existing debt, rather than a new extension of credit requiring new disclosures. Sultan, they say, never satisfied the original loan obligation. The loan modification agreement explicitly states “[n]othing in this Modification shall be understood or construed to be a satisfaction or release in whole or in part” of the original note and that the note “will remain unchanged and in full effect” with regards to all its terms and conditions as amended by the modification agreement. See Def.'s Ex. 1 at 2. Sultan, on the other hand, argues that the modification falls into the exception because her interest rate was increased and the new balance exceeded her old one plus the accrued charges. See Pl.'s Resp. at 4-5, ECF No. 16.

         Unfortunately for Sultan, the commentary on the regulation explicitly states that “[a] transaction is subject to § 226.20(a) only if it meets the general definition of a refinancing.”[2] 12 C.F.R. Part 226 Supp. I.[3] Thus, Sultan can only fit into the exception she relies on (subparagraph (a)(4)) if she first meets the general definition of a refinancing-that is to say, if “the original obligation has been satisfied or extinguished and replaced by a new obligation.” See Jackson v. Am. Loan Co., 202 F.3d 911, 913 (7th Cir. 2000) (“The rule stated by the Commentary is that only “the cancellation of [the original] obligation and the substitution of a new obligation” amount to a refinancing.”). By the terms of her agreement, Sultan's transaction with the defendants in January 2016 did not cancel the original obligation, and so does not constitute a refinancing. See Rodriguez v. Chase Home Fin., LLC, No. 10 C 05876, 2011 WL 4435633, at *3 (N.D. Ill. Sept. 23, 2011) (finding loan modification agreement is not a refinancing based on language of the agreement); Sheppard v. GMAC Mortg. Corp. (In re Sheppard), 299 B.R. 753, 762 (Bankr. E.D. Pa. 2003) (“Thus, to determine whether a transaction is a refinancing, one must first apply the definition of refinancing in § 226.20(a) of Regulation Z and the Official Staff Interpretations to the transaction at issue. If the result of that analysis is that the transaction is a refinancing, one of the five exceptions may be applicable to except the transaction from the disclosures required of a refinancing. However, if the transaction is found not to be a refinancing when applying the general definition, the exceptions are not implicated.”).

         The contract language Sultan points to, that the provisions of the modification “supersede and replace any inconsistent provisions, ” lends no help to her cause. That language does not indicate that the previous obligation was extinguished, only that the modifications agreed to would govern in the event of a conflict. Indeed, if the 2016 loan modification had extinguished the previous obligation, there would be no need for a provision addressing how an inconsistency with the original terms of the loan agreement would be resolved. That inconsistencies might arise confirms, rather than refutes, that the loan modification did not extinguish Sultan's original obligation. For that reason, Sultan's loan modification was not a refinancing and new TILA disclosures were not required. The motion to dismiss the TILA claims is therefore granted.

         II. FDCPA

         Next, Bayview (the only defendant named in the FDCPA claim) claims that the FDCPA claim is facially deficient because Sultan has not alleged that its actions were taken “in connection with the collection of any debt.” Def.'s Mot. at 6, ECF No. 10. Sultan acknowledges that her complaint does not use those exact words, but that it is a reasonable inference that should be made considering the alleged misrepresentations were made in a letter accompanying an attempt to restructure the defaulted loan so she could pay ...

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