Opinion ID: 581528
Heading Depth: 2
Heading Rank: 1

Heading: The Statutory Scheme and the Parties' Contentions

Text: 39 The parties agree on the basic statutory and regulatory structure governing this appeal. TILA generally permits a consumer borrower to rescind a loan transaction that results in the creditor taking a security interest in the borrower's principal dwelling. 15 U.S.C.A. § 1635(a) (quoted in note 2). The creditor must clearly and conspicuously disclose the borrower's rescission rights and provide forms for the borrower to do so, in accordance with regulations promulgated by the Board. Id. The Board's regulations require lenders to deliver to borrowers two copies of a notice of the right to rescind, and the notice must clearly and conspicuously disclose: 40 (1) The retention or acquisition of a security interest in the consumer's principal dwelling. 41 (2) The consumer's right to rescind the transaction. 42 (3) How to exercise the right to rescind, with a form for that purpose, designating the address of the creditor's principal place of business. 43 (4) The effects of rescission, as described in paragraph (d) of this section. 44 (5) The date the rescission period expires. 45 12 C.F.R. § 226.23(b). The effects of rescission that must be disclosed under 12 C.F.R. § 226.23(d) are essentially those stated in 15 U.S.C.A. § 1635(b) (quoted in note 5). Under the statute and regulations, if the lender's notice is proper, the borrower's right to rescind lasts for three days, but the rescission period extends to three years if the required notice and material disclosures (the annual percentage rate, finance charge, amount financed, total of payments, and payment schedule) are not delivered. 12 C.F.R. § 226.23(a)(3) (based on 15 U.S.C. § 1635(f)). 46 Porter's request to rescind came after three days following the transaction but before three years had expired. It was therefore timely only if Consumer's notice was deficient. Porter agrees that she received the material disclosures and two copies of the cancellation notice. She also concedes that the notice properly told her when and how to rescind. Her claim is only that Consumer did not clearly notify her how her rescission rights were limited, and therefore did not clearly indicate what the effects would be if she rescinded. 47 The limitation on her rescission rights, she argues, comes from 15 U.S.C.A. § 1635(e)(2), which provides that the provisions of section 1635 do not apply to 48 a transaction which constitutes a refinancing or consolidation (with no new advances) of the principal balance then due and any accrued and unpaid finance charges of an existing extension of credit by the same creditor secured by an interest in the same property. 49 The Board has interpreted the refinancing exemption as follows: 50 (f) Exempt transaction. The right to rescind does not apply to the following: 51 . . . . . 52 (2) A refinancing or consolidation by the same creditor of an extension of credit already secured by the consumer's principal dwelling. The right of rescission shall apply, however, to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amount attributed solely to the costs of the refinancing or consolidation. 53 12 C.F.R. § 226.23(f). 12 In short, a borrower may rescind the new money portion of certain refinancings, but not the old money portion. 54 The exemption has a rather simple rationale. Although in general consumer borrowers need a cooling off period to reconsider encumbering the title to their homes, a borrower who refinances has already had that time to rethink with respect to the old money. The borrower may want to reconsider further indebtedness, as that constitutes an additional risk of losing his or her home, 13 but Congress evidently felt that it would be unfair to lenders if, simply by the expedient of seeking refinancing for the same amount, borrowers could gain the right to cancel the earlier loan. 14 In short, although the general requirement of notification and opportunity to rescind protects borrowers, the statutory exemption for refinancings avoids overprotecting them at the expense of lenders. 55 When a refinancing does not involve new money, no disclosure of the (nonexistent) right to rescind is necessary, but where a refinancing does involve new money, lenders must still clearly notify borrowers of their (limited) rescission rights. Because rescission rights in refinancing situations differ from those applicable in new-loan situations, the Board promulgated, in addition to the H-8, a model rescission form H-9 for partially exempt refinancings. See Appendix H-9 to 12 C.F.R. part 226. The H-9 crucially differs from the H-8 in that it spells out that the borrower has the right to cancel the new transaction to the extent of the increase in the amount of credit, but that such cancellation will not affect the amount that the borrower already owes or the lender's existing security interest. 15 56 Consumer does not dispute this analysis. Instead, it argues that the 1987 transaction was not a refinancing at all for purposes of TILA. Therefore, in its view, Porter was entitled to rescind the entire 1987 loan (the old money first lent in 1986, as well as the new money first provided in 1987). By providing the H-8 notice, says Consumer, it adequately apprised Porter of her right to rescind both the old-money and new-money portions of the loan. Porter responds that the transaction was a partially exempt refinancing, and therefore she was only entitled to rescind the new-money portion of the 1987 loan. In her view, the H-8 form, which applies to general loan transactions (as opposed to the H-9, which is specifically intended for refinancings), was necessarily an inadequate notice. Consumer rejoins that even if the transaction was a refinancing, it could not have given the H-9 because the H-9 would have been misleading, and thus it cannot be faulted for providing the H-8. Moreover, it says, at worst it gave Porter too many rescission rights by letting her rescind both the old and new money portions, and that giving Porter more than TILA requires cannot violate the statute. 57 Our inquiry must proceed in two steps: we must determine (1) what rescission rights Porter had (which in turn depends on whether the transaction was a partially exempt refinancing); and (2) whether the H-8 gave Porter clear notice of those rights. We first conclude that the transaction was a partially exempt refinancing such that Porter was statutorily entitled to rescind only the new-money portion of the 1987 loan. We then conclude that the H-8 did not give Porter clear notice of that partial rescission right, as TILA requires. 58