Massachusetts Bankruptcy Court Upholds Validity of TILA/CCCDA Disclosures, Waiver

On May 28, the U.S. Bankruptcy Court for the District of Massachusetts held that (i) the use of a reduction feature to calculate the Annual Percentage Rate (APR) provided for an adjustable rate mortgage (ARM) loan does not violate the disclosure requirements of the Massachusetts Consumer Credit Cost Disclosure Act (CCCDA), the Massachusetts analog to the federal Truth in Lending Act (TILA), by failing to reflect that subprime borrowers would be more likely to be delinquent in their payments, and (ii) the waiver of TILA/CCCDA claims, even after the initial rescission period, is valid if the waiver is knowing and voluntary and communicated in a clear and conspicuous manner. In re DiVittorio, Adversary Proceeding No. 09-1089, 2010 WL 2204167 (Bankr. D. Mass. May 28, 2010). In this case, the debtor plaintiff brought suit seeking rescission of his loan through a bankruptcy court adversary proceeding, alleging that the defendant lender violated the CCCDA by providing an inaccurate APR on the Truth in Lending Disclosure Statement (TIL Disclosure). The debtor’s ARM interest rate was subject to a performance-based rate reduction feature by which the debtor would qualify for a reduced rate if he timely made the first two years of payments. In disclosing the APR in the TIL Disclosure, the lender used the reduced interest rate that the debtor would have been entitled to under the rate reduction feature, thereby assuming that he would timely make the first two years of payments. The debtor alleged that the APR stated on the TIL Disclosure was numerically inaccurate because it was calculated using the reduction feature, which did not take into account that subprime borrowers would be more likely to be delinquent in their payments. The debtor had previously signed a waiver of any claims against the lender in connection with the making, closing, administration, collection, or the enforcement of the loan documents. The lender moved to dismiss the debtor’s claims and additionally moved for summary judgment.

On the motion to dismiss, the bankruptcy court held that the CCCDA generally requires disclosures to reflect the terms of the legal obligation between the parties and, in the absence of exact information, to be based on the best information reasonably available at the time the disclosure is provided. The court reasoned that all disclosures are premised on what the parties obligate themselves to do, and to assume otherwise would render every disclosure an estimate and preclude any meaningful disclosure. Because the lender had the exact information regarding the debtor’s legal obligation to make timely payments, resorting to the best information reasonably available (e.g., the debtor’s contention that subprime borrowers were less likely to repay), was unnecessary.

On the motion for summary judgment, the lender argued, among other things, that the debtor’s written waiver prohibited any loan origination claims. However, the debtor argued that it is not permissible to waive the right of rescission after the expiration of the initial three-day rescission period. The court held that the provisions in TILA and the CCCDA applicable to waiver of the right to rescind before the initial three-day rescission period do not apply to the extended right of rescission. The court noted that judicial review of a waiver or release, at a minimum, requires that it is knowing and voluntary. Here, the debtor argued that his waiver was not "knowing" because he was unaware that he had a CCCDA claim due to the lender’s concealment of the "true" APR. The court disagreed, finding that the debtor’s possession of the loan documents put him on inquiry notice of his purported CCCDA claims and his right to rescind. Further, by specifically referencing claims arising in connection with the making, closing, administration, collection, or the enforcement of the loan documents, the waiver should have compelled him to investigate the possibility of such claims. The court noted that it was significant that the debtor executed the waiver as part of a loan modification after eight months of negotiations, during which the debtor was represented by counsel. As such, the court found that the debtor’s execution of the waiver was knowing and voluntary. Further, the court acknowledged that TILA and the CCCDA require any waiver to be clearly and conspicuously disclosed, as distinct from general waivers of "any and all claims." The court found that the debtor’s waiver satisfied this burden because it expressly referenced claims arising in connection with the loan documents.