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Financial Services Law Insights and Observations

First Circuit Finds Waiver of Rescission Rights Through Loan Modification, Affirms District Court Dismissal for Failure to State a Claim Under Massachusetts' TILA Equivalent

TILA

Lending

On January 6, the U.S. Court of Appeals for the First Circuit affirmed two prior court rulings against a plaintiff for failure to state a claim for relief under the Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA), Massachusetts' equivalent of the Truth in Lending Act (TILA). The First Circuit also concluded that execution of a loan modification meant that plaintiff waived any rescission rights under the MCCCDA, an issue which the district court did not reach. DiVittorio v. HSBC Bank USA, N.A., No. 11-1188, 2012 WL 33063 (1st Cir. Jan. 6, 2007). In DiVittorio, plaintiff sought to rescind a loan agreement on the ground that the disclosures made at closing did not comply with the MCCCDA. Plaintiff argued that he was entitled to rescission, damages and attorneys' fees because (i) the APR was not calculated in conformity with applicable regulations, (ii) the disclosure significantly underestimated the finance charge for the loan, and (iii) the disclosure failed to specify explicitly that payments were to be made monthly. The First Circuit, however, found that plaintiff, following repeated defaults on the loan obligation, knowingly and willingly entered into a loan modification agreement that contained a release by plaintiff with a waiver provision which waived any rescission rights he may have had. The modification had been entered into with the assistance of counsel and approved by the bankruptcy court. Independent of the modification agreement, the First Circuit concluded that plaintiff failed to state a claim for relief under TILA or the MCCCDA because (i) the performance-based reduction in interest rate was used in APR calculations, reflecting the parties' legal obligations, and was adequately set forth in the loan documents; (ii) there was no need to include in the disclosures any "unanticipated" additional interest charged as a result of late payments, as such falls outside the definition of "finance charge"; and (iii) the disclosure that there would be 360 payments spanning thirty years was sufficient such that a reasonable person would have understood that payments were to be made on a monthly basis, despite the form's failure to use the term "monthly" or to refer to the life of the loan over "360 months."

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