Cetto v. LASALLE BANK NAT. ASS'N

Filed: March 7, 2008

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 06-1720

(1:05-cv-01090-CMH-TC)

JAMES ALEXANDER CETTO, II; ELIZABETH ANN

CETTO,

Plaintiffs - Appellants,

versus

LASALLE BANK NATIONAL ASSOCIATION, as Trustee

for Structured Asset Investment Loan Series

2003-BC9 by Wilshire Credit Corporation, its

Authorized Servicing Agent,

Defendant - Appellee,

versus

SAVINGS FIRST MORTGAGE, LLC,

Party in Interest.

O R D E R

The court amends its opinion filed February 29, 2008, as

follows:

On page 4, line 15, the symbol “÷” is added in the

parenthetical between the numbers “$12,169” and “$153,378.71.”

For the Court - By Direction

/s/ Patricia S. Connor

Clerk

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

JAMES ALEXANDER CETTO, II; 

ELIZABETH ANN CETTO,

Plaintiffs-Appellants,

v.

LASALLE BANK NATIONAL

ASSOCIATION, as Trustee for

Structured Asset Investment Loan

Series 2003-BC9 by Wilshire Credit  No. 06-1720

Corporation, its Authorized

Servicing Agent,

Defendant-Appellee,

v.

SAVINGS FIRST MORTGAGE, LLC,

Party in Interest.



Appeal from the United States District Court

for the Eastern District of Virginia, at Alexandria.

Claude M. Hilton, Senior District Judge.

(1:05-cv-01090-CMH-TC)

Argued: October 30, 2007

Decided: February 29, 2008

Before NIEMEYER, SHEDD, and DUNCAN, Circuit Judges.

Affirmed by published opinion. Judge Niemeyer wrote the opinion,

in which Judge Shedd and Judge Duncan joined.

2 CETTO v. LASALLE BANK

COUNSEL

ARGUED: Thomas Ray Breeden, Manassas, Virginia, for Appel-

lants. Paul Wilbur Jacobs, II, CHRISTIAN & BARTON, L.L.P.,

Richmond, Virginia, for Appellee. ON BRIEF: Nichole Buck

Vanderslice, CHRISTIAN & BARTON, L.L.P., Richmond, Virginia,

for Appellee.

OPINION

NIEMEYER, Circuit Judge:

James and Elizabeth Cetto seek to rescind the refinancing of their

Virginia home based on their claim that the total points and fees

charged in the transaction qualified the loan as what is commonly

referred to as a "high-cost mortgage" under the Truth in Lending Act

("TILA") as amended by the Home Ownership and Equity Protection

Act ("HOEPA"), which entitled them to specific disclosures and

terms that they were not afforded.1 A high-cost mortgage is one in

which the "points and fees" exceed 8% of the "total loan amount." See

15 U.S.C. § 1602(aa)(1)(B)(i). To support their claim, the Cettos con-

tend that title search and title binder fees charged by the settlement

agent at closing, which are usually not includable as "points and fees,"

should be included in the calculation of "points and fees" in this case

because (1) the settlement agent was affiliated with the mortgage bro-

ker on the transaction and (2) the mortgage broker in turn was a

"creditor" on the loan, as they claim that term is defined in 15 U.S.C.

§ 1602(f). They argue that the mortgage broker was a "creditor"

because the mortgage broker had served as a lender on previous occa-

sions in unrelated transactions, thus falling within their definition of

"creditor," which is based on their interpretation of the last sentence

of § 1602(f).

1

The purpose for enacting TILA and HOEPA was to provide economic

stabilization in consumer credit lending by assuring meaningful disclo-

sure of credit terms and thus permitting consumers to make an informed

use of credit. See 15 U.S.C. § 1601(a).

CETTO v. LASALLE BANK 3

It is undisputed by the parties that the settlement agent in this case

was affiliated with the mortgage broker and that if the mortgage bro-

ker meets the definition of "creditor" in § 1602(f) and Regulation Z

under it, the fees paid to the settlement agent for the title search and

title binder would have to be included as part of the "points and fees"

charged on the transaction, making the loan a high-cost mortgage.

We conclude, as did the district court, that the mortgage broker in

this case was not a "creditor" as defined in § 1602(f), and therefore

the title search and title binder fees paid to the settlement agent were

not includable as part of the "points and fees" charged. Without the

inclusion of the title search and title binder fees, the loan to the Cettos

was not a "high-cost mortgage" and therefore did not require the addi-

tional disclosures and protections of TILA and HOEPA. Accordingly,

we affirm the judgment of the district court.

I

Following a solicitation from Savings First Mortgage, LLC, James

and Elizabeth Cetto decided to refinance their home in Dale City, Vir-

ginia, "so that [they could] cash out and have some money to do

whatever [they] needed to do in [Mr. Cetto’s] business and at home."

Savings First, functioning as a mortgage broker, obtained a 30-year

adjustable interest rate loan for the Cettos from MorEquity, Inc., at an

initial interest rate of 5.85%, subject to adjustments thereafter based

on market conditions. Savings First charged the Cettos $7,400 for

broker and processing fees.

Through the refinancing transaction, which closed on April 8,

2003, the Cettos borrowed $166,000, with which they paid off their

previous mortgage and debts recorded against their house, as well as

the costs and fees of the refinancing. They then took the balance in

cash. With the cash, they fixed up their house, paid some bills, and

took a vacation.

Settlement of the new loan was conducted by Accurate Settlement

Services, Inc., an "affiliate" of Savings First, as defined by 12 U.S.C.

§ 1841(k). The settlement sheet, which the Cettos signed and dated at

the closing on April 8, 2003, discloses that from the $166,000 pro-

ceeds of the loan, the Cettos paid:

4 CETTO v. LASALLE BANK

(1) the prior mortgage and other debts recorded against

their house in the amount of $103,191.52;

(2) amounts charged by third parties for appraisal, a title

search and title binder, insurance, tax stamps, and

property taxes, in the total amount of $3,226.83;

(3) prepaid finance charges of $12,169 (including a loan

discount, mortgage broker and processing fees, mort-

gage underwriting and administration fees, flood certi-

fication fee, and release fee); and

(4) interest for 17 days, in the amount of $452.29.

The $46,960.36 balance was paid to the Cettos. The settlement sheet

discloses, as significant to TILA and HOEPA, that the "total loan

amount" as defined by statute was $153,378.71 and that the "points

and fees" as defined by statute were $12,169. The cost of the loan

therefore was 7.93% ($12,169 ÷ $153,378.71), rendering the loan not a

high-cost mortgage because the "points and fees" were not greater

than 8% of the amount financed. See 15 U.S.C. § 1602(aa)(1)(B)(i).

About three months after the refinancing closed, on July 1, 2003,

MorEquity sold the loan and mortgage to Lehman Brothers as part of

a package of 286 loans bundled for investment purposes, denominated

as "Structured Asset Investment Loan Series 2003-BC9," and LaSalle

Bank National Association was appointed the trustee of the bundled

asset. For purposes of the Cettos’ claims in this case, LaSalle Bank

stands in the place of MorEquity, the original lender. See 15 U.S.C.

§ 1641(d)(1).

The refinancing increased the Cettos’ monthly payment on their

home from $866 per month to $1,199 per month (including real estate

taxes and insurance), which the Cettos found stressful. Mr. Cetto said

he knew his monthly payment would go up, but he did not know that

it would be that much. In addition, after reviewing the closing costs,

Mr. Cetto observed that they were unexpectedly high. As he testified

in deposition, "After [the three-day cancellation period had elapsed

when he reviewed the loan papers] I noticed, you know, wow, this is

high."

CETTO v. LASALLE BANK 5

By letters dated September 14 and 17, 2004, some 17 months after

closing, addressed to the servicing agent for the bundled loans asset,

Mr. Cetto stated that he was rescinding the refinancing transaction,

claiming violations of TILA, HOEPA, and the Real Estate Settlement

Procedures Act, as well as "other consumer protection statutes."

When his demand for rescission was rejected on the basis that the

Cettos’ loan did not qualify for the more generous rescission provi-

sion of HOEPA, the Cettos commenced this action against LaSalle

Bank, as assignee of the loan and mortgage.

In their complaint, the Cettos alleged that the $166,000 refinancing

loan was a high-cost mortgage, as defined by 15 U.S.C.

§ 1602(aa)(1)(B)(i), because, according to their calculation, the total

"points and fees" exceeded 8% of the total loan amount. To support

their claim that the loan cost them more in "points and fees" than 8%,

they included as "points and fees" $1,274.48 paid to Accurate Settle-

ment, the settlement agent, for its title search and title binder. They

claimed, therefore, that federal law entitles them to disclosures and

terms that were not provided. Based on these violations, they alleged

that they are entitled to rescission, statutory damages and other dam-

ages, attorneys fees, and costs.

LaSalle Bank denied that the settlement agent’s fees were properly

includable as "points and fees" to determine whether the transaction

qualified as a high-cost mortgage, and it also filed a cross-claim for

$188,669.44, plus interest, attorneys fees, and costs, alleging that the

Cettos failed to make payments on the loan since August 11, 2004,

and that the loan therefore is in default.

On cross-motions for summary judgment, the district court denied

the Cettos’ motion and granted LaSalle Bank’s motion. The court

concluded that Savings First was not a "creditor" on the transaction

but rather acted only as the mortgage broker in that it did not lend any

money to the Cettos. Therefore the fees paid to Accurate Settlement,

an affiliate of Savings First, for its title search and title binder were

not "points and fees" charged by a "creditor" or one affiliated with a

"creditor." From the district court’s judgment dated June 1, 2006, the

Cettos filed this appeal.

The only issue raised on appeal is whether, under TILA and

HOEPA, the definition of "creditor," as set forth in 15 U.S.C.

6 CETTO v. LASALLE BANK

§ 1602(f), includes a person who acted only as a mortgage broker in

the particular transaction, but who had acted as a lender in the past

for unrelated transactions. This issue, which requires a construction

of § 1602(f), is one of first impression.

II

In greater particularity, the Cettos seek rescission of their refinanc-

ing loan and damages because of various violations of TILA and

HOEPA, which require a lender to make certain disclosures and pro-

hibit certain loan terms if the loan qualifies as what is commonly

referred to as a high-cost mortgage. A loan is a high-cost mortgage

when "the total points and fees payable by the consumer at or before

closing" exceed "8 percent of the total loan amount." 15 U.S.C.

§ 1602(aa)(1)(B)(i). The Cettos maintain that the points and fees cal-

culation for their loan failed to include $1,274.48 paid to Accurate

Settlement for the title search and title binder. When those charges are

included as costs, the points and fees paid by the Cettos exceed 8%,

triggering the additional protections that HOEPA added when it

amended TILA.

The Cettos’ claim, therefore, depends on whether the title search

and title binder fees paid to Accurate Settlement at closing were prop-

erly excluded from the calculation of "points and fees" in determining

whether their loan was a high-cost mortgage. If those fees were prop-

erly excluded, the total points and fees charged were lower than 8%

of the total loan amount; but if those fees are includable, then the

points and fees exceed 8% and the Cettos would be entitled to relief.

The facts are not in dispute, and the question reduces to one of stat-

utory interpretation, which we review de novo. See Holland v. Pardee

Coal Co., 269 F.3d 424, 430 (4th Cir. 2001).

Under HOEPA, the threshold for the high-cost mortgage protec-

tions is determined by dividing the total points and fees payable by

the consumer by the total loan amount to determine whether that ratio

exceeds 8%. "Total points and fees" on a mortgage means:

(A) all items included in the finance charge, except inter-

est or the time-price differential;

CETTO v. LASALLE BANK 7

(B) all compensation paid to mortgage brokers;

(C) each of the charges listed in section 1605(e) of this

title (except an escrow for future payment of taxes),

unless —

(i) the charge is reasonable;

(ii) the creditor receives no direct or indirect com-

pensation; and

(iii) the charge is paid to a third party unaffiliated

with the creditor; and

(D) such other charges as the Board determines to be

appropriate.

15 U.S.C. § 1602(aa)(4) (emphasis added). Section 1605(e), in turn,

lists the following fees:

(1) Fees or premiums for title examination, title insurance,

or similar purposes.

(2) Fees for preparation of loan-related documents.

(3) Escrows for future payments of taxes and insurance.

(4) Fees for notarizing deeds and other documents.

(5) Appraisal fees, including fees related to any pest infes-

tation or flood hazard inspections conducted prior to

closing.

(6) Credit reports.

15 U.S.C. § 1605(e) (emphasis added). Accordingly, fees for title

searches and title binders are not included in the calculation of "points

and fees" unless they are unreasonable, the creditor receives direct or

indirect compensation in respect to them, or the third party to whom

the fees are paid is affiliated with the creditor.

8 CETTO v. LASALLE BANK

In this case, the parties agree that if the $1,274.48 in fees paid to

Accurate Settlement are included in the calculation of "points and

fees payable by the consumer," the cost of the Cettos’ loan would

exceed 8% of the total loan amount. The Cettos argue that the fees

paid to Accurate Settlement should be included because Accurate Set-

tlement was affiliated with "the creditor," namely Savings First. La-

Salle Bank agrees that Accurate Settlement is affiliated with Savings

First, but it contends that Savings First was not "the creditor," as

required by the statute. The statute includes title search and binder

fees only if Accurate Settlement was affiliated "with the creditor." See

15 U.S.C. § 1602(aa)(4)(C)(iii).

The issue thus reduces to the question of whether Savings First was

"the creditor" on the refinancing transaction. If it was, then the Cettos

properly claim that fees paid to an affiliate of Savings First must be

included in the points and fees charged to the Cettos.

The TILA, as amended by HOEPA, defines "creditor" as follows:

The term "creditor" refers only to a person who both (1)

regularly extends, whether in connection with loans, sales of

property or services, or otherwise, consumer credit which is

payable by agreement in more than four installments or for

which the payment of a finance charge is or may be

required, and (2) is the person to whom the debt arising

from the consumer credit transaction is initially payable on

the face of the evidence of indebtedness or, if there is no

such evidence of indebtedness, by agreement. Notwithstand-

ing the preceding sentence, in the case of an open-end credit

plan involving a credit card, the card issuer and any person

who honors the credit card and offers a discount which is a

finance charge are creditors. For the purpose of the require-

ments imposed under part D of this subchapter and sections

1637(a)(5), 1637(a)(6), 1637(a)(7), 1637(b)(1), 1637(b)(2),

1637(b)(3), 1637(b)(8), and 1637(b)(10) of this title, the

term "creditor" shall also include card issuers whether or not

the amount due is payable by agreement in more than four

installments or the payment of a finance charge is or may be

required, and the Board shall, by regulation, apply these

requirements to such card issuers, to the extent appropriate,

CETTO v. LASALLE BANK 9

even though the requirements are by their terms applicable

only to creditors offering open-end credit plans. Any person

who originates 2 or more mortgages referred to in subsec-

tion (aa) of this section in any 12-month period or any per-

son who originates 1 or more such mortgages through a

mortgage broker shall be considered to be a creditor for

purposes of this subchapter.

15 U.S.C. § 1602(f) (emphasis added). It is undisputed that Savings

First is not a "creditor" according to § 1602(f)’s first sentence,

because Savings First is not "the person to whom the debt arising

from [the loan] is initially payable" on the face of the loan documents.

The transaction documents show that the Cettos’ loan was initially

payable to MorEquity, not Savings First. The Cettos argue, however,

that the last sentence of § 1602(f) provides a stand-alone alternative

definition of "creditor," under which Savings First qualifies because

it originated two or more high-cost mortgages in a 12-month period,

albeit not the mortgage in this case. They maintain that because Sav-

ings First originated unrelated high-cost loans to other borrowers in

the past, Savings First, even though only acting as the mortgage bro-

ker in this transaction, should be considered a "creditor" for all of its

transactions, including this one.

The language of the first sentence of § 1602(f) is unambiguous in

defining "creditor" to refer "only to a person who both (1) regularly

extends . . . consumer credit . . . and (2) is the person to whom the

debt arising from the consumer credit transaction is initially payable

on the face of the evidence of indebtedness . . . ." 15 U.S.C. § 1602(f)

(emphasis added). The definition given in this sentence is restrictive

and precise, referring only to a person who satisfies both require-

ments. Thus, even if an institution were to extend consumer credit

regularly — however "regularly" might be defined — it still would

not be a "creditor" under the first sentence of § 1602(f) unless it was

also the one to which the debt was initially payable. Because a mort-

gage broker is not one to whom the initial debt is payable, neither it

nor its affiliates are "creditors" under this definition. Fees paid to the

mortgage broker’s affiliates for title search and binders would accord-

ingly not be included in the calculation of total "points and fees." See

15 U.S.C. § 1602(aa)(4); id. § 1605(e).

10 CETTO v. LASALLE BANK

The last sentence of § 1602(f), which the Cettos contend provides

an alternative stand-alone definition of "creditor," refers only to a per-

son who has originated two or more high-cost mortgages in a 12-

month period or one such mortgage if through a mortgage broker. If

the Cettos are correct in their construction, the last sentence would so

extend the class of "creditors" as effectively to include any participant

in a loan transaction who has ever made one or two high-cost loans

in the past, eliminating the requirement for that person that it be the

one to whom the debt in the given transaction is initially payable.

Such a construction would not only broaden the definition of "credi-

tor" to unworkable limits, but it would also make an arbitrary distinc-

tion between persons, based on irrelevant aspects of their lending

history. Thus, in any given transaction, a mortgage broker lending no

money in the transaction but who had previously made a thousand

loans in which the costs were no more than 8.0% of the loan amount

would not be a "creditor," but a mortgage broker who had previously

made two loans in which the costs were 8.1% of the loan amount

would be a "creditor," regardless of whether it was lending any money

in the current transaction. But the statutory language does not support

the Cettos’ construction.

First, because the first sentence of § 1602(f) requires that both ele-

ments of the two-part test be met for determinations of "creditor" sta-

tus, we should not automatically construe the last sentence of

§ 1602(f) to override either part of the first sentence by implication.

To avoid this result, the last sentence must be read to provide addi-

tional particularization to the first sentence, clarifying when a person

extending a high-cost mortgage "regularly extends" credit such that he

is "considered to be a creditor for purposes of this subchapter."

Second, the last sentence cannot stand alone from the first because

alone, it has no tie to any extension of credit in the current transac-

tion. Any person in the current transaction would be a creditor so long

as during some 12-month period in its business history it extended

two high-cost mortgages. The only way to give the content of

§ 1602(f) a coherent meaning is to take the last sentence as dealing

with the frequency with which a person extends installment credit to

become one who "regularly extends" credit, as that phrase is used in

the first sentence.

CETTO v. LASALLE BANK 11

Third, the last sentence speaks of "any person who originates 1 or

more [high-cost] mortgages through a mortgage broker," manifesting

the clear understanding that "a mortgage broker" in a transaction is

someone distinct from "the creditor." See 15 U.S.C. § 1602(f)

(emphasis added). Maintaining this distinction is confirmed elsewhere

in the statute as Congress included in the points and fees calculation

"all compensation paid to mortgage brokers," see 15 U.S.C.

§ 1602(aa)(4), making no mention of compensation paid to the bro-

kers’ affiliates, even though it clearly contemplated and included fees

paid to affiliates of the creditor. In arguing that the last sentence pro-

vides an alternative, stand-alone definition of "creditor" that includes

mortgage brokers who have in the past extended credit, the Cettos

have failed to address this language in § 1602(aa)(4) that clearly

includes the fees of "mortgage brokers" and the fees of affiliates of

creditors, while making no mention of the fees paid to affiliates of

mortgage brokers. Had it been Congress’ intent, that section could

have included fees "paid to mortgage brokers and their affiliates." But

it did not. Thus, Congress continued its distinction between mortgage

brokers and creditors and their respective duties and responsibilities

based on their roles in the particular transaction.

Fourth, the last sentence speaks of "any person who originates 1

or more [high-cost] mortgages," (emphasis added), again distinguish-

ing from a mortgage broker. The originator of a mortgage is not the

mortgage broker in the transaction because Congress would not have

used different terms to describe a single entity. Indeed, the one who

"originates" a mortgage is the same entity to whom the debt "is ini-

tially payable," as referred to in the first sentence.

Fifth, the Cettos’ argument that because the second and third sen-

tences of § 1602(f) create stand-alone definitions of "creditor," the

fourth sentence should also be treated as a stand-alone definition fails

to take into account the historical facts. The first three sentences were

stand-alone definitions in the pre-HOEPA version of TILA. HOEPA,

which added protections in circumstances when the creditor originates

a high-cost mortgage, added the last sentence of § 1602(f) as a patch

to extend the first-sentence definition of "creditor" in the context of

mortgages to include persons who have originated only two prior

high-cost mortgages.

12 CETTO v. LASALLE BANK

When enacting HOEPA in 1994 as amendments to TILA, Congress

amended the definition of creditor by adding the last sentence of

§ 1602(f). Home Ownership and Equity Protection Act, Pub. L. No.

103-325, § 152(c), 108 Stat. 2160, 2191 (1994). The Senate Report

explained the addition of that sentence as follows:

The current definition of creditor in Truth-in-Lending

excludes those who originate four or fewer mortgages per

year.[2] For High Cost Mortgages, the Committee has

extended coverage to anyone making a high cost mortgage

through a broker and anyone who makes more than one

High Cost Mortgage in a twelve month period. The Com-

mittee seeks to prevent brokers from evading the legislation

by matching each borrower with a different private individ-

ual acting as a lender.

S. Rep. No. 103-169, at 25 (1993) as reprinted in 1994 U.S.C.C.A.N.

1881, 1909. Thus, Congress was concerned with persons who were

evading the law by arranging high-cost loans through individual

investors who did not "regularly extend" credit as it was defined in

Regulation Z at the time. These individuals would serve as the lender

for only one or two mortgages, and so did not qualify as "creditors"

by the terms of § 1602(f)’s first sentence and Regulation Z’s defini-

tion of "regularly extend[ing]" credit, which required more than five

previous extensions of credit through mortgages. With no "creditor"

in these transactions, TILA would not apply at all. The 1994 amend-

ment, thus, was designed to reach such persons who arranged for a

group of smaller, less frequent investors to serve as lenders for high-

2

Here, Congress refers to Regulation Z’s numerical requirements for

determining when a lender "regularly extends consumer credit." These

numerical requirements were established in the Regulation in the 1980s,

after a decade under TILA in which courts had little guidance as to what

was meant by the phrase. Although Congress refers to "those who origi-

nate four or fewer" mortgages as being wholly exempt from the defini-

tion of creditor under TILA, Regulation Z actually states that a person

is a creditor only if he extended credit "more than 5 times" for transac-

tions secured by a dwelling, not "5 or more," as the Senate report errone-

ously reads Regulation Z. See 12 C.F.R. § 226.2(a)(17) n.3. The

discrepancy, however, is not material to the discussion here.

CETTO v. LASALLE BANK 13

cost mortgages, thereby avoiding the requirements of TILA simply

because they did not "regularly extend" consumer credit as it was then

defined. With the new language, the person making a high-cost mort-

gage loan becomes a "creditor" for future transactions in which he

extends credit even if he originated just two high-cost loans in 12

months or even a single high-cost loan through a mortgage broker.

See 15 U.S.C. § 1602(f).

In light of this history, nothing can be gained from blindly viewing

the structure of § 1602(f) alone, as the Cettos suggest.

Sixth, the Cettos’ structural argument that because the first three

sentences are stand-alone definitions, so must the last sentence be a

stand-alone definition also fails to consider the substance of each of

the sentences. The first sentence defines "creditor" for installment

loans involving both personal property and real property. The second

and third sentences define "creditor" in the credit card context to

include a merchant who honors the credit card and the issuer of the

card. Credit card loans, unlike the loans addressed in the first sen-

tence, are not installment loans (indeed, many borrowers pay off their

debt in one payment). The fourth and last sentence returns to the sub-

ject of the first, addressing creditors in the context of installment

loans involving property. The first and last sentences thus are linked

by their substantive content.

Finally, we believe that a less awkward and surely a less problem-

atic reading, indeed the more natural reading of the entire subsection

— one that construes the first and last sentences in harmony with each

other — would take the last sentence to define with more particularity

when a person who is making a high-cost installment loan "regularly

extends" credit, as that phrase appears in the first sentence.

In sum, the universal definition of "creditor" in the first sentence

of § 1602(f), the substantive and linguistic connections between the

first and last sentences, the differential terminology between "credi-

tor" and "mortgage broker," the history of the last sentence’s enact-

ment, and common sense directs us to conclude that the last sentence

is not a stand-alone definition, as argued by the Cettos, but rather a

particularizing clarification of the first sentence, which defines "credi-

14 CETTO v. LASALLE BANK

tor" in an installment loan as the person to whom the obligation is ini-

tially payable.

III

In addition to the unambiguous statutory language of TILA and

HOEPA, Regulation Z, promulgated by the Federal Reserve Board to

assist in applying § 1602(f), provides that "creditor" cannot include a

mortgage broker who does not extend credit in the transaction and

that the last sentence of § 1602(f) explains the first prong of the "cred-

itor" definition in the first sentence — what it means to "regularly

extend" credit — in circumstances when high-cost mortgages are

involved. Regulation Z defines creditor as:

(i) A person (A) who regularly extends consumer credit3 that

is subject to a finance charge or is payable by written agree-

ment in more than 4 installments (not including a downpay-

ment), and (B) to whom the obligation is initially payable,

either on the face of the note or contract, or by agreement

when there is no note or contract.

FN3: A person regularly extends consumer credit only

if it extended credit (other than credit subject to the require-

ments of § 226.32 [high-cost mortgages]) more than 25

times (or more than 5 times for transactions secured by a

dwelling) in the preceding calendar year. If a person did not

meet these numerical standards in the preceding calendar

year, the numerical standards shall be applied to the current

calendar year. A person regularly extends consumer credit

if, in any 12-month period, the person originates more than

one credit extension that is subject to the requirements of

§ 226.32 [high-cost mortgages] or one or more such credit

extensions through a mortgage broker.

12 C.F.R. § 226.2(a)(17)(i) (emphasis added). Footnote 3 of Regula-

tion Z states that the last sentence of § 1602(f) refers to and further

defines part (1) of the first sentence as to who "regularly extends"

credit. Thus, a person "regularly extends" credit as used in part (1) of

the first sentence of § 1602(f) when he has extended credit through

mortgages more than five times in the previous year or when he has

CETTO v. LASALLE BANK 15

made more than one high-cost mortgage previously (or just one, if

through a mortgage broker), as provided in the last sentence of

§ 1602(f).

Regulation Z thus confirms that the last sentence does not operate

as a stand-alone definition. Instead, the Regulation creates a two-

tiered structure to define a person who "regularly extends consumer

credit" in the mortgage context. On one level it defines "regularly" as

any person who has extended credit through more than five mortgages

(whether high-cost or not) in the preceding calendar year, and on the

other level it defines "regularly" as any person who has extended

credit through more than one high-cost mortgage (or one, if through

a mortgage broker) in any 12-month period. To be a "creditor," how-

ever, the person must also always fulfill the second prong of Regula-

tion Z’s definition (which tracks exactly the statutory definition in the

first sentence of 15 U.S.C. § 1602(f)) by being the one to whom the

obligation is initially payable on the face of the loan document.

Because the mortgage broker in a transaction is not the one to whom

the debt is initially payable, even if the broker extended credit on any

number of previous, unrelated transactions, it is not a "creditor" for

that particular transaction.

Based on both § 1602(f) and Regulation Z promulgated under it,

we hold that Savings First was not a "creditor" in the Cettos’ refinanc-

ing transaction, and thus we affirm the district court’s judgment

reaching this same conclusion.3

3

Although no other court of appeals has yet found it necessary to con-

strue the last sentence of § 1602(f), lower courts have done so, mostly

rejecting the position taken by the Cettos. See Viernes v. Executive Mort-

gage, Inc., 372 F. Supp. 2d 576, 582 (D. Haw. 2004) (finding that the last

sentence of 15 U.S.C. § 1602(f) does not create an independent definition

of "creditor" under TILA); Wilson v. Bel Fury Investments Group, LLC,

2006 U.S. Dist. LEXIS 35740, *9-13 (D. Neb., Feb. 6, 2006) (finding

that the final sentence of § 1602(f) is not a stand-alone definition of cred-

itor but simply expands on the definition to explain who "regularly

extends" consumer credit). But see Anderson v. Wells Fargo Home Mort-

gage, Inc., 259 F. Supp. 2d 1143, 1149 (W.D. Wash. 2003) (stating,

without referring to Regulation Z, that the final sentence of § 1602(f) is

a stand-alone definition of "creditor" but not relying on this statement in

the holding of the case).

16 CETTO v. LASALLE BANK

IV

Unable to provide any argument why Regulation Z does not dictate

the outcome of this case, the Cettos contend that Regulation Z itself

is invalid because it contradicts what they see as the "unambiguous"

meaning of § 1602(f) — that it contains a free-standing definition of

"creditor" in the last sentence.

To address the Cettos’ attack on Regulation Z, we must assess the

regulation under the familiar two-step framework set out in Chevron

U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S.

837, 842-43 (1984), because Regulation Z resulted from the exercise

of the Federal Reserve Board’s congressionally delegated authority to

enact regulations that carry legal force. See 15 U.S.C. § 1604; House-

hold Credit Servs., Inc. v. Pfenning, 541 U.S. 232, 238-39 (2004)

(applying Chevron to Regulation Z). Indeed, the Supreme Court has

observed that "Congress has specifically designated the Federal

Reserve Board and staff as the primary source for interpretation and

application of truth-in-lending law." Ford Motor Credit Co. v. Milhol-

lin, 444 U.S. 555, 566 (1980). The Court in Milhollin stated,

"[b]ecause creditors need sure guidance through the ‘highly technical’

Truth in Lending Act, legislators have twice acted to promote reliance

upon Federal Reserve pronouncements." Id. at 566 (citation omitted).

First, Congress provided a good-faith defense to creditors who com-

ply with the Board’s rules and regulations, as set forth in 15 U.S.C.

§ 1640(f); and second, it expanded this good-faith defense to creditors

Several other courts have refused to deem mortgage brokers to be

"creditors," but there is no evidence in their opinions that they considered

past extensions of credit by the brokers that would fall within Regulation

Z, and the courts did not explicitly address § 1602(f)’s last sentence. See

Robey-Harcourt v. Bencorp Financial Inc., 326 F.3d 1140, 1142-43

(10th Cir. 2003); Wilson v. Homecomings Financial Network, Inc., 407

F. Supp. 2d 893, 896 (N.D. Ohio 2005); Noel v. Fleet, 971 F. Supp.

1102, 1109 (E.D. Mich. 1997); Sweeney v. Savings First Mortgage, LLC,

879 A.2d 1037, 1046-48 (Md. 2005) (finding that "[o]ne thing is certain,

mortgage brokers are not included in the definition of ‘creditor’ under

the TILA" and therefore holding that TILA does not preempt state laws

that regulate mortgage brokers).

CETTO v. LASALLE BANK 17

who conform to "any interpretation or approval by an official or

employee of the Federal Reserve System duly authorized by the

Board to issue such interpretations or approvals." 15 U.S.C.

§ 1640(f); Milhollin, 444 U.S. at 566-67. Thus, under specifically

applicable statutory provisions and Supreme Court holdings, we must

accord strong deference to Regulation Z.

The Cettos can succeed under the Chevron analysis only if they can

demonstrate that the text of the statute is unambiguous in favor of

their construction, in which case we would have to apply it as written,

regardless of what the agency regulation provides. See Chevron, 467

U.S. at 842-43; see also Estate of Cowart v. Nicklos Drilling Co., 505

U.S. 469, 476 (1992); cf. Milhollin, 444 U.S. at 566-67 n.9. Thus they

argue that because the last sentence of § 1602(f) does not explicitly

define a person who "regularly extends consumer credit" described in

part (1) of the first sentence, the last sentence must therefore be a

stand-alone definition of "creditor." They argue that this construction

is unambiguous and, accordingly, that the Federal Reserve Board’s

construction of § 1602(f) in Regulation Z is an impermissible one. See

Chevron, 467 U.S. at 843.

Inasmuch as we rejected the Cettos’ construction of § 1602(f) in

Part II, above, by drawing on a common sense reading of the lan-

guage used in the statute itself as well as the statutory structure that

distinguishes between mortgage brokers and creditors, we cannot

agree that the Cettos’ contrary construction is unambiguously correct

and that Regulation Z therefore is an impermissible construction of

§ 1602(f) because it is inconsistent with the Cettos’ construction.

But even if we restrict our focus to the last sentence of § 1602(f)

and the absence of explicit language indicating that the purpose of the

sentence is to modify further the first sentence, as the Cettos urge, we

could assume at most the existence of a technical gap or ambiguity

as to whether the last sentence modifies the first. Assuming that were

so, we would then determine, under Chevron’s second step, whether

Regulation Z is "based on a permissible construction of the statute."

Chevron, 467 U.S. at 843. In doing so, we would not need to conclude

that "the agency construction [is] the only one it permissibly could

have adopted to uphold the construction, or even the reading the court

would have reached if the question initially had arisen in a judicial

18 CETTO v. LASALLE BANK

proceeding." Id. at 843 n.11. Moreover, because a construction is per-

missible if it is reasonable, we would not be entitled "[to] substitute

[our] own construction of a statutory provision for a reasonable inter-

pretation made by the administrator of an agency." Id. at 844.

On the assumption of a technical gap or ambiguity in the statute,

we nonetheless conclude that Regulation Z is a reasonable construc-

tion of the statute.

Looking through the inquiring lens of reasonableness, we conclude

that Regulation Z’s interpretation — that the last sentence of

§ 1602(f) modifies the first sentence of that section — makes com-

plete sense. As we have already pointed out, the first sentence defines

a "creditor" as "only . . . a person" (1) who "regularly extends" credit

"and" (2) who is the person to whom the debt in the given transaction

is initially payable. The two requirements are mandatory and without

exception. Moreover, they make sense when reading a statute that

imposes disclosure requirements on the creditor in a given transac-

tion, because it is the creditor who lends the money in the transaction.

If one of the two requirements for defining a creditor in the first

sentence is eliminated by treating the last sentence as an independent

definition, the consequences are significant and, indeed, unreason-

able. First, the first sentence and the last sentence would have created

an arbitrary distinction regarding whether a transaction’s broker is a

creditor or not, without logic or reason. One mortgage broker, who is

not a lender in the current transaction, is deemed a "creditor" because

it made two loans in its history having costs exceeding 8%, and

another mortgage broker, who likewise is not a lender in the current

transaction, is excluded from the definition of "creditor" only because

all of its prior loans — no matter how many — had costs of 8% or

less. Second, mortgage brokers in a transaction would be regulated the

same as creditors, even though they extended no credit to the con-

sumer and even though the statute refers to mortgage brokers as per-

sons distinct from creditors. Third, the absurdity of such a

construction would be that the TILA and HOEPA would regulate

mortgage brokers as creditors, not because the mortgage brokers

extended any credit to the consumer, but because they had at some

time in the past extended credit as a lender. Common sense suggests

that TILA and HOEPA were enacted to protect consumers from credi-

CETTO v. LASALLE BANK 19

tors in specific consumer loans, not from non-lenders who may have

served as creditors in some other transaction years before.

Avoiding these consequences, Regulation Z reads the first and last

sentences of § 1602(f) in a natural way that lets them stand in har-

mony.

Accordingly, we conclude that the Federal Reserve Board’s inter-

pretation of "creditor" in Regulation Z is, if not the correct one, cer-

tainly a permissible one. First, as shown above, it is a logical

interpretation and fits into one of two possible interpretations of the

statute based on the plain meaning of the text. Second, the clause in

the last sentence of § 1602(f), making a creditor out of "any person

who originates 1 or more [high-cost] mortgages through a mortgage

broker," suggests that the mortgage broker is a person other than the

"creditor" in a mortgage transaction. See 15 U.S.C. § 1602(f) (empha-

sis added). Finally, it conforms to common sense. It would be strange

for a mortgage broker that merely arranged a particular loan to be

considered a "creditor" for the entire subchapter, 15 U.S.C. §§ 1601-

77 (Consumer Credit Cost Disclosure), just because it had originated

a mortgage and extended credit in some earlier, unrelated transaction.

Thus, the Federal Reserve Board’s interpretation — using the last

sentence of § 1602(f) to define further what is meant by "regularly

extend[ing]" consumer credit — is a reasonable and therefore permis-

sible construction of the statute.

V

As a final attempt to attack the validity of Regulation Z, the Cettos

contend that the Federal Reserve Board’s official staff interpretation

of Regulation Z contradicts the Regulation’s obvious meaning. The

inference to be drawn is that either the position taken in Regulation

Z or the position taken by the staff is an unreasonable construction

and therefore neither can be accorded deference as reasonable. See

Milhollin, 444 U.S. at 565 ("Unless demonstrably irrational, Federal

Reserve Board staff opinions construing the Act or Regulation should

be dispositive . . . ."); see also 15 U.S.C. § 1640(f) (good faith com-

pliance with a Board staff opinion is a shield to liability under certain

sections of TILA and HOEPA).

20 CETTO v. LASALLE BANK

The relevant staff interpretation notes that "[t]he definition [of

creditor] contains four independent tests. If any one of the tests is met,

the person is a creditor for purposes of that particular test." 12 C.F.R.

§ 226, Supp. I, at 374 (emphasis added). The Cettos argue that this

statement refers to the statutory definition of "creditor" located in 15

U.S.C. § 1602(f). Because there are four sentences in § 1602(f), the

Cettos reason that each sentence must therefore amount to an individ-

ual definition of "creditor" and therefore that the staff interpretation

supports their view that the last sentence of § 1602(f) is a free-

standing definition — the "fourth definition" under the staff interpre-

tation.

The Cettos’ understanding of the Federal Reserve Board’s staff

interpretation is patently wrong. The staff interpretation refers to Reg-

ulation Z’s definition of "creditor," located in 12 C.F.R.

§ 226.2(a)(17), not to the statutory definition, located in 15 U.S.C.

§ 1602(f). Indeed the introduction to the Board’s staff interpretation

states: "This commentary is the vehicle by which the staff of the Divi-

sion of Consumer and Community Affairs of the Federal Reserve

Board issues official staff interpretations of Regulation Z . . . ." 12

C.F.R. § 226, Supp. I, at 368 (emphasis added).

Regulation Z’s definition of "creditor" does indeed contain four

independent tests, the first reciting the two-part test explained in the

first sentence of 15 U.S.C. § 1602(f) and interpreting the last sentence

of § 1602(f) to describe what it means to "regularly extend consumer

credit" when a high-cost mortgage is involved. See 12 C.F.R.

§ 226.2(a)(17)(i). The three additional definitions in Regulation Z

deal with various methods of becoming a "creditor" by extending

credit through the issuance and acceptance of credit cards. See 12

C.F.R. § 226.2(a)(17)(ii)-(iv). In neither Regulation Z nor the staff

interpretation is there any stand-alone definition of "creditor" con-

forming to § 1602(f)’s last sentence. Regulation Z’s definition makes

clear that, in this context, a creditor must be one to whom the debt

is initially owed. Thus, the official staff position, which is consistent

with Regulation Z, actually undermines rather than advances the Cet-

tos’ position. Moreover, it confirms further our understanding that the

final sentence of § 1602(f) must be read to explain what it means to

"regularly extend" consumer credit, as that phrase appears in the first

sentence.

CETTO v. LASALLE BANK 21

Because the Federal Reserve Board, through both Regulation Z and

its staff interpretation, provides a consistent, rational, and therefore

permissible explanation of the definition of "creditor" in § 1602(f), we

are not free to ignore the construction made by the agency tasked with

providing guidance on the statute.

VI

Were we to construe § 1602(f) to make any mortgage broker a

"creditor," simply because the mortgage broker on a few occasions

earlier was a creditor in unrelated transactions, we would broaden sig-

nificantly the duties imposed on persons participating in loan transac-

tions, with untold and unknown consequences that cannot now be

fully foreseen. The TILA as amended by HOEPA is a detailed and

complex statute concerned with balancing the benefits of disclosure

requirements with the burdens that such disclosure would impose on

various parties to credit transactions. To expand the disclosure

requirements to persons who are not clearly creditors would be anti-

thetical to the clear, permissible, and authoritative interpretation given

by the agency experts in this area and would introduce undefinable

instability to an area in which Congress sought to introduce stability.

In addition, denying Savings First the ability to rely on the Board’s

permissible Regulation Z would lead to widespread confusion. Mort-

gage brokers would be unsure of their status under lending laws and

would be punished for relying on the very regulations on which they

have been encouraged by Congress in the statute to rely. See, e.g., 15

U.S.C. § 1640(f); Milhollin, 444 U.S. at 566-67. Regulation Z pro-

vided the necessary "sure guidance" through the "highly technical"

mortgage lending laws, see id. at 566, and Savings First relied on this

recognized guidance.

Therefore, we hold that the definition of "creditor" in § 1602(f),

based on traditional notions of statutory construction, the Federal

Reserve Board’s Regulation Z, and common sense, does not reach

mortgage brokers in transactions in which they act only in the role of

broker, even though they may have acted as a statutorily-defined

"creditor" in prior unrelated transactions.

The judgment of the district court is

AFFIRMED.