The opinion
FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
LARRY L. JONES; JANET JONES,
Plaintiffs-Appellants, No. 03-55575
v.
D.C. No.
CV-02-01123-MJL
E*TRADE MORTGAGE CORPORATION;
E*TRADE BANK, OPINION
Defendants-Appellees.
Appeal from the United States District Court
for the Southern District of California
M. James Lorenz, District Judge, Presiding
Argued and Submitted
December 10, 2004—Pasadena, California
Filed February 11, 2005
Before: Betty B. Fletcher, John T. Noonan, and
Richard A. Paez, Circuit Judges.
Opinion by Judge Noonan
1793
JONES v. E*TRADE MORTGAGE CORP. 1795
COUNSEL
Daniel H. Harris, Chicago, Illinois, for the plaintiffs-
appellants.
Douglas P. Lobel, McLean, Virginia, for the defendants-
appellees.
OPINION
NOONAN, Circuit Judge:
Larry L. Jones (Jones) and Janet Jones appeal the judgment
of the district court dismissing their complaint with prejudice
for failure to state a cause of action under the Truth In Lend-
ing Act (TILA), 15 U.S.C. §§ 1601— 1667f, against E*Trade
Mortgage Company and E*Trade Bank (collectively
E*Trade). Holding that the Joneses have stated a viable com-
plaint, we reverse and remand.
ALLEGATIONS
The Joneses allege, and for the purpose of this appeal we
take as true, the following:
In September, 2001, Jones contacted E*Trade to arrange
the refinancing of the mortgage on his home. On September
1796 JONES v. E*TRADE MORTGAGE CORP.
15, 2001, Lisa Arroyo, a loan consultant employed by
E*Trade, sent him five documents to complete his loan appli-
cation. Among the documents was one entitled “40-Day
Lock-in Disclosure and Agreement” (Agreement). It identi-
fied the Joneses and their property and established a loan
amount of $201,000 at an interest rate of 7.25 percent. The
Agreement further provided for a “Rate Lock Fee” that would
be refunded at the close of escrow.1
The Agreement also contained general terms providing that
applicants were required to return all documents listed on an
enclosed checklist within three calendar days or forfeit the
“lock deposit.” If an applicant provided all the required infor-
mation but his or her loan was not approved by the lender
“based on income qualifying or credit,” the Agreement pro-
vided that the lock-in fee would be refunded. If, however, the
loan “fail[ed] to close for any other reason,” including the
applicant’s decision to cancel the application, the lock-in fee
would not be refunded.2
On September 21, 2001, E*Trade approved the $201,000
loan at 7.25 percent interest, credited the Joneses with the
$400 lock-in fee, and sent them a “Notice of Right to Cancel.”
This notice outlined the Joneses’ right under TILA to cancel
the loan within three business days of the date of the transac-
tion (specified as September 23, 2001— the same day the
notice was signed) or the date the Joneses received their TILA
disclosures. If the transaction were cancelled, the notice
informed the Joneses that E*Trade “must return to you any
money or property you have given to us or to anyone else in
connection with the transaction.” The notice gave the Joneses
1
The Joneses paid $400.00 for the locked-in rate, although the Agree-
ment specifies the amount charged as $800.00. The Joneses’ complaint
indicates that the $800.00 charge was merely a typographical error.
2
The complete text of the Agreement is included in Appendix A.
JONES v. E*TRADE MORTGAGE CORP. 1797
until midnight on September 26, 2001, to send notice of can-
cellation to E*Trade.3
On September 25, 2001, Jones discovered that advertised
interest rates were below 7.25 percent. He called E*Trade,
spoke to Adam Ouye, a mortgage sales manager, and asked
that the loan be repriced. Ouye refused and observed that, if
the Joneses rescinded, they would forfeit the $400 lock-in fee.
Jones invoked Regulation Z under the Truth In Lending Act.
Ouye told him that E*Trade was not governed by Regulation
Z and that they would lose the $400.
The Joneses proceeded with the loan at 7.25 percent inter-
est for 30 years. Closing took place on October 8, 2001. At
that time the average interest on a 30-year home mortgage
was 6.77 percent.
Jones complained to the Comptroller of the Currency. As
a result, the Department of the Treasury’s Office of Thrift
Supervision contacted E*Trade, and on January 10, 2002,
reported to Jones the following:
Upon receipt of your correspondence, we asked
E*Trade Bank to research the issue you have raised
regarding the refund of the interest rate lock in
deposit when a loan is rescinded. Mr. Gregory D.
Benson, Director of Compliance and Security,
responded on behalf of the institution and explained
that the institution’s policy is to refund the deposit
only in cases where the loan applicant does not qual-
ify.
3
The complete text of the Notice of Right to Cancel is included in
Appendix B.
1798 JONES v. E*TRADE MORTGAGE CORP.
PROCEEDINGS
On March 6, 2002, the Joneses brought this suit in the
Northern District of Illinois as a class action against E*Trade.
The case was transferred to the Southern District of Califor-
nia. On August 15, 2002, the Joneses filed an amended com-
plaint alleging that E*Trade had failed to provide the “clear
and conspicuous” disclosure of rescission rights required by
15 U.S.C. § 1635(a) and 12 C.F.R. § 226.23(b) and also stat-
ing a claim under California Business and Professions Code
section 17200. E*Trade moved to dismiss. On March 14,
2003, the district court granted the motion.
The district court ruled that the Lock-in Agreement
addressed only refund of the $400 lock-in fee before closing,
and so was not inconsistent with the rescission right set out
in the Notice of Right to Cancel. The district court dismissed
the TILA claim with prejudice and the California claim with-
out prejudice.
The Joneses appeal.
ANALYSIS
[1] The purpose of the Truth In Lending Act is to ensure
that users of consumer credit are informed as to the terms on
which credit is offered them. 15 U.S.C. § 1601. To that end,
the law requires creditors to “clearly and conspicuously dis-
close” borrowers’ rights to rescind a home mortgage loan, in
accordance with regulations of the Federal Reserve Board. 15
U.S.C. § 1653(a).
[2] The statute is implemented by Regulation Z, which
requires creditors to describe the effects of rescission, includ-
ing the creditor’s obligation to “return any money or property
that has been given to anyone in connection with the transac-
tion.” 12 C.F.R. § 226.23(d)(2). The Staff Commentary on
this regulation adds:
JONES v. E*TRADE MORTGAGE CORP. 1799
Refunds to consumer. The consumer cannot be
required to pay any amount in the form of money or
property either to the creditor or to a third party as
part of the credit transaction. Any amounts of this
nature already paid by the consumer must be
refunded. “Any amount” includes finance charges
already accrued, as well as other charges, such as
broker fees, application and commitment fees . . .
12 C.F.R. part 226 Supp. I para. 23(d)(2)-1. On the face of the
documents before us, the Lock-in Disclosure and Agreement
appears to be part of an application to E*Trade for credit. The
$400 charge is attached to this application and to the acquisi-
tion by the borrower of the locked-in interest rate. It is diffi-
cult to see this agreement as a separate transaction to be
distinguished from the loan itself. It is step one in the several
steps in obtaining this particular loan from E*Trade. Accord-
ingly, E*Trade cannot be allowed to subvert the rescission
right, including the right to the return of all the property and
money tendered it in “this transaction.” The construction of
the Lock-in Disclosure and Agreement, first advanced by
Ouye, a sales manager for E*Trade, then adopted by E*Trade
replying to the Office of Thrift Supervision, and finally
accepted by the district court, separates the several steps into
several transactions and so permits the lender to extract
money from the borrower who exercises his statutory right of
rescission. That is not permitted by the Truth In Lending Act.
E*Trade makes the argument that if the loan had never
closed, the Joneses would not have had the right to rescind.
The argument is irrelevant to this case. The loan did close.
Jones did have a right to rescind. What that right included was
not clear to him because of Ouye’s representations and what
now appears to have been the corporate policy of E*Trade.
[3] The vitality of the Joneses claim under the Truth In
Lending Act gives vitality as well to their state claim. Accord-
ingly, the judgment of the district court is REVERSED and
1800 JONES v. E*TRADE MORTGAGE CORP.
the case is REMANDED for proceedings consistent with this
opinion.
JONES v. E*TRADE MORTGAGE CORP. 1801
APPENDIX A
Lender has delivered to you a loan application checklist
(“Checklist”) concurrently with the delivery of this Lock-in
Disclosure. YOU MUST RETURN ALL OF THE DOCU-
MENTS LISTED ON THE CHECKLIST WITHIN THREE
(3) CALENDAR DAYS OF THE LOCK-IN DATE STATED
ABOVE. IF YOU FAIL TO SUBMIT THIS DOCUMENTA-
TION WITHIN THE THREE (3) CALENDAR DAYS:
A. YOUR RATE IS SUBJECT TO CHANGE TO THE
HIGHER OF THE FOLLOWING:
1. CURRENT MARKET RATE
2. ORIGINAL LOCKED-IN RATE
B. APPLICANT DOES NOT QUALIFY FOR REFUND
OF LOCK DEPOSIT FOR ANY REASON.
Although the TrueLock™ program locks in the interest rate
and Value Price on your requested loan, this does not guaran-
tee that your loan will close. Your loan application has
received preliminary approval based on certain information
and assumptions made during the application process. How-
ever, prior to closing your loan, Lender must verify property
value, property conditions, mortgage insurance (if applicable),
clear title, and certain other information that may be requested
to evaluate your ability and willingness to meet credit obliga-
tions and the value and condition of the property.
If you provide Lender with all documentation requested of
you (within 3 calendar days) to complete the underwriting
review of your loan application (including, but not limited to,
the information on the Checklist) and, following such review,
Lender does not approve your loan for closing, based on
income qualifying or credit, the lock-in fee will be refunded
to you. If your loan fails to close for any other reason (includ-
1802 JONES v. E*TRADE MORTGAGE CORP.
ing your decision to cancel the application, then the lock-in
fee will not be refunded to you.
Please be aware that if your loan fails to close within the
stated lock-in period, Lender is under no obligation to extend
such period or to close the loan on the terms stated herein.
Lender does not warrant the lock-in period against any delays
in processing, regardless of the party who is causing such
delay. Should the lock-in period expire before your loan is
funded, you will need to lock in a new interest rate and Guar-
anteed Value Price based on then current market conditions or
the Original locked-in rate, whichever is higher. Because of
this, it is imperative that you provide Lender, within the time
frame stated above, with all documentation that is requested
to complete the review of your loan application.
JONES v. E*TRADE MORTGAGE CORP. 1803
APPENDIX B
NOTICE OF RIGHT TO CANCEL
You are entering into a transaction that will result in a mort-
gage, deed of trust, or security deed (“security interest”) on
your home. You have a legal right under federal law to cancel
this transaction, without cost, within THREE BUSINESS
DAYS from whichever of the following events occurs last:
1. The date of the transaction, which is Sept. 23,
2001; or
2. The date you received your Truth-in-Lending
disclosures; or
3. The date you received this notice of your right
to cancel.
If you cancel the transaction, the mortgage is also cancelled.
Within 20 CALENDAR DAYS after we receive your notice,
we must take the steps necessary to reflect the fact that the
mortgage on your home has been cancelled, and we must
return to you any money or property you have given to us or
to anyone else in connection with this transaction.
You may keep any money or property we have given you
until we have done the things mentioned above, but you must
then offer to return the money or property. If it is impractical
or unfair for your to return the property, you must offer its
reasonable value. You may offer to return the property at your
home or at the location of the property. Money must be
returned to the address below. If we do not take possession of
the money or property within 20 CALENDAR DAYS of your
offer, you may keep it without further obligation.
HOW TO CANCEL:
1804 JONES v. E*TRADE MORTGAGE CORP.
If you decide to cancel this transaction, you may do so by
notifying us in writing:
Name of
Creditor: E*TRADE MORTGAGE CORPORATION
At: 7755 CENTER AVENUE #100
HUNTINGTON BEACH, CA 92647
You may use any written statement that is signed and dated
by you, and that states your intention to cancel and/or you
may use this notice by dating and signing below. Keep one
copy of this notice because it contains important information
about your rights.
If you cancel by mail or telegram, you must send the notice
no later than MIDNIGHT of Sept. 26, 2001 (or MIDNIGHT
of the THIRD BUSINESS DAY following the latest of the
three events listed above.) If you send or deliver your written
notice to cancel some other way, it must be delivered to the
above address no later than that time.
I WISH TO CANCEL,
Date:
Signature
The undersigned each acknowledge receipt of two copies of
this NOTICE OF RIGHT TO CANCEL and one copy of the
Federal Truth-in-Lending Disclosure Statement, all given by
Lender in compliance with the Truth in Lending Simplifica-
tion and Reform Act.
Each Borrower in this transaction has the right to cancel. The
exercise of this right by one Borrower shall be effective as to
all Borrowers.