Watkins v. Suntrust Mortgage, Inc.

PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

EDWARD B. WATKINS, 

Plaintiff-Appellant,

v.

 No. 10-1915

SUNTRUST MORTGAGE,

INCORPORATED,

Defendant-Appellee.



Appeal from the United States District Court

for the Eastern District of Virginia, at Richmond.

James R. Spencer, Chief District Judge.

(3:10-cv-00098-JRS)

Argued: October 27, 2011

Decided: December 14, 2011

Before NIEMEYER, WYNN, and DIAZ, Circuit Judges.

Affirmed by published opinion. Judge Niemeyer wrote the

majority opinion, in which Judge Diaz joined. Judge Wynn

wrote a dissenting opinion.

COUNSEL

ARGUED: Henry Woods McLaughlin, III, LAW OFFICE

OF HENRY MCLAUGHLIN, P.C., Richmond, Virginia, for

Appellant. Mark C. Shuford, KAUFMAN & CANOLES,

2 WATKINS v. SUNTRUST MORTGAGE, INC.

P.C., Richmond, Virginia, for Appellee. ON BRIEF: Mat-

thew B. Chmiel, KAUFMAN & CANOLES, P.C., Richmond,

Virginia, for Appellee.

OPINION

NIEMEYER, Circuit Judge:

The issue presented is whether a lender violates the Truth

in Lending Act, 15 U.S.C. § 1601 et seq. ("TILA"), in provid-

ing notice to a borrower who is refinancing his mortgage of

the right to rescind the transaction, using a form of notice sub-

stantially similar to Model Form H-8 in the Appendix to Reg-

ulation Z, 12 C.F.R. pt. 226, rather than using Model Form H-

9, which was designed for refinancing transactions.

The district court dismissed the borrower’s complaint for

failure to state a claim upon which relief could be granted,

concluding that although Model Form H-8 is somewhat dif-

ferent from Model Form H-9, the use of Model Form H-8 in

a refinancing transaction did not amount to a TILA violation.

We agree. Model Form H-8 includes all of the information

required by TILA and Regulation Z to advise borrowers of the

right to rescind a consumer credit transaction, including a refi-

nancing transaction, and accordingly we affirm.

I

Edward Watkins and Danielle Watkins refinanced the loan

on their house in Richmond, Virginia, with a new loan from

SunTrust Mortgage, Inc., secured by a deed of trust on their

house. SunTrust had also been the lender on the Watkinses’

prior loan. At the closing of the refinancing transaction on

May 7, 2007, SunTrust gave the Watkinses written notices of

their right to rescind the transaction, using a form of notice

WATKINS v. SUNTRUST MORTGAGE, INC. 3

that was substantially similar to Form H-8 ("Rescission

Model Form (General)"), as included in the Appendix to Reg-

ulation Z, 12 C.F.R. pt. 226. Model Form H-8 contained all

of the information specified in TILA and Regulation Z for

disclosure of the right to rescind a secured consumer credit

transaction, but it did not include some language specific to

refinancing transactions, which is included in Model Form

H-9.

Some 18 months after closing, when the Watkinses had

fallen behind in payments on their loan, SunTrust scheduled

a foreclosure sale of the house for the end of December 2009.

By letter dated December 14, 2009, the attorney for Edward

Watkins, who was then separated from his wife, announced

that Watkins was rescinding the May 7, 2007 refinancing

transaction because SunTrust had "provided the Watkinses

notices of right to cancel applicable to a new extension of

credit by a new creditor, whereas this was an extension of

additional credit by an existing creditor with an existing lien

on the home." The letter explained:

Attached to this letter is a copy of Exhibit H-9 to

Regulation Z (promulgated by the Federal Reserve

Board) which provides the proper notice of right to

cancel in a credit transaction involving a new exten-

sion of credit by an existing creditor. . . . The notice

of right to cancel you provided to the Watkinses . . .

did not set forth proper language such as set forth in

Exhibit H-9 to Regulation Z for new extensions of

credit by existing creditors. . . . Rather, the notice

you provided to the Watkinses was based on Exhibit

H-8 to Regulation Z, for credit transactions by an

entirely new creditor.

The letter claimed that SunTrust’s use of Form H-8 in lieu of

Form H-9 was "a material violation of TILA disclosure

requirement[s]."

4 WATKINS v. SUNTRUST MORTGAGE, INC.

When SunTrust failed to take steps to rescind the transac-

tion, Edward Watkins commenced this action under TILA,

seeking a declaratory judgment that he was entitled to rescind

the May 7, 2007 refinancing transaction and an award of stat-

utory damages in the amount of $2,000.

SunTrust filed a motion to dismiss Watkins’ complaint

under Federal Rule of Civil Procedure 12(b)(6), asserting that

the disclosures that SunTrust provided to the Watkinses fully

complied with the requirements of TILA and Regulation Z,

albeit through Model Form H-8 rather than Model Form H-9.

SunTrust claimed that Model Form H-8 provided the Watkin-

ses with all of the information required by TILA to inform

them of the right to rescind. SunTrust suggested that Watkins’

attempt to rescind after facing foreclosure was "plainly noth-

ing more than a transparent, and legally improper, attempt to

avoid foreclosure."

The district court granted SunTrust’s motion, explaining:

While it would seem obvious that a lender would be

well advised to use a Model Form H-8 in a new

extension of credit and Model Form H-9 when refi-

nancing an existing mortgage, the Court cannot con-

clude that a lender’s use of one form in place of

another, without more, is in and of itself a violation

of the TILA. Since Watkins has not alleged that the

disclosures made at the time of the refinancing were

otherwise deficient, the Court must conclude that he

has failed to show his entitlement in either law or

fact, to the relief he seeks.

From the district court’s order dismissing the case, dated

July 15, 2010, Watkins filed this appeal.

II

To facilitate the "informed use of credit," the Truth in

Lending Act requires lenders "clearly and conspicuously" to

WATKINS v. SUNTRUST MORTGAGE, INC. 5

make a number of disclosures to borrowers, including the dis-

closure of the borrowers’ right to rescind a consumer credit

transaction. 15 U.S.C. §§ 1601(a), 1635(a). TILA provides

that a borrower has the right to rescind a consumer credit

transaction in which the borrower gives the lender a security

interest in the borrower’s principal dwelling. The right to

rescind extends "until midnight of the third business day"

after the closing of the transaction or after delivery of TILA-

required disclosure forms, id. § 1635(a), but if the required

disclosures are not delivered to the borrower, the borrower’s

right to rescind expires three years after closing, id. § 1635(f).

TILA requires the Federal Reserve Board to promulgate

regulations to carry out the purposes of the Act, including

"model disclosure forms" to "facilitate compliance with the

disclosure requirements." 15 U.S.C. § 1604(b). But TILA also

provides that "[n]othing in this subchapter may be construed

to require a creditor [in giving notice of the right to rescind]

to use any such model form or clause prescribed by the Board

under this section." Id.

As directed, the Board promulgated Regulation Z, 12

C.F.R. pt. 226, in which it itemized the notice requirements

for disclosing the right of rescission. Regulation Z provides

that the notice of the right to rescind must "conspicuously dis-

close" the following elements:

(i) The retention or acquisition of a security inter-

est in the consumer’s principal dwelling.

(ii) The consumer’s right to rescind the transaction.

(iii) How to exercise the right to rescind, with a

form for that purpose, designating the address

of the creditor’s place of business.

(iv) The effects of rescission, as described in para-

graph (d) of this section.

6 WATKINS v. SUNTRUST MORTGAGE, INC.

(v) The date the rescission period expires.

12 C.F.R. § 226.23(b)(1); see also 15 U.S.C. § 1635(a), (b).

The "effects of rescission," as described in clause (d) of

§ 226.23, are that rescission (1) voids the transaction, includ-

ing the security interest created by it; (2) entitles the borrower

to a refund of all amounts, including finance charges, paid in

connection with the transaction; and (3) requires the bor-

rower, after the lender has carried out its obligations in rescis-

sion, to refund any money or property that the borrower

received as a result of the transaction. See 12 C.F.R.

§ 226.23(d). In Appendix H to Regulation Z, the Board pro-

vides two model forms for rescinding "closed-end

transactions"—Model Form H-8 ("Rescission Model Form

(General)") and Model Form H-9 ("Rescission Model Form

(Refinancing with Original Creditor)").1

Model Form H-8, which is the "general" model form for

rescinding closed-end secured consumer credit transactions,

provides as follows:

NOTICE OF RIGHT TO CANCEL

Your right to cancel

You are entering into a transaction that will result in

a [mortgage/lien/security interest] [on/in] your home.

You have a legal right under federal law to cancel

this transaction, without cost, within three business

1

The dissenting opinion seems to assume that use of Model Form H-8

is "the appropriate model form in Appendix H promulgated by the Federal

Reserve Board for new borrowers." Post at 20 (emphasis added); see also

post at 21. But nothing supports that assertion. Form H-8 is the "general"

form included for rescinding closed-end secured consumer credit transac-

tions. See App’ H to Reg. Z, 12 C.F.R. pt. 226. We cannot conclude that

a "general" form must be limited in use to transactions with "new borrow-

ers."

WATKINS v. SUNTRUST MORTGAGE, INC. 7

days from whichever of the following events occurs

last:

(1) the date of the transaction, which is ______; 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 [mort-

gage/lien/security interest] 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/lien/security interest] [on/in] 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 prop-

erty. If it is impractical or unfair for you 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 obliga-

tion.

How to Cancel

If you decide to cancel this transaction, you may do

so by notifying us in writing, at (creditor’s name and

business address).

8 WATKINS v. SUNTRUST MORTGAGE, INC.

You may use any written statement that is signed

and dated by you and states your intention to cancel,

or you may use this notice by dating and signing

below. Keep one copy of this notice because it con-

tains important information about your rights.

If you cancel by mail or telegram, you must send the

notice no later than midnight of (date) (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

____________________

Consumer’s Signature Date

This form contains all of the information required by TILA

and Regulation Z to disclose the right to rescind a secured

consumer credit transaction. See 15 U.S.C. § 1635(a), (b); 12

C.F.R. § 226.23(a), (b), (d).

Model Form H-9, designated for rescinding a transaction

"Refinancing with Original Creditor," provides essentially the

same information as does Model Form H-8, but it also

includes two additional sentences to reflect that the transac-

tion is a refinancing. First, instead of Form H-8’s disclosure

that the borrower is "entering into a transaction that will result

in a security interest in your home," Form H-9 provides that

"[y]ou are entering into a new transaction to increase the

amount of credit previously provided to you." Second, Form

H-9 adds a sentence, "If you cancel this new transaction, it

will not affect any amount that you presently owe."

It is undisputed that the Watkinses’ May 7, 2007 loan trans-

action was a refinancing involving the same creditor that

WATKINS v. SUNTRUST MORTGAGE, INC. 9

extended credit to the Watkinses on their prior loan. It is also

undisputed that at the closing of the transaction, SunTrust pro-

vided the Watkinses with a disclosure of their right to rescind

that was substantially similar to Model Form H-8 and that did

not include the two additional sentences included in Model

Form H-9.

Watkins contends that SunTrust’s use of Form H-8 to dis-

close the right of rescission gave him inadequate notice of his

right of rescission. He argues essentially that the notice of

right to rescind a refinancing transaction must contain some

advice to the borrower that a rescission will only affect the

new amount financed and must also disclose that if the bor-

rower rescinds, the borrower’s obligations will revert to the

preexisting loan. As he states:

There are substantial differences between the notice

of right to cancel for a loan from a new lender and

the notice of right to cancel for extension of new

credit by an existing creditor. If the loan is an exten-

sion of new credit by an existing creditor, as here,

the debtor must be told that if the debtor rescinds,

the debtor can go back to the pre-existing loan. The

notice of right to cancel which Sun Trust gave to

Watkins and his wife told them that if they

rescinded, the entire transaction was canceled. It did

not tell them, and therefore did not tell Watkins, that

he could rely on his right to return to the pre-existing

loan.

To support his argument that Form H-9 must be used, Wat-

kins relies heavily on the Seventh Circuit’s decision in Handy

v. Anchor Mortgage Corp., 464 F.3d 760 (7th Cir. 2006),

where the court held that a lender, which had given the bor-

rower both the H-8 and H-9 Model Forms of notice, violated

TILA’s disclosure requirements. Reiterating its prior determi-

nation that "hypertechnicality reigns in TILA cases," the court

reasoned, "[w]here more than one reading of a rescission form

10 WATKINS v. SUNTRUST MORTGAGE, INC.

is ‘plausible,’ the form does not provide the borrower with a

clear notice of what her right to rescind entail[s]." Id. at 764

(internal quotation marks omitted). Watkins urges that we

apply a similarly strict standard in evaluating SunTrust’s com-

pliance with TILA and Regulation Z, including the model

forms included in the Appendix to Regulation Z.

SunTrust acknowledges that Model Form H-9 contains

"some language regarding the effect of rescission on the prior

indebtedness," which it did not include in the disclosure that

it provided to the Watkinses. But it contends that the addi-

tional language is language that "neither Congress nor the

Federal Reserve Board deemed mandatory, as no requirement

for it is provided either in TILA or Regulation Z." SunTrust

argues that even Watkins’ complaint "effectively" acknowl-

edges that "he had received in the notice provided to him by

[SunTrust] all of the information which TILA requires of a

lender under the circumstances described." In addition, Sun-

Trust argues that "TILA was not intended to be used as a

hypertechnical loophole for borrowers to escape their contrac-

tual obligations." Notice of the right to rescind, it argues, need

not be "perfect," so long as it substantially complies with the

requirements of TILA and Regulation Z.2

We begin our analysis with a review of the statutory and

regulatory language relating to the right of rescission and dis-

closure of the right.

TILA gives the borrower the right to rescind "any con-

sumer credit transaction" in which the credit is secured by a

2

The dissent assumes as "undisputed" that SunTrust "did not use the

appropriate model form to provide notice to the Watkinses." Post at 20;

see also post at 21. It then concludes that this "should end our intervention

in this matter" because TILA demands absolute compliance. Post at 21.

But the dissent’s assumption is misplaced. SunTrust’s entire argument on

appeal rests on its contention that it did use an appropriate form, comply-

ing fully with TILA and Regulation Z. And in our opinion we conclude

that it did.

WATKINS v. SUNTRUST MORTGAGE, INC. 11

lien on the borrower’s home. 15 U.S.C. § 1635(a). And when

"any consumer transaction" is so rescinded, TILA provides

that (1) the borrower is relieved of any obligation to pay a "fi-

nance or other charge"; (2) the security interest created by the

transaction becomes void; and (3) upon the lender’s perfor-

mance in returning money paid by the borrower and in void-

ing the security interest, the borrower must return to the

lender any money paid to the borrower. Id. § 1635(b). Finally,

TILA requires that the creditor "clearly and conspicuously

disclose, in accordance with regulations of the Board, to any

obligor in a transaction subject to this section the [rescission]

rights of the obligor under this section." Id. § 1635(a). The

statute does not make any distinction between a consumer

credit transaction that provides initial financing and a con-

sumer credit transaction that refinances an existing loan. The

right to rescind is made applicable to "any consumer credit

transaction" and the effects of rescission are the same with

respect to any form of such a transaction.

Regulation Z likewise makes no such distinction. It man-

dates that the notice of rescission include "[t]he effects of

rescission as described in paragraph (d) of this section," 12

C.F.R. § 226.23(b)(1)(iv), and paragraph (d) simply parrots

the statutory language, as described above. Consistent with

the common understanding of rescission, the creditor must

give back all fees received from the borrower and undo the

security interest given with respect to the loan, and the bor-

rower in turn must return the money it received. The parties

are thus returned to the status quo ante.

Watkins’ suggestion that the failure slavishly to follow the

language of Form H-9 in giving notice of the right of rescis-

sion is a violation of TILA cannot be supported by the lan-

guage of TILA or of Regulation Z. While TILA does indeed

require the Federal Reserve Board to publish model disclosure

forms "to facilitate compliance with the disclosure require-

ments," 15 U.S.C. § 1604(b) (emphasis added), it just as

quickly provides that the lender need not use any such model

12 WATKINS v. SUNTRUST MORTGAGE, INC.

form, so long as the required information is provided, id.

Indeed, the statute goes further, providing that the lender

"shall be deemed to be in compliance with the disclosure pro-

visions" even if it modifies the Board’s form by "deleting any

information which is not required by this subchapter." Id.

(emphasis added). Consistent with these statutory provisions,

the regulations require the use of a Board-drafted form "or a

substantially similar notice." 12 C.F.R. § 226.23(b)(2)

(emphasis added).3

Accordingly, SunTrust was not required to include in any

notice the information contained in the two additional sen-

tences included in Form H-9 for refinancing. Indeed, the two

additional sentences are nothing more than a particularized

restatement of what is contained in Form H-8, which is that

the right to rescind applies to the entire consumer credit trans-

action. Just as an initial financing transaction may be

rescinded, so may a refinancing be rescinded, and, as with any

rescission, the effect of rescission is to return the parties to the

same position they were in before the rescinded transaction

was consummated.

Thus, because SunTrust’s notice to the Watkinses fulfilled

each requirement imposed by TILA and by Regulation Z—

indeed, nearly verbatim—it is an unsustainable argument to

maintain that its notice was in violation of TILA. See Santos-

Rodriguez v. Doral Mortg. Corp., 485 F.3d 12, 18 (1st Cir.

2007) (Model Form H-8 is sufficient for refinancing transac-

tions); Mills v. EquiCredit Corp., 172 F. App’x. 652, 656-57

(6th Cir. 2006) (same); Veale v. Citibank, 85 F.3d 577, 580

(11th Cir. 1996) (same).

3

Despite the specific requirements and exceptions included in TILA and

Regulation Z, the dissent maintains that SunTrust "should have provided"

notice of rescission with Model Form H-9, implying, without citation, that

something in TILA and Regulation Z requires the use of Model Form H-9

for refinancing with an original creditor. But as we point out, nothing in

TILA or Regulation Z requires use of Form H-9 or use of the distinct lan-

guage or information given in Form H-9.

WATKINS v. SUNTRUST MORTGAGE, INC. 13

Watkins argues that SunTrust’s notice of the right of rescis-

sion incorrectly told the Watkinses that if they rescinded, "the

entire transaction was canceled. It . . . did not tell Watkins that

he could rely on his right to return to the pre-existing loan."

The second sentence of this argument, however, does not fol-

low from the first. As Watkins acknowledges, the notice

advised the Watkinses of the right to rescind the entire trans-

action, which was a correct statement and was required by

law. When an entire transaction is rescinded, however, the

status quo before the transaction must be restored, including,

in this case, the reinstatement of the prior loan.

By definition, a refinancing is the taking out of a new loan

to repay an existing loan, hence refinancing. The new loan

can be taken out to replace the prior loan with one having a

lower interest rate or one having a fixed rate as opposed to a

variable rate. The refinancing can replace a longer term loan

with a shorter term loan or a balloon-payment loan. And, of

course, a refinancing can provide "cash out," which would

increase the loan amount under the refinancing. But in any of

these refinancing transactions, the preexisting financing

arrangement is extinguished and replaced by the new financ-

ing.

Thus, when any such refinancing transaction is rescinded,

the entire new loan transaction, including the security agree-

ment, is voided, and the parties are returned to the status quo

ante. But none of these details relating to particular terms of

a refinancing and to the particularized effects of rescinding

those terms need be disclosed under TILA or Regulation Z.

The reversal of the terms of any particular form of refinancing

flows from the more generalized right of a borrower to

rescind the "entire transaction," as understood by Watkins.

Thus when Watkins was told that he could rescind the entire

refinancing transaction, he was told that all the aspects of the

new transaction would be undone, and because the new trans-

action extinguished the prior financing, to rescind would

require that his situation before the transaction be restored.

14 WATKINS v. SUNTRUST MORTGAGE, INC.

Even if we were to understand that the additional language

contained in H-9 was somehow required by TILA, we would

nonetheless find no violation here because the additional

information included in Model Form H-9 was substantially

included in the notice provided for in Model Form H-8.

Model Forms H-8 and H-9 both describe in similar language

the effects of rescission, using the language contained in

TILA and Regulation Z. Form H-9, however, spells out fur-

ther that rescission of a refinancing will essentially return the

borrower to his pretransaction status such that the rescission

"will not affect any amount that you presently owe." While

rescission, by definition, includes restoration of the parties to

their prior positions, this additional language in Form H-9

simply emphasizes that the previous loan and security interest

in the property will be reinstated. We cannot conclude that the

omission of this elaboration about the effects of a rescission

results in a violation of TILA, which allows for substantial

compliance with the rescission notice requirements. As we

have held, TILA’s regulations should be "reasonably con-

strued and equitably applied." Am. Mortg. Network, Inc. v.

Shelton, 486 F.3d 815, 819 n.4 (4th Cir. 2007). And this view

is the interpretative approach adopted by most of the circuits.

See Santos-Rodriguez, 485 F.3d at 16 ("Most courts have con-

cluded that the TILA’s clear and conspicuous standard is less

demanding than a requirement of perfect notice"); Veale, 85

F.3d at 581 ("TILA does not require perfect notice; rather it

requires a clear and conspicuous notice of rescission rights");

Gambardella v. G. Fox & Co., 716 F.2d 104, 118 (2d Cir.

1983) ("TILA . . . does not require perfect disclosure"); Smith

v. Chapman, 614 F.2d 968, 972 (5th Cir. 1980) ("Strict com-

pliance does not necessarily mean punctilious compliance if,

with minor deviations from the language described in the Act,

there is still a substantial, clear disclosure of the fact or infor-

mation demanded by the applicable statute or regulation"); cf.

Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 568 (1980)

("Meaningful disclosure [under TILA] does not mean more

disclosure. Rather, it describes a balance between competing

considerations of complete disclosure and the need to avoid

WATKINS v. SUNTRUST MORTGAGE, INC. 15

information overload") (internal quotation marks and alter-

ations omitted).

At bottom, we conclude that nothing in TILA requires a

lender specifically to advise the borrower of the specific "ef-

fects" of rescinding a mortgage refinancing, as distinct from

rescinding an initial mortgage financing. Because SunTrust’s

notice to the Watkinses, given in their refinancing transaction,

included all of the "effects of rescission" that are mandated by

TILA and Regulation Z, we conclude that the disclosure that

SunTrust gave through use of Model Form H-8 satisfied the

requirements of TILA and Regulation Z, even though the

notice did not contain the additional language contained in

Model Form H-9. Accordingly, we affirm the judgment of the

district court.

AFFIRMED

WYNN, Circuit Judge, dissenting:

"Congress enacted [the Truth in Lending Act] in 1968, as

part of the Consumer Credit Protection Act . . . to assure a

meaningful disclosure of credit terms so that the consumer

will be able to compare more readily the various credit terms

available to him and avoid the uninformed use of credit . . . ."

Koons Buick Pontiac GMC, Inc. v. Nigh, 543 U.S. 50, 53-54,

(2004) (internal citations omitted); see also Mourning v. Fam-

ily Pub. Serv., Inc., 411 U.S. 356, 377 (1973) ("The Truth in

Lending Act reflects a transition in congressional policy from

a philosophy of ‘Let the buyer beware’ to one of ‘Let the

seller disclose[ ]’" and, in so doing "Congress expressly

sought ‘to . . . avoid the uninformed use of credit.’") (quoting

15 U.S.C. § 1601). 15 U.S.C. § 1635 requires creditors to

"clearly and conspicuously disclose" the borrower’s rescission

rights under the Truth in Lending Act. 15 U.S.C. § 1635(a).

To that end, to enforce the disclosure requirements under

the Truth in Lending Act, "Congress gave the debtor a right

16 WATKINS v. SUNTRUST MORTGAGE, INC.

to specific information and therefore defined ‘injury in fact’

as the failure to disclose such information." White v. Arlen

Realty & Dev. Corp., 540 F.2d 645, 649 (4th Cir. 1975). The

Truth in Lending Act requires a lender to "clearly and con-

spicuously" disclose to the borrower the borrower’s right to

rescind and the length of the rescission period, as well as to

provide the borrower with "appropriate forms . . . to exercise

[the] right to rescind [a] transaction."1 15 U.S.C. § 1635(a).

Additionally, the Act also requires creditors to disclose the

effects of rescission. Regulation Z § 226.23(b)(1).

This Court has held that "to insure that the consumer is pro-

tected, as Congress envisioned, requires that the provisions of

the Act and the regulations implementing it be absolutely

complied with and strictly enforced." Mars v. Spartanburg

Chrysler Plymouth, Inc., 713 F.2d 65, 67 (4th Cir. 1983)

(holding that technical violation, even if merely a "minor vari-

ation in language and type size" from Truth in Lending Act

requirements, imposes liability), superseded on other grounds

by statute, 15 U.S.C. § 1640 (a)(2)(A), Pub.L. 104-12, May

18, 1995, 109 Stat. 161; see also Huff v. Stewart-Gwinn Fur-

niture Co., 713 F.2d 67, 69 (4th Cir. 1983) (holding that

minor violations of Truth in Lending Act and Regulation Z

impose liability even if, as creditor alleged, the consumer

"was not misled and was given a meaningful and correct dis-

closure of crucial credit terms").

1

Two footnotes in the majority opinion appear to suggest that there is

a dispute as to whether SunTrust used the "appropriate form" in providing

notice to the Watkinses. But neither the majority nor SunTrust disputes the

underlying premises that Form H-9 is designed for existing borrowers;

SunTrust provided the Watkinses notice by providing Form H-8 which is

designed for new borrowers; and the Watkinses were existing borrowers.

The dispute, if any, lies in the conclusion that arises from those premises.

Whereas the majority holds that the notice provided by Form H-8 is close

enough to meet the disclosure requirements of the Truth in Lending Act,

this Court in Mars v. Spartanburg Chrysler Plymouth, Inc., 713 F.2d 65,

67 (4th Cir. 1983), made it plain that the Truth in Lending Act requires

strict compliance. But, tellingly, the majority ignores our binding and con-

trolling decision in Mars by not even citing to it.

WATKINS v. SUNTRUST MORTGAGE, INC. 17

It is important to point out that although this Court, in Am.

Mortg. Network, Inc. v. Shelton, 486 F.3d 815 (4th Cir. 2007),2

suggested that the Truth in Lending Act should be "reason-

ably construed and equitably applied," that holding did not

and indeed could not overrule the binding precedent set by

this Court in Mars. See Am. Mortg. Network, Inc., 486 F.3d

at 819 n. 4. "[A] panel of this court cannot overrule, explicitly

or implicitly, the precedent set by a prior panel of this court.

Only the Supreme Court or this court sitting en banc can do

that." Scotts Co. v. United Indus. Corp., 315 F.3d 264, 272

(4th Cir. 2002) (citing Mentavlos v. Anderson, 249 F.3d 301,

312 n.4 (4th Cir. 2001)); see also Jones v. Angelone, 94 F.3d

900, 905 (4th Cir. 1996) ("we cannot, as a panel of the court,

overrule the decision of another panel; only the en banc court

may overrule a prior panel decision").

In Mars, this Court held that the Truth in Lending Act and

its regulations must "be absolutely complied with and strictly

enforced." Like our holding in Mars, other circuit courts have

also required that the Truth in Lending Act and its regulations

be absolutely complied with and strictly enforced. See Handy

v. Anchor Mortg. Corp., 464 F.3d 760, 764 (7th Cir. 2006)

("Truth in Lending Act does not easily forgive ‘technical’

errors.") (quotation marks omitted); Smith v. Fid. Consumer

Disc. Co., 898 F.2d 896, 898 (3rd Cir. 1990) ("Once the court

finds a violation, no matter how technical, it has no discretion

with respect to liability.") (quotation omitted); Semar v. Platte

Valley Fed. Sav. & Loan Ass’n, 791 F.2d 699, 704 (9th Cir.

2

Unlike the present case, Shelton was an action concerning the proce-

dural requirements for exercising the right to rescind. The issue in Shelton

was whether the lender had an obligation to return the borrower’s property

per the Truth in Lending Act deadlines after the lender learned that the

borrowers were unable to tender the loan proceeds to the lender. We

affirmed the grant of summary judgment in favor of the lender because

"[o]nce the trial judge . . . determined that [plaintiffs] were unable to ten-

der the loan proceeds, the remedy of unconditional rescission was inappro-

priate . . . . [And, consequently,] [t]he trial court properly exercised its

discretion in denying rescission." Shelton, 486 F.3d at 821.

18 WATKINS v. SUNTRUST MORTGAGE, INC.

1986) ("Technical or minor violations of [Truth in Lending

Act] or Reg Z . . . impose liability on the creditor and entitle

the borrower to rescind."); Williamson v. Lafferty, 698 F.2d

767, 768-69 (5th Cir. 1983) (holding that the failure to fill in

rescission expiration date violates the Truth in Lending Act).

The Truth In Lending Act provides that the Federal

Reserve Board:

. . . shall publish model disclosure forms and clauses

for common transactions to facilitate compliance

with the disclosure requirements of this title [15

USCS §§ 1601 et seq.] and to aid the borrower or

lessee in understanding the transaction by utilizing

readily understandable language to simplify the tech-

nical nature of the disclosures. . . . Nothing in this

title [15 USCS §§ 1601 et seq.] may be construed to

require a creditor or lessor to use any such model

form or clause prescribed by the Board under this

section.

15 U.S.C. § 1604(b). The Federal Reserve Board, in promul-

gating regulations under this statute, recognized that the stat-

ute offered the lender the options of using the model

disclosure forms or devising its own form to meet the disclo-

sure requirements. Those regulations further emphasized the

safe-harbor value of using the model disclosure forms under

12 C.F.R. § 226.23(b)(2), which has the force of law. That

regulation provides that a lending institution shall disclose the

right to rescind to the borrower through a "notice of a right to

rescind" in two ways:

1) provide the "appropriate model form in Appendix

H"; or

2) provide "a substantially similar notice."

See 12 C.F.R. § 226.23(b)(2).

WATKINS v. SUNTRUST MORTGAGE, INC. 19

By choosing to use the appropriate model disclosure form

method, both the lender and borrower are put on notice that

the form itself "shall be deemed to be in compliance with the

disclosure provisions of [the Truth in Lending Act]." 15

U.S.C. § 1604(b) (emphasis added). Furthermore, in choosing

the appropriate model disclosure form method, the lender has

but one duty to fulfill to be deemed in compliance with the

Truth in Lending Act – use the "appropriate model form."

To that end, the extensive analysis of the majority in deter-

mining if the disclosure requirements of the statute are met by

SunTrust, which chose to use the appropriate model disclo-

sure form method, seems beside the point. Indeed, the inter-

vention of the judiciary should be quite limited and efficient

when a lender chooses the appropriate model disclosure form

method, for the inquiry need only concern whether a lender

chose the appropriate form. If so, then the lender is deemed

in compliance; if not, then it is not in compliance with the

statute.

On the other hand, if a lender chooses to use the substan-

tially similar notice method, then the document that it chooses

to devise must meet the disclosure requirements of the statute.

In that instance, an analysis such as the majority’s would be

necessary to determine if the devised document met the statu-

tory disclosure requirements.

Here, SunTrust chose to use the "appropriate model form

in Appendix H" disclosure method rather than to devise its

own form to provide "substantially similar notice" required

under the Truth In Lending Act. Thus, the dispositive issue on

appeal is whether a lender that chooses to use the "appropriate

model form in Appendix H" must use the appropriate form to

comply with the Truth in Lending Act. Certainly yes. As it is

undisputed that SunTrust did not use the appropriate model

form, it follows that SunTrust was not in compliance with the

Truth in Lending Act. It is a simple and straightforward result

that is readily understood by both the lender and borrower. In

20 WATKINS v. SUNTRUST MORTGAGE, INC.

short, the intervention of courts should end when it is deter-

mined that a lender who chose to use the appropriate model

disclosure form method used the wrong form.

That was exactly the level of judicial restraint that the Sev-

enth Circuit exercised in Handy. There, the Seventh Circuit

noted that even the lender’s simultaneous provision of both a

Form H-8 and a Form H-9 did not meet Truth in Lending

Act’s clear and conspicuous disclosure requirement, espe-

cially with regard to the "effects of rescission." Id. at 464 F.3d

at 764. In Handy, the lender provided the borrower, at the

time of her closing on a home loan, four copies of Form H-9

and one copy of Form H-8. The plaintiff argued that because

the lender provided two different forms to her, the lender had

failed to clearly and conspicuously disclose her right to

rescind the transaction. In agreeing with the plaintiff, the Sev-

enth Circuit explained:

Even if Anchor is correct that a close parsing of

Form H-9’s "effects of rescission" statement might

make it possible to reconcile it with the type of loan

extended to Handy, the notice provided remains

insufficient for Anchor to prevail. Where more than

one reading of a rescission form is "plausible," the

form does not provide the borrower with a clear

notice of what her right to rescind entail[s].

Id. (quoting Porter v. Mid-Penn Consumer Disc. Co., 961

F.2d 1066, 1077 (3rd Cir. 1992)).

Here, the fact that SunTrust did not use the appropriate

model form to provide notice to the Watkinses is undisputed.

SunTrust chose form H-8, which is the "appropriate model

form in Appendix H" promulgated by the Federal Reserve

Board for new borrowers, rather than form H-9, which is the

"appropriate model form in Appendix H" for "(Refinancing

(with Original Creditor)." See 12 C.F.R. § 226, Appx. H-8,

H-9 (emphasis added). Because the Watkinses were existing

WATKINS v. SUNTRUST MORTGAGE, INC. 21

borrowers, SunTrust failed to use the appropriate model form

to provide notice to the Watkinses as existing borrowers. It

follows that SunTrust failed to absolutely comply with the

disclosure provisions of the Truth in Lending Act.

As stated earlier, that should end our intervention in this

matter. But even if we opt to interject additional unnecessary

judicial action by analyzing whether the wrong form used

under the "appropriate model form" disclosure method none-

theless met the "substantially similar notice" requirements, we

would be constrained to hold that SunTrust has violated the

Truth in Lending Act.

Here, the wrong form used by SunTrust under the "appro-

priate model form" disclosure method was Model Form H-8.

Model Form H-8, which is for new borrowers, wrongly set

forth the consequences that the Watkinses, as existing bor-

rowers, would face if they chose to cancel the transaction

within three business days. Model Form H-8 states:

Your Right to Cancel.

You are entering into a transaction that will result in

a mortgage, lien or security interest on/in your

home. You have a legal right under federal law to

cancel this transaction without cost, within three (3)

business days from whichever of the following

events occurs last:

(1) the date of the transaction, which is; May 7,

2007; or

(2) the date you received your Truth in Lending dis-

closures; or

(3) the date you received this notice of your right to

cancel.

22 WATKINS v. SUNTRUST MORTGAGE, INC.

If you cancel the transaction, the mortgage, lien or

security interest is also canceled. Within (20) calen-

dar days after we receive your notice we must take

steps necessary to reflect the fact that the mortgage,

lien, or security interest on/in your home has been

canceled, and we must return to you any money or

property you have given to us or to anyone else in

connection with this transaction.

12 C.F.R. § 226, Appx. H-8 (emphases added). Thus, the

Model H-8 Form wrongly informed the Watkinses that if they

exercised their right to rescind, SunTrust would rescind the

entire credit transaction, and the entire lien on the Watkinses’

home. This was clearly an incorrect disclosure.

In contrast, the appropriate model disclosure form that Sun-

Trust should have provided is Model Form H-9, which is the

appropriate model form for a new extension of credit by an

existing lender. Model Form H-9 states:

Your Right to Cancel

You are entering into a new transaction to increase

the amount of credit previously provided to you.

Your home is the security for this new transaction.

You have a legal right under federal law to cancel

this new transaction, without cost, within three busi-

ness days from whichever of the following events

occurs last:

(1) the date of this new transaction, which is May 7,

2007; or

(2) the date you received your new Truth in Lending

disclosures; or

(3) the date you received this notice of your right to

cancel.

WATKINS v. SUNTRUST MORTGAGE, INC. 23

If you cancel this new transaction, it will not affect

any amount that you presently owe. Your home is

the security for that amount. Within 20 calendar days

after we receive your notice of cancellation of this

new transaction, we must take the steps necessary to

reflect the fact that your home does not secure the

increase of credit. We must also return any money

you have given to us or anyone else in connection

with this new transaction.

12 C.F.R. § 226, Appx. H-9 (emphases added). Thus, Model

Form H-9 would have correctly informed the Watkinses that

if they exercised the right to rescind, then only the new exten-

sion of credit would be rescinded, leaving unaffected the prior

lien of the pre-existing mortgage loan. Clearly, the borrower’s

right of rescission in a refinancing transaction with the same

lender is substantially different from the right of rescission

contained in the notice of cancellation that SunTrust provided

to the Watkinses.

In sum, this case is a simple case requiring only judicial

restraint to follow: the clear language and policy directions of

Congress in enacting the Truth in Lending Act; the simple

regulations of the Federal Reserve Board in providing a

choice between using the safe-harbor method or devising a

document to meet the Truth in Lending Act requirements; and

the unequivocal and controlling holding of our decision in

Mars. An analysis of whether the incorrect form used here

was in substantial compliance is not warranted because Sun-

Trust chose to use the appropriate model disclosure form

method and failed to use the appropriate form. But not only

did SunTrust violate the Truth in Lending Act by providing

the wrong form to the Watkinses, the wrong form itself failed

to meet the requirements of the "substantially similar notice"

method (which SunTrust did not choose in any event). It fol-

lows that SunTrust failed to meet the requirements of the

Truth in Lending Act, which we held under Mars must be

24 WATKINS v. SUNTRUST MORTGAGE, INC.

"absolutely complied with and strictly enforced."3 Accord-

ingly, I respectfully dissent.

3

It is worthwhile to note that holding the lender accountable for provid-

ing the wrong Model Disclosure Form would not mean that the borrower

escapes liability on the principal of the loan. Under 15 U.S.C. § 1635 (b),

when a borrower rescinds, he is "not liable for any finance or other

charge"; "any security interest . . . becomes void"; and "[w]ithin 20 days

after receipt of a notice of rescission," the lender must "return to the [bor-

rower] any money or property given as earnest money, down payment, or

otherwise." 15 U.S.C. § 1635(6). In other words, although the borrower

would be required to make payment to the lender for the loan’s principal,

the lender would not benefit from its own mistake by continuing to receive

additional interest payments from the borrower. See 15 U.S.C. § 1640(a).

By ignoring the consequences of the two choices under the Truth in Lend-

ing Act as expressed by regulation, the result reached by the majority not

only ensures a regulatory windfall to the lender, but it also undermines the

strong policy considerations that underlie the Truth in Lending Act.