A Truth-in-Lending Act case in Florida is the focus of a major legal battle between the banking industry and consumer groups.
At issue: whether a consumer facing foreclosure may use the Truth-in- Lending Act to rescind a mortgage after the deadline for doing so has expired.
The Supreme Court agreed early this month to resolve the dispute in Beach v. Ocwen Federal Bank. (The case used to be called Beach v. Great Western Bank, but Ocwen recently bought the disputed loan as part of a bulk purchase from Great Western.)
Arguments are expected early next year, and a decision is likely in May or June.
More than a dozen trade groups and banks are expected to file briefs to support Ocwen, while the National Consumer Law Center in Boston is organizing a coalition to support the plaintiffs.
"This is an important case," said Michael F. Crotty, deputy general counsel for litigation at the American Bankers Association. "Every time you impose a burden on banks, you simply add to the cost of doing business. Those costs get passed on to consumers across the board."
"The types of errors that give rise to the right of rescission are very serious," said Gary Klein, staff attorney at the National Consumer Law Center. "It is important for consumers to be able to raise those errors when defending their homes from foreclosure."
The "Beach" in the lawsuit's name refers to David and Linda Beach, who in June 1981 financed construction of a house on a vacant lot they owned in Jupiter, Fla. They refinanced that loan in 1986 with Great Western Bank.
The Beaches defaulted on the new loan a few years later, and Great Western sought to foreclose in 1991. The couple responded by trying to rescind the mortgage, charging Great Western made a "material" error in the mortgage disclosure statement.
This error, according to documents filed with the court, was a $7.24 overstatement of the finance charge.
"Rescission would not be remedial," the bank wrote in a brief, "but would be a punishment designed to cause Great Western to comply in the future."
Great Western also disputed the couple's right to rescind, arguing that Truth-in-Lending lets consumers sue to void mortgages only within three years of closing.
But the Beaches countered that Congress meant to allow later suits of this kind in response to foreclosure proceedings.
The difference is critical.
The Colorado Supreme Court and federal appeals courts in New York and Illinois have allowed consumers to raise Truth-in-Lending defenses long after the time limit has expired. These judges have focused on a legal theory known as recoupment.
Under the recoupment theory, a litigant may deduct from a judgment the amount he or she is owed under the same contract. The rationale is that it is unfair to allow one party to sue over a provision of the contract while the other side is barred from countersuing.
The Florida Supreme Court, however, rejected this rationale, arguing that Congress intended to bar the use of Truth-in-Lending defenses after three years in all cases, including during foreclosures.
The Truth-in-Lending Act has been a repeated source of conflict between bankers and activists. Congress intervened in 1995 to resolve the last major dispute, which involved whether certain courier fees should be included in the finance charge. The so-called Rodash fix clarified that courier fees are not part of the finance charge. It also increased the tolerance for errors and voided pending courier-fee suits.