Pacific Shore Funding v. Lozo

42 Cal.Rptr.3d 283

138 Cal.App.4th 1342

PACIFIC SHORE FUNDING, Plaintiff, Cross-Defendant and Respondent, v. Zoran LOZO et al., Defendants, Cross-Complainants and Appellants.

No. B178694.

Court of Appeal, Second District, Division 3.

April 27, 2006.

Certified for Partial Publication.^*

Knapp, Petersen & Clarke and Stephen M. Harris for Defendants, Cross-Complainants and Appellants.

Morrison & Foerster, H. Mark Mersel and Eric D. Olson for Plaintiff, Cross-Defendant and Respondent.

AARP Foundation Litigation and Barbara Jones; Jean Constantine-Davis (Washington, D.C.) and Nina Simon (Washington, D.C.); and Michel Schuster, Washington, D.C.), as Amici Curiae on behalf of Appellants.

Bill Lockyer, Attorney General, Richard M. Frank, Chief Deputy Attorney General, Tom Greene, Chief Assistant Attorney General, Albert Norman Shelden, Assistant Attorney General, Ronald A. Reiter and Benjamin G. Diehl, Deputy Attorneys General, as Amici Curiae on behalf of Defendants, Cross-Complainants and Appellants.

Severson & Werson and Jan T. Chilton as Amici Curiae on behalf of Respondent.

ALDRICH, J.

INTRODUCTION

A year after refinancing a loan they had obtained from Pacific Shore Funding, Zoran and Monika Lozo attempted to rescind the original loan transaction on the ground Pacific Shore had violated various disclosure requirements of the Truth In Lending Act (15 U.S.C. § 1601 et seq., "TILA," as amended by the Home Ownership and Equity Protection Act of 1994, 15 U.S.C. §§ 1602(aa) & 1639 "HOEPA"). The trial court granted Pacific Shore's summary judgment motion following King v. State of Cal. (9th Cir.1986) 784 F.2d 910, cert. den. King v. California (1987) 484 U.S. 802, 108 S.Ct. 47, 98 L.Ed.2d 11, rehg. den. 484 U.S. 971, 108 S.Ct. 474, 98 L.Ed.2d 412 (King), ruling that once having refinanced their first loan, the Lozos had nothing left to rescind.

In the published portion of this opinion, we decline to follow King, and are instead persuaded by the reasoning of myriad federal courts from other circuits. We hold that borrowers are not precluded from rescinding a consumer credit transaction that is secured by their residence and subject to TILA merely because they have already refinanced that loan.

In the unpublished portion, we hold that the trial court erred in granting summary judgment of the Lozos' claim under the Unfair Business Practices Act (Bus. & Prof.Code, § 17200, "the UCL") because a lender's violation of TILA can be an unfair business practice or act under the UCL. Accordingly, the judgment is reversed.

FACTUAL AND PROCEDURAL SYNOPSIS

1. The loan and the refinance.

The facts are undisputed. On August 7, 2000, defendants and cross-complainants, the Lozos, obtained a non purchase-money mortgage in the amount of $28,000 secured by a deed of trust against their home. The lender was plaintiff and cross-defendant Pacific Shore, a residential mortgage lender. The loan carried an interest rate of 13.375 percent. Pacific Shore charged, among other things, origination, funding, processing, and settlement fees in excess of $2,800, which amounted to more than 10 percent of the principal amount of the loan. Because the points and fees charged by Pacific Shore exceeded eight percent of the total loan amount, it was considered a high cost loan and thus subject to the disclosure requirements of TILA. (15 U.S.C. §§ 1602(aa), 1635(a), & 1639(a) & (b); 12 C.F.R. § 226.32(a)(1) (2006).)

In June 2002, the Lozos obtained a second loan from Pacific Shore in the amount of $71,600, which was used, among other things, to pay off the full outstanding balance of the first loan. The Lozos were also charged a prepayment penalty.

In April 2003, the Lozos attempted to rescind the first loan by notifying Pacific Shore. Pacific Shore rejected the demand.

2. The lawsuit and summary judgment motion.

Pacific Shore filed its complaint against the Lozos seeking a judicial declaration that the August 2000 loan agreement was valid and binding according to its terms, and the Lozos were not entitled to rescind it.

The Lozos responded with a cross-complaint asserting that the first loan was subject to the disclosure requirements of TILA and Federal Reserve Board Regulation Z implementing it (12 C.F.R. § 226.1 (2006)). Under TILA, the Lozos alleged that Pacific Shore had failed to properly and timely provide mandated disclosures and had rejected their attempt to rescind the first loan agreement.

Pacific Shore moved for summary judgment on the grounds, there being no dispute of fact, that based on long-standing authority in King, supra, 784 F.2d 910, the Lozos' repayment of the first loan terminated any rights they may have had to rescind it under TILA.

The Lozos opposed the summary judgment motion by arguing that King was improperly decided and not binding. They enumerated the specific TILA omissions: (1) The notice of the right to rescind did not include the date of the transaction or the deadline by which the notice of rescission must be sent (15 U.S.C. § 1635(a); 12 C.F.R. § 226.23(b) (2006))¹; and (2) Pacific Shore failed to provide, at least three business days before the execution of the first loan's documents, two copies of the consumer disclosures of the (a) interest rate, (b) monthly payments, (c) borrowers' right not to complete the transaction, along with notices that (d) the borrowers risked losing their home if they did not meet their loan obligations. (15 U.S.C. § 1639(a)(1) & (a)(2).)

The trial court granted Pacific Shore's summary judgment motion. In so doing, the court determined that "[i]t is undisputed that the loan . . . in this case had been refinanced in full prior to the time that the Lozos sought to exercise a right of rescission of that loan under the Truth in Lending Act. In King [] the court held that a loan which had been refinanced could not be rescinded under the federal Truth in Lending Act . . . because `there is nothing to rescind.'" The Lozos appeal.

DISCUSSION

1. Standard of review.

Summary judgment is granted when a moving party establishes the absence of a triable issue of material fact and the right to entry of judgment as a matter of law. (Code Civ. Proc., § 437c, subd. (c); Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843, 107 Cal.Rptr.2d 841, 24 P.3d 493.) "`"`We review the [superior] court's decision to grant . . . summary judgment de novo.' [Citation.]" [Citation.]' [Citation.] There being no dispute as to the operative facts here, the question is purely a legal one for us to resolve. [Citation.]" (Nathanson v. Hecker (2002) 99 Cal.App.4th 1158, 1162, 121 Cal.Rptr.2d 773.)

2. TILA, HOEPA, and Regulation Z.

Congress enacted TILA in 1968 "to protect consumers' choice through full disclosure and to guard against the divergent and at times fraudulent practices stemming from uninformed use of credit. [Citations.]" (King, supra, 784 F.2d at p. 915.) The stated Congressional purpose behind TILA is "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, and to protect the consumer against inaccurate and unfair credit billing and credit card practices." (15 U.S.C. § 1601(a); 12 C.F.R. § 226.1(b) (2006).)

HOEPA amends TILA to "ensure that consumers understand the terms of such loans and are protected from high pressure sales tactics . . . . [The amendment] also prohibits High Cost Mortgages from including certain terms such as prepayment penalties and balloon payments that have proven particularly problematic." (Sen.Rep. No. 103-169, 2d Sess., p. 21 (1994), reprinted in 1994 U.S.Code Cong. & Admin. News, p.1905.)²

Toward this end, TILA requires that specific disclosures be provided to borrowers of qualifying consumer credit transactions that are secured by the borrowers' residence. Section 1635 of title 15 of the United States Code mandates that lenders clearly and conspicuously disclose to borrowers that borrowers have a right to rescind the transaction until midnight of the third business day following consummation of the transaction. (15 U.S.C. § 1635(a)³; 12 C.F.R. § 226.23(b) (2006).) HOEPA further directs lenders to disclose: that borrowers are not required to complete the loan agreement merely because they have received disclosures or signed the loan application; that they could lose their home if they do not meet their loan obligations; and the percentage rate, the amount of monthly payments, and in the case of adjustable rate loans, that the interest rate and payment could increase. (15 U.S.C. § 1639(a)(1) & (a)(2)⁴.) Such disclosures must be made "not less than 3 business days prior to consummation of the transaction." (15 U.S.C. § 1639(b)(1).)

The remedies under TILA include civil liability and damages. If any required disclosures are not given, the borrower's right to rescind is extended from three days to three years after the date of consummation of the transaction. (15 U.S.C. § 1635(a) & (f); 12 C.F.R. § 226.23(a)(3) (2006).) Thus, "a single violation of TILA, whether it be substantive or technical, extends a borrower's period for rescission. [Citations.]" (Wiggins v. Avco Financial Services (D.D.C.1999) 62 F.Supp.2d 90, 94; see Semar v. Platte Valley Federal S & L Ass'n (9th Cir.1986) 791 F.2d 699, 704 [minor technical, as well as major, violations of TILA or Regulation Z entitle the borrower to rescind].) Lenders who fail correctly to notify the borrower of the right to rescind are also liable to the borrower for damages plus costs and attorney fees. (15 U.S.C. § 1640(a)(1), (a)(2)(A) & (a)(3).) Lenders who omit the disclosures under section 1639 are subject to liability in the amount equal to the sum of all finance charges and fees paid by the consumer, unless the failure to comply with the statute is not material. (15 U.S.C. § 1640(a)(4).)

As a consumer protection statute, TILA "is to be liberally construed in favor of...