Clark v. Troy and Nichols, Inc., 88-3360

• Decision Date: 10 February 1989
• Docket Number: No. 88-3360,88-3360
• Citation: 864 F.2d 1261
• Parties: William T. CLARK, III, Plaintiff-Appellant, v. TROY AND NICHOLS, INC. and Residential Funding Corporation, Defendants- Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1261

864 F.2d 1261

William T. CLARK, III, Plaintiff-Appellant, v. TROY AND NICHOLS, INC. and Residential Funding Corporation Defendants- Appellees.

No. 88-3360.

United States Court of Appeals Fifth Circuit.

Feb. 10, 1989.

Rehearing Denied March 17, 1989.

James G. Perdigao, New Orleans, La., for plaintiff-appellant.

Robert J. Brilliant, Donald A. Meyer, New Orleans, La., for defendants-appellees.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before THORNBERRY, GEE, and POLITZ, Circuit Judges.

GEE, Circuit Judge:

The Facts

William Clark, the plaintiff/appellant, was seeking financing in order to purchase a residence. Troy & Nichols, the defendant/appellee, [T & N] provided Clark with a flyer advertising a special, fixed-rate mortgage to buyers with a substantial down payment or equity. The flyer stated that under the special mortgage program (EASYDOCS) tax returns and employment and income verification were not required, debt to income analysis was not required, and verification of loans not shown on the credit report was not required. The flyer further advertised that such loans would be available if the property to be purchased was a single-family, owner occupied dwelling; if the amount of the requested loan was more than $50,000 and less than $600,000 and the borrower had and proved possession of a down-payment in excess of 35% of the value of the property; and if the borrower had an excellent credit history and two appraisals substantiated that the value of the property exceeded the value of the loan plus the down-payment.

Clark discussed the EASYDOCS program with David Deichman, a loan officer for T & N, and decided to apply for a 30-year fixed rate mortgage under the program. Clark and Deichman then filled out an application listing the assets to be used for the 35% down-payment. At that time Clark gave T & N a $534.00 non-refundable application fee. After completing the application Deichman then asked Clark if he would be interested in locking into an agreed upon interest rate for a period of 30 days. Deichman presented a form entitled "TROY & NICHOLS, INC. RATE & DISCOUNT AGREEmenT for RFd (resIdentIal funDing Corporation, co-defendant in this case) Limited Documentation Loans Only." This agreement stated that if Clark's loan was approved within 30 days T & N agreed to lend the money at the interest rate specified in the agreement, regardless of the state of interest rates at the time of the loan's approval. T & N also agreed to use their best efforts to get the loan approved within the 30-day period. For his part of the agreement, Clark promised to commit himself to the terms of the agreement, regardless of fluctuations in interest rate during the 30-day period. The agreement further provided that in the event that Clark wanted to break the "lock-in" agreement, T & N would release the commitment if Clark paid a 1% origination fee ($2,011.75). Both Clark and Deidman signed this agreement locking the parties into the interest rate stated for a period of 30 days.

The record indicates that the good faith estimates of the disclosures required by the Truth in Lending Act and Regulation Z were sent to Clark by T & N within 3 days after Clark submitted his loan application. Clark received these documents 6 days after he applied for the loan. Over the next month Clark supplied T & N with the requested proof of down payment and appraisals of the property. The parties agreed that Clark's credit history was not at issue. On April 15, 1987, one day before expiration of the 30-day period during which the parties were locked into the stated interest rate, T & N notified Clark that his application for an EASYDOCS loan had been denied. The basis stated for the denial was that T & N (and RFC) "would not grant credit to any applicant on the terms and conditions that Clark had requested."

After T & N denied Clark's application for an EASYDOCS loan, they offered to secure other financing for him. The alternative financing required a 50% down payment and specified a higher interest rate than that specified in the lock-in agreement. Clark refused T & N's offer and obtained financing elsewhere. Because interest rates had risen during the preceding 30 days, Clark was unable to arrange financing on terms as good as those originally offered by T & N in their lock-in agreement.

Clark filed suit in federal district court, alleging that T & N violated Regulation Z of the Truth in Lending Act by failing to deliver good faith estimates of Truth in Lending disclosures before consummation of the loan. Clark further alleged that the disclosures, even if timely, violated the Truth in Lending Act because they were inaccurate and misleading. Clark's complaint also contained pendant state claims. T & N filed a motion for judgment on the Pleadings which the district court, sua sponte, converted to a motion for summary judgment on the issue of whether the signing of the Rate & Discount Agreement (the Agreement) was a consummation for purposes of the Truth in Lending Act. Clark filed a cross motion for summary judgment. The district court granted summary judgment for T & N on that issue. R.F.C. then filed a motion for summary judgment on Clark's remaining federal and state claims. The district court granted that motion and Clark appealed.

Regulation Z of the Truth in Lending Act states that

(a) Time of disclosure. In a residential mortgage transaction subject to the Real Estate Settlement Procedures Act (12 U.S.C. Sec. 1601 et seq.), the creditor shall make good faith estimates of the disclosures required by Sec. 226.18 before consummation, or shall deliver or place in the mail not later than three buisness days after the creditor receives the consumer's written application, whichever is earlier. (emphasis added)

Clark concedes that the disclosures required by Regulation Z were mailed within 3 days after his loan application was received by T & N. He contends, however, that the credit transaction was consummated at the time that the parties signed the Rate & Discount Agreement. Thus, according to Clark, T & N was required to provide him with the disclosures before he signed the agreement. The district court correctly stated that "[t]he only question before the Court is ... was whether the signed Rate & Discount Agreement was a 'consummation' of a consumer credit transaction between plaintiff and defendant."

Regulation Z defines "consummation" as the "time that a consumer becomes contractually obligated on a credit transaction." 12 C.F.R. Sec. 226.2(a)(13) (1987) (emphasis added) The official interpretation of the staff of the Division of Consumer & Community Affairs of the Federal Reserve Board states that this definition is

[A] significant departure from longstanding interpretations of the previous definition. It now focuses only on the time the consumer becomes contractually obligated, rather than the time the consumer pays the nonrefundable fee or suffers an economic penalty for failing to go forward with the credit transaction.

12 C.F.R. Chapter 2, art. 226.2 Supp. 1 at P. 676.

The official staff commentary on this definition provides, in part,

State law governs. When a contractual obligation on the consumer's part is created is a matter to be determined under applicable law; Regulation Z does not make this determination. A contractual commitment agreement, for example, that under applicable law binds the consumer to the credit terms would be consummation. Consummation, however, does not occur merely because the consumer has made some financial investment in the transaction (for example, by paying a nonrefundable fee) unless, of course, applicable law holds otherwise.

Official Staff Comment 12 C.F.R. 226.2(a)(13). See also Bourgeois v. Haynes Construction Company, 728 F.2d 719 (5th Cir.1984).

Clark contends that by signing the Rate & Discount Agreement T & N relinquished its right to deny Clark's loan application provided that Clark met the conditions stated in the EASYDOCS' flyer. According to Clark, therefore, by signing the agreement T & N became obligated to extend credit and Clark became obligated on the credit transaction. In other words,...