Werts v. Federal Nat. Mortg. Ass'n
| Decision Date | 26 March 1985 |
| Docket Number | Civ. A. No. 84-2473. |
| Parties | In the Matter of Melvin WERTS, Appellant, v. FEDERAL NATIONAL MORTGAGE ASSOCIATION, Appellee. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Henry J. Sommer, Community Legal Services, Philadelphia, Pa., for appellant.
David Zeehandelaar, Bolger, Picker & Weiner, Philadelphia, Pa., for appellee.
In November, 1969, plaintiff-debtor ("plaintiff") and defendant-creditor ("defendant") executed a residential mortgage under the terms of which plaintiff agreed to make monthly mortgage payments from January, 1970 to December, 1989. In March, 1981, however, plaintiff stopped making payments. Defendant then filed an action in mortgage foreclosure in the Philadelphia County Court of Common Pleas, and judgment was entered in favor of defendant in January, 1982. In February, 1982, plaintiff filed a petition under Chapter 13 of the United States Bankruptcy Code which stayed the scheduled Sheriff's sale of his house. Defendant then filed proof of secured claim in the bankruptcy proceeding, and plaintiff filed this complaint as an objection to defendant's claim.
Plaintiff raises two distinct issues. First, plaintiff argues that defendant failed to comply with the requirements of the Truth in Lending Act, 15 U.S.C. § 1640, when it issued disclosure documents to plaintiff in the 1969 mortgage transaction. As a result, plaintiff asserts defendant's claim must be reduced by $1,000.00. Second, plaintiff contends that the notice of foreclosure defendant sent plaintiff in 1981 did not satisfy the requirements of Pennsylvania Act No. 6 of 1974, 41 P.S. §§ 403-04. Consequently, plaintiff concludes that defendant may not include attorney's fees or costs in its claim.
The Bankruptcy Court initially denied plaintiff's objection to the claim. 36 B.R. 799 (Bkrtcy.1984). Plaintiff filed a motion to alter or amend judgment, arguing that the court had committed manifest error of law on the Truth in Lending issue. The court granted the motion initially, but later vacated its order as "having been entered in error" and denied plaintiff's motion. Plaintiff then filed his notice of appeal to this court. I shall consider both the Truth in Lending issue and the Act 6 issue in turn.
The Truth in Lending Act was passed by Congress in 1968 to remedy what it perceived to be widespread consumer confusion about the nature and cost of credit obligations. Mourning v. Family Publications Service, Inc., 411 U.S. 356, 363-64, 93 S.Ct. 1652, 1657-58, 36 L.Ed.2d 318 (1973). The purpose of the Act is ". . . to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various terms available to him and to avoid the uninformed use of credit. . . ." 15 U.S.C. § 1601. As a result, the Act and the Federal Reserve Board's Regulation Z, 12 C.F.R. § 226.1 et seq., require that certain disclosures be made clearly, conspicuously, in a meaningful sequence, and in specific terms. 12 C.F.R. § 226.6(a).
Plaintiff alleges that in his original loan documents, some of the required disclosures were not made in the precise terms prescribed by Regulation Z and some were not made at all. The Bankruptcy Court addressed only the first of these concerns:
The debtor asserts that the original loan documents are defective in failing to express the annual percentage rate of the loan and the amount financed. Our review of the pertinent documents indicates that FNMA did make these necessary disclosures although the terms were not specifically denominated as such. Thus, this basis for the debtor\'s objection to the proof of claim is without merit.
At 802. I find, however, that defendant's failure to use the precise language set forth in Regulation Z coupled with defendant's omission of certain required disclosures violated the Act.
Plaintiff first points to the absence in the documents given to him of the terms "annual percentage rate" and "amount financed" as specifically required by 12 C.F.R. § 226.8. In F.T.C. v. Beauty-Style Modernizers, Inc., 513 F.2d 625 (3d Cir. 1975) cert. denied 423 U.S. 864, 96 S.Ct. 123, 46 L.Ed.2d 93 (1975), the Third Circuit affirmed the decision of the F.T.C. that a creditor violated the Act when it substituted its own terms for those prescribed in the Regulation. As in our case, one of the terms the creditor omitted was "amount financed". The F.T.C. stated:
There is no such thing as substantial compliance with the Truth in Lending Act and the Regulation. Either you are or you aren\'t. The purpose of that statute is to permit the ordinary consumer, without regard to the degree of his commercial sophistication, to receive the kind of credit information that will allow him effectively to compare the credit terms being offered in the marketplace and thus to "shop" for the most favorable terms available.
In re Beauty-Style Modernizers, Inc., CCH Cons. Cred. Guide ¶¶ 98, 791 (F.T.C. 1974). See also Pennino v. Morris Kirschman & Co., 526 F.2d 367, 370 (5th Cir.1976) () and Mason v. General Finance Corporation of Virginia, 542 F.2d 1226, 1233 (4th Cir.1976) ().
Moreover, plaintiff need not claim that he was actually deceived by the absence of the terms in order for the court to find that the Act was violated. Dzadovsky v. Lyons Ford Sales, Inc., 593 F.2d 538, 539 (3d Cir.1979). In fact, in Thomka v. A.Z. Chevrolet, 619 F.2d 246, 250 (3d Cir. 1980), the Third Circuit cited a Fifth Circuit holding that "once the court finds a violation, no matter how technical, it has no discretion with respect to the imposition of liability." Grant v. Imperial Motors, 539 F.2d 506, 510 (5th Cir.1976).
Plaintiff next points to defendant's failure to set forth the due dates of the mortgage payments as required by 12 C.F.R. § 226.8(b)(3). While a letter addressed to plaintiff and dated five days before the mortgage was executed did inform plaintiff that payments would be due "on the first of each month . . . until further notice," this information is not included on the documents containing the other terms of the mortgage agreement. Both the case law and the regulation state clearly that all required disclosures must appear on a single page unless a precisely worded notice directing the borrower to information on other documents appears on the page containing the majority of the disclosures. Gennuso v. Commercial Bank and Trust Co., 566 F.2d 437, 441 (3d Cir. 1977); Thomka, supra, 619 F.2d at 249; 12 C.F.R. § 226.8(a). No such notice appears on the disclosure documents in question.
Defendant also failed to disclose the "amount or method of computing the amount of any default, delinquency or similar charges payable in the event of late payments." This information is required by 12 C.F.R. § 226.8(b)(4).
While defendant does not dispute plaintiff's specific allegations of inadequate disclosures under the Act, it does raise two defenses. First, defendant points to 15 U.S.C. § 1612(b) which states, "no civil or criminal penalty provided under the Truth in Lending Act for any violation thereof may be imposed upon the United States or any agency thereof . . ." Defendant argues that it is an agency of the U.S. Government and that therefore plaintiff cannot recoup statutory damages under the Act. This defense was correctly rejected by the Bankruptcy Court. At 801. Courts in several circuits have stated convincingly that since 1968, F.N.M.A. has been considered a privately-owned corporation in suits against private citizens. For example, in Roberts v. Cameron-Brown Co., 556 F.2d 356 (5th Cir.1977), the Fifth Circuit explained:
Although regulated by the Government in some aspects of its business, F.N.M.A. is essentially a privately-owned mortgage banker. . . . In 1968, Congress specifically disassociated F.N.M.A. from its previous ownership and transferred it to private ownership. 2 U.S.Cong. & Admin. News 1968 at 2943-44. F.N.M.A. maintains the capital structure of a privately owned corporation. 12 U.S.C. § 1718. . . . We stand with the Sixth Circuit position that although the regulating statutes impose certain obligations on F.N.M.A., the federal government and F.N.M.A. have not become so interdependent as to make its actions the actions of the federal government.
Id. at 359. See also Northrip v. F.N.M.A., 527 F.2d 23 (6th Cir.1975). Indeed, in 1968, Congress split the Federal National Mortgage Association into two separate and distinct corporations. One is the Government National Mortgage Association which was to "remain in the government." The other is F.N.M.A., "a government-sponsored private corporation." 12 U.S.C. § 1716b. Therefore, plaintiff's recoupment claim is not barred by 15 U.S.C. § 1612(b).
F.N.M.A.'s second defense is that plaintiff's objection is barred by the Truth in Lending Act's one year statute of limitations. This provision states:
Any action under this subsection may be brought . . . within one year from the date of the occurrence of the violation. This subsection does not bar a person from asserting a violation of this subchapter in an action to collect the debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action, except as otherwise provided by state law.
15 U.S.C. § 1640(e). The Bankruptcy Court recently held that the filing of a proof of claim is "an action to collect the debt" under § 1640(e) which allows a debtor to file a timely objection asserting violations of the Act. Hanna v. Lomas & Nettleton Company, (In Re Hanna), 31 B.R. 424 (Bankr.E.D.Pa.1983). I find the court's reasoning persuasive. See...
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