Belini v. Washington Mutual Bank, FA

United States Court of Appeals
For the First Circuit

Nos. 04-2532
04-2533

RICHARD BELINI; THERESA LUSCIER-BELINI,

Plaintiffs, Appellants,

v.

WASHINGTON MUTUAL BANK, FA,

Defendant, Appellee.

APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Michael A. Ponsor, U.S. District Judge]

Before

Boudin, Chief Judge,
Lynch and Lipez, Circuit Judges.

Christopher M. Lefebvre, with whom Family and Consumer Law
Center was on brief, for appellant.
Kevin C. Maynard, with whom Bulkley, Richardson and Gelinas,
LLP was on brief, for appellee.

June 15, 2005
 LYNCH, Circuit Judge. This Truth in Lending Act (TILA)

case raises difficult and rarely seen issues that arise when

transactions regulated by a given state -- here, Massachusetts --

have been exempted by the Federal Reserve from most of the Act's

requirements. See 15 U.S.C. § 1633; see also Bizier v. Globe Fin.

Servs., Inc., 654 F.2d 1, 2 (1st Cir. 1981). Only five states have

received such exemptions. See 12 C.F.R. Pt. 226, Supp. I. In the

end, however, this case turns on a narrower issue, one of first

impression for this court under TILA. The question is whether TILA

permits a damages claim to be stated by the debtor under 15 U.S.C.

§ 1640 based on the creditor's alleged failure to respond properly

to the debtor's notice of rescission. We hold that it does. In

doing so, we join the approach of four other circuits, and we know

of no circuit which has held to the contrary.

The plaintiffs, Richard and Theresa Belini, alleged that

the defendant, Washington Mutual Bank, sold them a high-cost

mortgage without making disclosures required by TILA and equivalent

Massachusetts law. They sued in federal court, asserting claims

for damages for failure to make these disclosures, for rescission,

and for damages for Washington Mutual's alleged failure to respond

properly to their notice of rescission, under both TILA and similar

Massachusetts law. The district court held that all of the

Belinis' damages claims were time barred, without discussing

separately their claim for Washington Mutual's alleged failure to

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respond to their notice of rescission. This left the rescission

claim itself and the question of whether there was either federal

question jurisdiction or diversity jurisdiction. The court found

that the amount-in-controversy requirement was not met, so there

was no diversity jurisdiction, and that there was no federal

question jurisdiction over a claim for rescission (as opposed to a

claim for damages) because of the Massachusetts exemption from

certain TILA requirements.

Although it is clear from the Federal Reserve regulations

that a debtor's ability to bring a federal damages action under 15

U.S.C. § 1640 is preserved despite the Massachusetts exemption, see

12 C.F.R. § 226.29(b), it is much murkier, given the current

drafting of these regulations, whether a debtor's right to sue for

rescission under federal law is preserved. Similarly, the question

of how to measure the amount in controversy in an action for

rescission is difficult.

We reverse. We find it unnecessary to resolve the

difficult question of whether the federal court had either federal

question jurisdiction or diversity jurisdiction over the rescission

claim, because we find that the Belinis have a viable, non-time-

barred federal damages claim under TILA based on the defendant's

alleged failure to respond properly to the Belinis' notice of

rescission. This damages claim provides a basis for federal

question jurisdiction. That means that the Belinis' claim for

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rescission, which has virtually identical elements under TILA and

Massachusetts law, is within the court's supplemental jurisdiction.

This case does not fall into a category that would render the

district court's exercise of supplemental jurisdiction

discretionary.

I.

We begin with a brief overview of the relevant provisions

of TILA, which was passed in 1968. The purpose of 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). The Act

requires creditors to make "clear and accurate disclosures of terms

dealing with things like finance charges, annual percentage rates

of interest, and the borrower's rights." Beach v. Ocwen Fed. Bank,

523 U.S. 410, 412 (1998).

If the creditor fails to do so, it can be held liable for

criminal penalties, see 15 U.S.C. § 1611, and a debtor can sue for

damages (including a statutory penalty of twice the finance

charge), see 15 U.S.C. § 1640(a). Beach, 523 U.S. at 412.

Further, for certain loan transactions -- those involving security

interests in a debtor's primary residence -- the debtor can demand

that the creditor rescind the mortgage if certain material

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disclosures are not made. See 15 U.S.C. § 1635(a). If the

creditor does not take steps to do so within twenty days, the

debtor can bring suit in federal court to enforce her right of

rescission. Id. § 1635(b). Several agencies have administrative

authority under TILA, but the relevant implementing agency for our

purposes is the Federal Reserve, which has promulgated a set of

regulations ("Regulation Z") in this area. See 12 C.F.R. Pt. 226.

The Federal Reserve can allow exemptions from some

federal requirements if it finds that a state has adequately

regulated in the area:

The [Federal Reserve] shall by regulation
exempt from the requirements of this part any
class of credit transactions within any State
if it determines that under the law of that
State that class of transactions is subject to
requirements substantially similar to those
imposed under this part, and that there is
adequate provision for enforcement.

15 U.S.C. § 1633. The Federal Reserve has granted exemptions under

section 1633 to certain classes of credit transactions in Maine,

Massachusetts, Connecticut, Wyoming, and Oklahoma. 12 C.F.R. Pt.

226, Supp. I. In these few states, as to certain TILA requirements

the federal provisions have no force and creditors are subject to

state requirements that are generally quite similar and often

identical to the federal requirements. See Ives v. W. T. Grant

Co., 522 F.2d 749, 755 (2d Cir. 1975).

However, according to the Federal Reserve's regulations,

the exemption's displacement of federal law in favor of state law

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is not absolute. See 12 C.F.R. § 226.29(b). It is well

established that debtors retain at least the ability to file

federal suits for damages in federal court under 15 U.S.C. § 1640,

regardless of the exemption. See id.; Ives, 522 F.2d at 752-56.

II.

The Belinis reside in a home in North Adams,

Massachusetts, which they have owned since before the transaction

at issue here. On December 29, 2000, plaintiffs obtained a

$102,750 loan from a now defunct company, Foundation Funding Group,

Inc., secured by this home. Defendant Washington Mutual Bank is,

according to the complaint, the assignee and current owner of the

mortgage obtained by the Belinis from Foundation Funding Group,

Inc.

The Belinis allege that they were not provided with

various disclosures prior to closing this mortgage transaction,

which are required under both TILA and its Massachusetts

equivalent. In particular, they allege that the mortgage was a

high-cost mortgage under both TILA (as amended by the Home

Ownership Equity Protection Act of 1994 (HOEPA)) and its

implementing regulations, see 15 U.S.C. § 1602(aa); 12 C.F.R. §

226.32, as well as the relevant Massachusetts regulations, see

Mass. Regs. Code tit. 209, § 32.32(1). They further allege that

Foundation Funding did not furnish the Belinis with all the

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required disclosures for such high-cost mortgages, including the

following required disclosure:

You are not required to complete this
agreement merely because you have received
these disclosures or have signed a loan
application. If you obtain this loan, the
lender will have a mortgage on your home. You
could lose your home, and any money you have
put into it, if you do not meet your
obligations under the loan.

15 U.S.C. § 1639(a)(1)(A),(B); 12 C.F.R. § 226.32(c)(1); Mass.

Regs. Code tit. 209, § 32.32(3)(a).

The Belinis allege that under both federal and

Massachusetts law, the failure by Foundation to make the required

disclosures, which -- they allege -- were "material," gave the

Belinis the right to rescind the mortgage until such time as the

disclosures were actually delivered. See 15 U.S.C. § 1635(a);

Mass. Gen. Laws ch. 140D, § 10(a). United States Code section

1635(a) and Massachusetts General Laws section 10(a), which contain

essentially identical language, provide that in any consumer credit

transaction

in which a security interest . . . is or will
be retained or acquired in any property which
is used as the principal dwelling of the
person to whom credit is extended, the
[debtor] shall have the right to rescind the
transaction until midnight of the third
business day following the consummation of the
transaction or the delivery of the information
and rescission forms required under this
section together with a statement containing
the material disclosures required by this
subchapter, whichever is later . . . .

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15 U.S.C. § 1635(a).

On May 9, 2003, counsel for the Belinis sent a letter to

Washington Mutual Bank, giving it notice that the Belinis were

asserting their right to rescind the mortgage transaction. This

rescission notice read in part:

Please be advised that I have been authorized
by my clients to rescind [the mortgage]
transaction and hereby exercise that right
pursuant to [TILA], 15 U.S.C. Section 1635 and
Regulation Z, [15 C.F.R.] Section 226.23.
The primary basis for the rescission is that
Mr. and Mrs. Belini were not provided with a
completed copy of the notice of their right to
rescind the above consumer credit transaction,
in violation of 15 U.S.C. Section 1635(a) and
Regulation Z, [15 C.F.R.] Sections 226.17 and
226.23, and the advanced [HOEPA] disclosures
required by 15 U.S.C. § 1639(b)(1).

The notice did not mention any provisions of Massachusetts state

law.

The rescission notice from the Belinis concluded by

instructing Washington Mutual that "[p]ursuant to Regulation Z, you

have twenty days after receipt of this Notice of Rescission to

return to my clients all monies paid and to take action necessary

and appropriate to terminate the security interest." The

requirement that creditors return a debtor's money and take action

to terminate their security interest in the debtor's property

within twenty days of receiving a rightful notice of rescission is,

again, the same under both federal and Massachusetts law. See 15

U.S.C. § 1635(b); Mass. Gen. Laws ch. 140D, § 10(b). The Belinis

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allege that the notice was received by Washington Mutual Bank (and

they present a signed return receipt to prove this), and yet,

Washington Mutual did not return the payments and fees that the

Belinis had paid on the mortgage, nor did it take any steps to

terminate its security interest on the property. There is no

allegation concerning whether Washington Mutual replied to the

notice in any way.

III.

The Belinis sued Washington Mutual Bank in Massachusetts

federal district court on July 11, 2003, Civil Action No. 03-30175,

and a first amended complaint was filed on November 17, 2003. The

first amended complaint alleged that the court had federal question

jurisdiction, premised on TILA, and alleged that Foundation

Funding, at the time the loan was closed, failed to provide the

Belinis with required disclosures under both state and federal law.

The first amended complaint sought rescission of the loan under

both federal and state law, damages under both federal and state

law, and costs and attorney's fees.

Washington Mutual moved to dismiss the complaint under

Fed. R. Civ. P. 12(b)(1) and 12(b)(6). Washington Mutual argued

first that the exemption granted by the Federal Reserve to

Massachusetts from the requirements of TILA extended to a claim for

rescission; such a claim therefore had to be brought under

Massachusetts state law and not federal law. Washington Mutual

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noted that, according to the Federal Reserve, the Massachusetts

exemption extended to "chapters 2 and 4" of TILA, although it did

not extend "to the civil liability provisions of [15 U.S.C. §§]

1640 and 1641." 12 C.F.R. § 226.29; 12 C.F.R. Pt. 226, Supp. I.

Washington Mutual argued that since the right to rescind was rooted

in 15 U.S.C. § 1635, which was part of Chapter 2 but not found in

sections 1640 or 1641 (which, they argue, provided only for

damages), any right to sue for rescission fell under the exemption.

As to the Belinis' suit for damages under TILA, see 15

U.S.C. § 1640, Washington Mutual conceded that the plain language

of the Federal Reserve's regulation allowed such an action to be

brought in federal court under section 1640 despite the

Massachusetts exemption, see 12 C.F.R. § 226.29(b), and Washington

Mutual did not challenge this regulation. However, Washington

Mutual contended that any action under section 1640 was time-

barred, because the section contained a one-year statute of

limitations, see 15 U.S.C. § 1640(e), and suit was brought more

than one year after the closing of the loan, when the required

disclosures were allegedly not furnished to the Belinis. Since the

only federal claim in the case was time barred, Washington Mutual

argued, the court should dismiss the state law rescission and

damages claims. Finally, Washington Mutual argued that the

complaint should be dismissed as well for a wholly independent

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reason: service was not made upon Washington Mutual within 120 days

of the filing of the action, as required by Fed. R. Civ. P. 4(m).

The Belinis argued in opposition to this motion that the

Federal Reserve regulations in effect interpreted TILA's exemption

provision, 15 U.S.C. § 1633, to say that any federal private right

of action, whether for damages or rescission, was preserved from

the exemption. The exemption in the Belinis' view extended only to

substantive requirements and public, agency-based enforcement, but

not to the jurisdiction of the federal court. The Belinis argued

as well that the right to sue to enforce the right of rescission

was properly located under section 1640 (which was expressly

preserved from the exemption), and not section 1635 (which was

not). On the damages claim, the Belinis argued that Washington

Mutual misunderstood the nature of their claim: they were suing for

damages not based on the initial failure to make the required

disclosures (although this also violated the statute), but rather

for Washington Mutual's improper failure to take the required steps

to return the Belinis' money and void their security interest upon

receipt of their rescission notice. The latter event occurred

within one year of the filing of the complaint.

In addition to filing an opposition, the Belinis took two

prophylactic steps in response to Washington Mutual's motion to

dismiss. First, they moved to file a second amended complaint:

this second amended complaint differed from the first amended

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complaint chiefly in that it alleged diversity as an alternate

basis for jurisdiction, should the court find no basis for federal

question jurisdiction. The Belinis alleged that the amount in

controversy requirement was met because the face value of the

mortgage that they sought to rescind was $102,750, which exceeded

$75,000. Second, the Belinis on May 4, 2004, filed an altogether

new, second action, No. 04-30083, with an identical complaint; the

purpose of filing this second action was to protect against adverse

statute of limitations consequences in case the first action was

dismissed for lack of timely service.

On October 26, 2004, the district court granted

Washington Mutual's motion to dismiss the first action, No. 03-

30175. It cited two bankruptcy court cases, In re Fidler, 226 B.R.

734, 736 (Bankr. D. Mass. 1998), and In re Desrosiers, 212 B.R.

716, 722 n.6 (Bankr. D. Mass. 1997), as support for its conclusion

that the Belinis' right to sue for rescission existed solely under

state law, and not under federal law, given the Massachusetts

exemption. It further held that the correct starting date for all

of plaintiffs' damages claims was the time the loan was

consummated, and that date was well more than one year before this

action was filed, so any damages claims under TILA were time-

barred.1 The court then dismissed the Belinis' remaining state law

1
The district court did not specifically discuss the Belinis'
damages claim based on Washington Mutual's failure to respond to
the Belinis' allegedly valid notice of rescission, but the claim
was adequately raised below both by the complaint and by other

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claims, noting the principle that the unfavorable disposition of

all a plaintiff's federal claims at an early date usually will

trigger the dismissal without prejudice of any supplemental state

law claims.

The court also disallowed the Belinis' motion to amend

their complaint and add diversity as a basis for jurisdiction. The

court held that the amount in controversy requirement was not met,

since the proper value of rescission for these purposes was not the

total face value of the mortgage, $102,750, but instead only the

total of the down payment, closing fees, and past payments that

Washington Mutual would be obligated to return to the Belinis if

rescission were effected, which was far less than $75,000.

Finally, as an independent basis for dismissal of this first

action, the court cited the Belinis' failure to effect timely

service.

The district court dismissed the Belinis' second action,

No. 04-30083, on November 2, 2004, adopting the same reasons that

it used to dismiss the first action except for the failure to

effect timely service. The Belinis filed a timely appeal of the

dismissal of both actions. However, the Belinis have not

challenged the dismissal because of untimely service on appeal.

Thus, they cannot prevail on the appeal of their first action, No.

03-30175, and we will affirm the dismissal of this action. That

filings.

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ground, however, does not apply to the dismissal of their second

action, No. 04-30083.

On appeal, the Belinis advance three contentions: (1) the

Massachusetts exemption under 15 U.S.C. § 1633 and 12 C.F.R. §

226.29 does not eclipse the federal cause of action to enforce the

right of rescission; (2) although the Belinis concede on appeal

that the statute of limitations under 15 U.S.C. § 1640(e) has run

for any federal damages claims based on the creditor's failure to

make disclosures at the time of the mortgage closing, they properly

state a separate damages claim based on Washington Mutual's failure

to respond to their notice of rescission; and (3) jurisdiction also

lies based on diversity because the district court improperly

undervalued the rescission remedy. Below, the Belinis asserted

state law damages claims under Mass. Gen. Laws ch. 140D, § 32, the

Massachusetts counterpart to 15 U.S.C. § 1640, but the Belinis have

not challenged the dismissal of these claims on appeal and thus

these claims are waived.

We reverse based on the Belinis' second contention,

thereby rendering consideration of the more difficult issues in

this case -- whether the exemption eclipses any federal action to

enforce the right of rescission and how to value the remedy of

rescission for diversity purposes -- unnecessary.

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 IV.

Washington Mutual does not dispute that the Federal

Reserve regulations expressly allow a damages action to be brought

under 15 U.S.C. § 1640 despite the Massachusetts exemption from

most of the requirements of TILA's Chapter 2. See 12 C.F.R. §

226.29(b)(1) ("No exemptions granted under this section shall

extend to the civil liability provisions of sections [1640 and

1641] of the act."). Nor does Washington Mutual challenge the

regulations themselves, as inconsistent with the statute allowing

the Board to grant these exemptions, 15 U.S.C. § 1633, or for any

other reason. See Ives v. W. T. Grant Co., 522 F.2d 749, 753-56

(2d Cir. 1975) (upholding these regulations from statutory

challenge).

Section 1640 allows damages actions to be brought against

"any creditor who fails to comply with any requirement imposed

under this part, including any requirement under section 1635 of

this title . . . ." 15 U.S.C. § 1640(a). Such a creditor can

generally be held liable for actual damages suffered, a statutory

penalty equal to twice the finance charge (with a minimum penalty

of $200 and a maximum penalty of $2,000),2 and attorney's fees and

2
This statutory penalty is unavailable for certain violations
of more minor requirements of TILA Chapter 2, although actual
damages and attorney's fees are still available even for violations
of these requirements. See 15 U.S.C. § 1640(a). The language of
the Act allows a statutory penalty to be assessed for a creditor's
failure to take adequate steps to respond, within twenty days, to
a debtor's rightful notice of rescission.

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costs. See id. Rescission is not a remedy for such a violation,

although it can be sought in the same action along with actual

damages and the statutory penalty. See id. § 1635(g). Before

1974, liability under section 1640(a) was imposed only for failure

to "disclose to any person any information required . . . to be

disclosed to that person"; in 1974, however, this language was

changed to refer to failure to "comply with any requirement." See

id. § 1640, Historical and Statutory Notes; see also Gerasta v.

Hibernia Nat'l Bank, 575 F.2d 580, 583-84 (5th Cir. 1978). In

1980, Congress added the specific reference to section 1635. See

15 U.S.C. § 1640(a), Historical and Statutory Notes. Most of the

requirements under TILA are disclosure requirements, but Congress

clearly did not limit liability to disclosure requirements alone.

Section 1635, in relevant part, provides that "[w]ithin

20 days after receipt of a notice of rescission [from a debtor],

the creditor shall return to the [debtor] any money or property

given as earnest money, down payment, or otherwise, and shall take

any action necessary or appropriate to reflect the termination of

any security interest created upon the transaction." 15 U.S.C. §

1635(b). Thus, section 1635(b) places certain requirements upon a

creditor: upon receiving a debtor's valid notice of rescission, the

creditor must, within twenty days, return all money paid by the

debtor and must void the security interest.3 Should the creditor

3
After the creditor has carried out these obligations, the
debtor has her own obligations. "Upon performance of the

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not take these steps within twenty days, then the debtor has

generally violated a "requirement" of section 1635 and can be held

liable for damages under section 1640. See, e.g., Mijo v. Avco

Fin. Servs. of Haw., Inc., 1991 WL 126660, at *1 (9th Cir. July 1,

1991) (unpublished); Smith v. Fid. Consumer Disc. Co., 898 F.2d

896, 903 (3d Cir. 1990); Smith v. Am. Fin. Sys., Inc., 737 F.2d

1549, 1552 (11th Cir. 1984); Arnold v. W.D.L. Invs., Inc., 703 F.2d

848, 850 (5th Cir. 1983); Gerasta, 575 F.2d at 584; Rowland v.

Novus Fin. Corp., 949 F. Supp. 1447, 1455 (D. Haw. 1996); see also

Ralph C. Clontz, Jr., 2 Truth in Lending Manual § 10.03[4], at 10-4

(2000).

We know of no court that has come to the contrary

position. Further, this result is sensible: section 1635 is

written with the goal of making the rescission process a private

one, worked out between creditor and debtor without the

creditor's obligations under this section, the [debtor] shall
tender the property to the creditor . . . ." 15 U.S.C. § 1635. As
we noted in Large v. Conseco Fin. Servicing Corp., 292 F.3d 49, 55-
56 (1st Cir. 2002), TILA alters common law rescission by forcing
the creditor to tender before the debtor, although the court has
the power under section 1635(b) to change these procedures where
appropriate. The creditor cannot use section 1640 to obtain
damages in instances where the debtor fails to tender, because
section 1640 only imposes liability on creditors.
In Large, we held that rescission of a mortgage governed by
TILA does not automatically occur at the time a debtor sends the
creditor a notice of rescission. See id. at 54-56. Rescission
only occurs when the parties agree to rescind or when a court (or
arbitrator) orders the remedy. See id. Large is not in conflict
with our holding here: rescission is not automatic when a notice of
rescission is sent, but a creditor can still be held liable for
wrongfully refusing to rescind when asked to do so by a debtor.

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intervention of the courts. The potential for damages (including

penalties and attorney's fees) creates incentives for creditors to

rescind mortgages when faced with valid requests without forcing

debtors to resort to the courts, for such resort causes substantial

delay and expense to debtors. Of course, where the debtor's notice

of rescission is invalid -- for example, where the creditor has not

actually failed to satisfy a material disclosure requirement that

would entitle the debtor to rescind -- then no damages can be

assessed against the creditor for failing to respond to the

notice.4 See Fid. Cons. Disc. Co., 737 F.2d at 903.

The statute of limitations for bringing an action under

section 1640 is "one year from the date of the occurrence of the

violation." 15 U.S.C. § 1640(e). The "date of the occurrence of

the violation," here, is at the earliest the date that Washington

Mutual received the Belinis' notice of rescission; in truth, the

date of the occurrence is likely twenty days later, when Washington

Mutual's time for responding to that notice expired. See Fid.

Consumer Disc. Co., 898 F.2d at 903. The Belinis' notice was not

mailed until May 9, 2003. The "date of the occurrence of the

4
A few lower courts have hinted that it may be inappropriate
to impose liability under section 1640 for a creditor's failure to
respond to a rescission notice even in certain circumstances where
the debtor is entitled to rescind, such as where the creditor fails
to tender within twenty days but instead seeks immediate equitable
relief before a court to change the order of tender under section
1635(b). See, e.g., Abel v. Knickerbocker Realty Co., 846 F. Supp.
445, 450 (D. Md. 1994). No such argument has been raised in this
case, at least not at this early stage.

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violation" cannot be the date the loan was closed; the closing is

not the source of the debtor's complaint, and such a rule would

create nonsensical results. 15 U.S.C. § 1635(f) states that "[a

debtor's] right of rescission shall expire three years after the

date of consummation of the transaction or upon the sale of the

property, whichever occurs first," notwithstanding that the

necessary material disclosures or forms have not been received. It

cannot be that the one-year statute of limitations under section

1640 for a creditor's failing to respond properly to a debtor's

notice of rescission expires before the debtor is required to send

that notice in the first place. Since the Belinis' second action

was filed on May 4, 2004, the action was obviously filed within one

year of the "occurrence of the violation."

Washington Mutual does not contest the correctness of

this analysis. It argues, however, that the Belinis' notice of

rescission did not require any response because it failed to state

a claim and so was invalid. This argument has no force.

In an exempt state, the Federal Reserve has constructed

a system whereby a creditor can be held liable under 15 U.S.C. §

1640 for failing to comply with any state law requirement that is

equivalent to an actionable requirement under TILA (however,

violations of state law requirements that go beyond TILA are

generally not actionable under section 1640 in an exempt state).

See 12 C.F.R. § 226.29(b)(2) ("If an exemption has been granted,

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the disclosures required by the applicable state law (except any

additional requirements not imposed by federal law) shall

constitute the disclosures required by this act [for purposes of

section 1640].");5 Ives, 522 F.2d at 753-54. Otherwise, section

1640 would be a nullity in an exempt state, since the substantive

federal requirements have been superceded by the exemption.

Because of the Massachusetts exemption, the substantive

requirements of state law are the requirements that creditors must

follow. This includes any disclosure requirements. The federal

requirements on the mechanics of rescission, found in 15 U.S.C. §

1635, are also superceded by state requirements: these include how

a creditor must notify a debtor of the right to rescind, how a

debtor should notify a creditor if he is taking advantage of his

right to rescind, and how long and what steps a creditor must take

to respond to that request. The Belinis' complaint alleges a

failure by the creditor to comply with certain state law disclosure

requirements applicable to high-cost mortgages, see Mass. Regs.

5
The Federal Reserve uses the term "disclosure" here, rather
than the broader term "requirement," but we think this choice of
language makes no difference. The remedial system in exempt states
would become hopelessly confused if some requirements (those that
constituted "disclosures") were actionable under section 1640,
while others were not. As well, the purpose of preserving the
federal civil liability provisions is to ensure that "consumers
retain access to both federal and state courts in seeking damages
or civil penalties for violations, while creditors retain the
defenses specified in those sections." 12 C.F.R. Pt. 226, Supp. I.
This purpose would not be well served by a rule that preserved
federal court jurisdiction for only some section 1640 damages
actions.

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Code tit. 209, § 32.32, which are identical to the federal

requirements embodied in the HOEPA amendments to TILA, see 15

U.S.C. § 1639. The complaint also alleges that Washington Mutual

violated state law rescission procedures by failing to respond to

the Belinis' allegedly meritorious rescission notice (which was

premised on the creditor's failure to provide these disclosures) by

returning the Belinis' money and voiding their security interest

within twenty days. The relevant state law rescission procedures

are also substantively identical to the federal rescission

procedures under TILA. Compare 15 U.S.C. § 1635(b), and 12 C.F.R.

§ 226.23, with Mass. Gen. Laws ch. 140D, § 10(b), and Mass. Regs.

Code tit. 209, § 32.15. Because the Belinis allege that Washington

Mutual failed to comply with an applicable state law requirement on

the mechanics of rescission that is also imposed by TILA -- the

requirement that a creditor return a debtor's money and take steps

to void its security interest within twenty days of receiving the

valid notice of rescission -- they have stated a damages claim

under section 1640.

The Belinis' rescission notice did not explicitly mention

Massachusetts state law: it instead relied entirely on the

disclosure requirements and rescission procedures found in TILA (as

amended by HOEPA) and its implementing regulation, Regulation Z.

But this cannot relieve Washington Mutual of potential liability.

The relevant substantive disclosure requirements under federal and

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state law are generally the same and the precise disclosures that

the Belinis allege the creditor did not make are found both in

Massachusetts and federal law. Moreover, the creditor's duties

upon receiving a valid notice of rescission are identical under

federal and state law. Washington Mutual was on notice from the

Belinis' letter of exactly which disclosure requirements it

allegedly violated and how it ought to respond to the notice.6

We conclude that the Belinis' claim that they are

entitled to damages under 15 U.S.C. § 1640 because of Washington

Mutual's failure to return their money and void the security

interest on their home within twenty days of receiving their notice

of rescission was timely and therefore survives Washington Mutual's

motion to dismiss.7 This claim furnishes a basis for federal

question jurisdiction. Through this claim, the Belinis can seek to

prove their case for actual damages due to Washington Mutual's

failure to respond to their notice, the statutory penalty, and

6
Although we can conceive of a situation where the creditor
might be prejudiced by a letter of rescission that failed to state
the proper statutory bases on which the request for rescission was
founded, Washington Mutual has made no such claim here. Although
it is free to raise such a claim on remand, we are dubious of such
an argument where, as here, the disclosure and rescission
provisions of the state and federal statutes appear to be
identical.
7
Washington Mutual was not the Belinis' initial creditor, but
rather an assignee of their initial creditor. See 15 U.S.C. § 1641
(stating when TILA causes of action may be brought against
assignees). Washington Mutual does not claim that its status as an
assignee is relevant to the questions presented in this appeal.

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attorney's fees. The request for rescission, however, constitutes

a separate claim.

The difficult issue of whether a TILA exemption, under 15

U.S.C. § 1633 and the Federal Reserve regulations, preserves a

federal rescission claim is effectively an issue of whether the

Belinis can bring their separate request for rescission under

federal law, or instead can only bring such a claim under state

law. We need not answer this question now, since the answer has no

practical effect on the district court's jurisdiction over the

Belinis' rescission claim. The remedial provisions accompanying

suits for rescission under TILA are essentially identical to the

remedial provisions accompanying suits for rescission under

Massachusetts law.8 Under either, the victorious debtor can obtain

both attorney's fees and costs, see 15 U.S.C. § 1640(a)(3); Mass.

Gen. Laws ch. 140D, § 32(a)(3); a debtor can seek both civil

damages and rescission in the same action, see 15 U.S.C. §§

1635(g), 1640(g); Mass. Gen. Laws ch. 140D, §§ 10(g), 32(f); and a

8
The one difference that we see is that under TILA, "[a
debtor's] right of rescission shall expire three years after the
date of consummation of the transaction or upon the sale of the
property, whichever occurs first," 15 U.S.C. § 1635(f) (emphasis
added); while under Massachusetts law, "[a debtor's] right of
rescission shall expire four years after the date of consummation
of the transaction or upon the sale of the property, whichever
occurs first," Mass. Gen. Laws ch. 140D, § 10(f) (emphasis added).
Washington Mutual has not argued to the district court or on appeal
that the rescission claim in either of the Belinis' two actions was
barred by a statute of limitations, and it filed no answer or
motions at all in response to the Belinis' second action, so any
such statute of limitations argument has been waived.

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debtor can seek rescission against an assignee as though that

assignee were the original creditor, see 15 U.S.C. § 1641(c); Mass.

Gen. Laws ch. 140D, § 33(c).

Even if the rescission claim could only be brought under

state law, the district court would still have supplemental

jurisdiction over this claim because it is part of the same "case

or controversy" as the section 1640 damages claim. See 28 U.S.C.

§ 1367(a). The district court has discretion to decline such

jurisdiction in a few circumstances: where the state law issues are

difficult or novel, where the state law claims "substantially

predominate[]" over other claims in the action, where the district

court has dismissed all claims over which it has original

jurisdiction, and in other "exceptional circumstances" raising

"compelling reasons for declining jurisdiction." Id. § 1367(c).

The district court correctly stated the general rule that

an early dismissal of all federal claims will generally lead to the

dismissal of all supplemental state law claims, see Gonzalez-De-

Blasini v. Family Dep't, 377 F.3d 81, 89 (1st Cir. 2004), but we

have reversed the district court's holding that all federal damages

claims were time barred and found that a viable federal damages

claim remains in the case. Moreover, application of the relevant

state law should be straightforward and this application implicates

important federal concerns, since the Massachusetts statute is

usually identical to TILA. State law applies only through a

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statutory exemption from TILA for transactions subject to

"substantially similar" requirements in a given state. 15 U.S.C.

§ 1633. For the same reason, state claims do not predominate: the

overarching structure is provided by TILA, which itself creates the

exemption for certain state requirements. The implicit suggestion

in the district court's opinion is that it would have exercised

supplemental jurisdiction over the state law claims if it had found

any viable federal claims in the case, and now that we have held

that there is a viable federal claim for damages, the district

court should exercise supplemental jurisdiction over the rescission

claim.

Finally, we emphasize that the question of whether the

exemption vitiates the possibility of bringing a federal claim to

enforce the right of rescission raises very difficult issues of

regulatory and statutory construction; the Federal Reserve

regulations lack clarity on this point. Further, this question is

unlikely to be litigated often, given that there are only five

states that have exemptions from parts of TILA, see 12 C.F.R. Pt.

226, Supp. I, and that even in these exempt states, an alternative

ground for federal jurisdiction will usually exist because of the

clear preservation of damages claims under section 1640. Issues

regarding the scope of the exemption have seldom arisen in the

almost forty years since TILA was passed.

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 It is also unnecessary for us to address the issue of

diversity jurisdiction, which involves the difficult question of

the proper valuation of a rescission remedy, since we have held

that the district court has federal question jurisdiction.9

V.

The district court's dismissal of the Belinis' first

action, No. 03-30175, is affirmed. The district court's dismissal

of the Belinis' second action, No. 04-30083, is reversed, and the

case is remanded for proceedings consistent with this opinion.

9
In the event that anything in this case should end up turning
on whether the rescission remedy is pursued as a state or federal
claim -- or under supplemental, federal question, or diversity
jurisdiction -- these issues can be considered if and when they
arise.

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