Santos-Rodriguez v. Doral Mortgage Corp.

United States Court of Appeals
For the First Circuit

No. 06-1769

JOHNNY SANTOS-RODRIGUEZ;
MARIA BETANCOURT-CASTELLANOS; C/P SANTOS-BETANCOURT;
LYMARY ROJAS-MORALES; RANFI VELEZ-ROMAN;
C/P VELEZ-ROJAS,

Plaintiffs, Appellants,

v.

DORAL MORTGAGE CORPORATION;
DORAL FINANCIAL CORPORATION;
XYZ CORPORATIONS,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

[Hon. Jaime Pieras, Jr., Senior U.S. District Judge]

Before

Selya, Circuit Judge,
Stahl, Senior Circuit Judge,
and Howard, Circuit Judge.

Gary E. Klein, with whom Gillian Feiner, Roddy, Klein &
Ryan, Juan M. Suarez Cobo, and Suarez Cobo Law Offices, PSC were
on brief, for appellants.
Nestor M. Mendez-Gomez, with whom Heidi Rodriguez, Carlos C.
Alsina-Batista, and Pietrantoni, Mendez & Alvarez LLP were on
brief, for appellees.

April 19, 2007
 STAHL, Senior Circuit Judge. Plaintiffs brought suit

against Doral Financial Corporation and Doral Mortgage Corporation

(collectively, "Doral") for violation of the federal Truth in

Lending Act (TILA), 15 U.S.C. §§ 1601-1667. Plaintiffs seek

rescission of their home loans, and damages, based on Doral's

alleged failure to provide them sufficient notice of their

rescission rights. The district court granted Doral's motion to

dismiss plaintiffs' claims. We affirm.

I. Background

Because this case reaches us on appeal from the granting

of a motion to dismiss under Federal Rule of Civil Procedure

12(b)(6), we accept as true plaintiffs' well-pleaded factual

allegations. See Rogan v. Menino, 175 F.3d 75, 77 (1st Cir. 1999).

There are two sets of plaintiffs in this case. The first

set, Johnny Santos-Rodriguez and Maria Betancourt-Castellanos ("the

Santoses"), obtained an original home mortgage from Doral Mortgage

in 1998. By March 2004, the Santoses had defaulted on 34 payments

under the original loan. To maintain their home, they elected to

refinance on March 13, 2004, again with Doral Mortgage. The new

loan totaled $78,750, of which $72,883.45 was used to pay off the

principal and finance charges due under the original loan, thus

cancelling that loan. The parties dispute what was done with the

$5,866.55 in additional proceeds from the refinancing. Doral

argues that the entire amount was remitted to Doral as financing

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charges, while the Santoses claim that one month after the

transaction was finalized, they received $1,300 in proceeds from

Doral.1 Within a year, Doral Mortgage assigned the Santoses' new

loan to Doral Financial,2 which was the legal holder of the note at

the time this action was brought.

The second set of plaintiffs is composed of Lymary Rojas-

Morales and Ranfi Velez-Roman ("the Rojases"). The Rojases

obtained an original home mortgage with Doral Mortgage.3 On August

27, 2003, the Rojases refinanced their original loan, again with

Doral Mortgage. The refinancing loan totaled $104,500, of which

$94,035.83 went to pay the principal balance and finance charges

1
This factual disagreement is of potential import because the
TILA rescission provisions do not apply to transactions "which
constitute[] a refinancing or consolidation (with no new advances)
of the principal balance then due and any accrued and unpaid
finance charges of an existing extension of credit by the same
creditor secured by an interest in the same property." 15 U.S.C.
§ 1635(e)(2). Doral alleges that the $1,300 remitted to the
Santoses a month after the transaction was surplus escrow funds
accumulated under the Santoses' original mortgage. However,
because this case reaches us on a motion to dismiss, we presume
that plaintiffs' allegation is correct: that the Santoses received
a new money advance as part of their refinance. See Rogan, 175
F.3d at 77.
2
According to plaintiffs' complaint, Doral Mortgage is a
wholly owned subsidiary of Doral Financial.
3
Because we accept as true plaintiffs' well-pleaded factual
allegations, we cannot consider Doral's argument, which appears to
have factual support in the record, that the Rojases obtained their
original home loan from Southern Mortgage, rather than Doral. If
true, the Rojases' transaction was not a same-lender refinancing,
meaning that plaintiffs' central argument -- that same-lender
refinancing requires specialized disclosures -- would not apply to
the facts of the Rojases' transaction.

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outstanding on the Rojases' original loan, which was cancelled. Of

the remaining funds, $6,251.76 went to Doral Mortgage for

refinancing fees, and $4,212.41 reverted to the Rojases as a new

money advance.

Before closing on the refinancing loans, Doral provided

the Santoses and Rojases with a Notice of Right to Cancel. The

form was modeled on Federal Reserve Board Model Form H-8. See 12

C.F.R. § 226.23 (app. H-8). Both sets of plaintiffs received

identical disclosure forms, and they acknowledged receipt by

signing the documents. Below, we excerpt the relevant sections of

the disclosure form that plaintiffs received:

You are entering into a transaction that will
result in a mortgage, lien or security
interest on your home. You have a legal right
under federal law to cancel this transaction,
without cost, within three business days . . .

If you cancel the transaction, the mortgage,
lien or security interest is also cancelled.

If you decide to cancel this transaction, you
may do so by notifying us in writing . . . .
You may use any written statement that is
signed and dated by you and states your
intention to cancel, or you may use this
notice by dating and signing below.

The TILA grants consumers a three-day rescission period

for any consumer credit transaction where a security interest will

be acquired by the lender in the consumer's principal dwelling. 15

U.S.C. § 1635(a). This three-day rescission period begins to run

when the transaction is consummated or upon delivery of notice of

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the consumer's right to rescind, whichever occurs later. Id.

However, the three-day rescission period is extended to three years

if the lender fails to meet the disclosure requirements of the

TILA. 15 U.S.C. § 1635(f). The Federal Reserve Board (FRB) has

issued an implementing regulation known as Regulation Z, which

governs, among other things, the disclosures that lenders must make

to consumers. 12 C.F.R. § 226.1 et seq. Regulation Z includes an

appendix of model forms for various consumer transactions,

including Model Forms H-8 and H-9, which are at issue here. See 12

C.F.R. § 226.23 (app. H-8, H-9).

In 2005, plaintiffs informed Doral of their intention to

rescind their refinance loans, arguing that Doral's alleged failure

to disclose properly their rescission rights had extended the

rescission period to three years. Thereafter, Doral issued written

rejections of plaintiffs' attempts to rescind. In response,

plaintiffs brought suit against Doral, originally framed as a class

action,4 in the United States District Court for the District of

Puerto Rico, seeking rescission of their loans, and statutory and

actual damages. The district court granted Doral's motion to

4
In their complaint, plaintiffs purported to bring their
claims on behalf of two classes of similarly situated consumers.
However, the district court dismissed plaintiffs' claims in their
entirety before the litigation reached the class certification
stage. In any event, we have recently held that class
certification is not available for rescission claims brought under
the TILA. See McKenna v. First Horizon Home Loan Corp., 475 F.3d
418, 423 (1st Cir. 2007).

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dismiss for failure to state a claim, holding that Doral met its

disclosure obligations by clearly and conspicuously informing the

plaintiffs of their rescission rights. Plaintiffs now appeal the

dismissal of their claims.

II. Discussion

We review de novo the grant of a motion to dismiss for

failure to state a claim, "accepting all well-pleaded facts as true

and giving the party who has pleaded the contested claim the

benefit of all reasonable inferences." Palmer v. Champion

Mortgage, 465 F.3d 24, 27 (1st Cir. 2006).

Plaintiffs make two arguments to support their assertion

that the rescission period for their refinance transactions should

be extended from three days to three years. First, they allege

that Doral failed to comply with the TILA's disclosure requirements

because it gave plaintiffs a form patterned on Model Form H-8,

which is designed for general transactions, rather than one

patterned on Model Form H-9, which is designed for same-lender

refinancing transactions. See 61 Fed. Reg. 49,237-02 (1996).

Second, plaintiffs argue that the form Doral used was misleading

because it did not adequately explain the effects of rescinding a

same-lender refinancing loan, as opposed to an original loan. We

take these arguments in turn.

Plaintiffs' first approach is a non-starter. They

insist, despite clear statutory and regulatory language to the

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contrary, that "if the creditor does not provide the 'appropriate

form,' the borrower 'shall have' rescission rights." This is

simply incorrect. The statute permits the lender to inform

consumers of their rescission rights by using "the appropriate form

of written notice published and adopted by the [Federal Reserve]

Board, or a comparable written notice of the rights of the

obligor." 15 U.S.C. § 1635(h) (emphasis added). The plain meaning

of the word "or" makes clear that the lender may comply with its

disclosure obligations by using a model form or, alternatively, a

comparable written notice. Regulation Z is equally clear that

either type of notice will satisfy the lender's obligation: "To

satisfy the disclosure requirement . . . the creditor shall provide

the appropriate model form in Appendix H of this part or a

substantially similar notice." 12 C.F.R. § 226.23(b)(2) (emphasis

added). In addition, the TILA plainly states that use of the model

forms is not obligatory. See 15 U.S.C. § 1604(b) ("Nothing in this

subchapter may be construed to require a creditor or lessor to use

any such model form or clause prescribed by the Board under this

section.").

In sum, because the plain language of the statute and

regulations does not require exclusive use of the model forms,

plaintiffs are incorrect to insist that Doral's alleged failure to

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provide the appropriate FRB form is a per se violation of 15 U.S.C.

§ 1635 and Regulation Z.5

Plaintiffs' second argument requires more analysis. They

assert that Doral's use of a form patterned on Model Form H-8

rather than H-9 significantly misled them as to their rescission

rights, because the effects of rescinding a same-lender refinance

loan are different from the effects of rescinding an original loan.

In particular, plaintiffs highlight that the form they received

failed to disclose that if a same-lender refinancing loan is

rescinded, the original loan is not cancelled, meaning that the

lender retains a security interest in the property under the

original loan, and the consumer reverts to paying off the original

loan. Plaintiffs argue that a consumer would be less willing to

rescind a same-lender refinance loan if he believed that as a

result he would also have to repay the original mortgage.

Our analysis of this argument must start with the

disclosure standard set forth in the TILA, which requires that

lenders "clearly and conspicuously disclose" borrowers' rescission

5
While the facts in this case do not require us to reach the
issue, we have previously noted that there is statutory and case
law support for the proposition that the model forms provide
lenders a safe harbor protection whereby "adherence to a model form
bars a TILA non-disclosure claim entirely." Palmer v. Champion
Mortgage, 465 F.3d 24, 29 n.5 (1st Cir. 2006); see also 15 U.S.C.
§ 1604(b) ("The Board shall publish model disclosure forms and
clauses for common transactions to facilitate compliance with the
disclosure requirements of this subchapter . . . .") (emphasis
added).

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rights. 15 U.S.C. § 1635(a). Regulation Z elaborates on this

disclosure standard by listing the five elements of clear and

conspicuous disclosure:

The notice shall be on a separate document
that identifies the transaction and shall
clearly and conspicuously disclose the
following:

(i) The retention or acquisition of a security
interest in the consumer's principal dwelling.
(ii) The consumer's right to rescind the
transaction.
(iii) How to exercise the right to rescind,
with a form for that purpose, designating the
address of the creditor's place of business.
(iv) The effects of rescission, as described
in paragraph (d) of this section.
(v) The date the rescission period expires.

12 C.F.R. § 226.23(b)(1). The fourth element, requiring disclosure

of the effects of rescission, is further explained at 12 C.F.R. §

226.23(d), which delineates several effects of rescission that must

be disclosed to the consumer, including:

(1) When a consumer rescinds a transaction,
the security interest giving rise to the right
of rescission becomes void and the consumer
shall not be liable for any amount, including
any finance charge.
(2) Within 20 calendar days after receipt of a
notice of rescission, the creditor shall
return any money or property that has been
given to anyone in connection with the
transaction and shall take any action
necessary to reflect the termination of the
security interest.
(3) If the creditor has delivered any money or
property, the consumer may retain possession
until the creditor has met its obligation
under paragraph (d)(2) of this section. When
the creditor has complied with that paragraph,
the consumer shall tender the money or

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 property to the creditor or, where the latter
would be impracticable or inequitable, tender
its reasonable value.

Id.

Most courts have concluded that the TILA's clear and

conspicuous standard is less demanding than a requirement of

perfect notice.6 See, e.g., Veale v. Citibank, 85 F.3d 577, 581

(11th Cir. 1996), cert. denied 520 U.S. 1198 (1997) ("TILA does not

require perfect notice; rather it requires a clear and conspicuous

notice of rescission rights."); Smith v. Chapman, 614 F.2d 968, 972

(5th Cir. 1980) ("Strict compliance does not necessarily mean

punctilious compliance if, with minor deviations from the language

described in the Act, there is still a substantial, clear

disclosure of the fact or information demanded by the applicable

statute or regulation."); Dixon v. D.H. Holmes Co., 566 F.2d 571,

573 (5th Cir. 1978) ("The question is not whether [notice provided

6
We do not follow the Seventh Circuit's view that "TILA does
not easily forgive 'technical' errors." Handy v. Anchor Mortgage
Corp., 464 F.3d 760, 764 (7th Cir. 2006) (quoting Cowen v. Bank
United of Texas, 70 F.3d 937, 941 (7th Cir. 1995)). As the
Eleventh Circuit has explained, Congress in 1995 rejected this
hyper-technical view of the TILA, by imposing a temporary
moratorium on TILA class actions and then amending the statute out
of concern that courts were "allow[ing] plaintiffs to rescind a
mortgage as a result of minor TILA violations." Smith, 108 F.3d at
1327 n.4. In response to Congress's actions, most courts have
adopted the clear and conspicuous standard in place of a rule of
hyper-technicality. We believe this is the correct position, as we
have recently stated. See McKenna, 475 F.3d at 424 ("In taking
this step, Congress made manifest that . . . it had not intended
that lenders would be made to face overwhelming liability for
relatively minor violations.").

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under the TILA] is capable of semantic improvement but whether it

contains a substantial and accurate disclosure . . . ."); see also

Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 568 (1980)

("Meaningful disclosure [under the TILA] does not mean more

disclosure. Rather, it describes a balance between competing

considerations of complete disclosure . . . and the need to avoid

. . . [information overload].") (internal quotation and citation

omitted) (emphasis in original). As this court has recently said,

the 1995 TILA amendments, see Truth in Lending Act Amendments of

1995, Pub. L. No. 104-29, 109 Stat. 271, 272-73, were intended by

Congress to "provide higher tolerance levels for what it viewed as

honest mistakes in carrying out disclosure obligations." McKenna,

475 F.3d at 424.

Thus, the key question in this case is whether Doral

clearly and conspicuously informed plaintiffs of their right of

rescission and the effects thereof, in compliance with the

requirements laid out in Regulation Z. We conclude that Doral met

its disclosure obligations. The form plaintiffs received

explained, among other things, that (1) they were entering a

transaction that would result in a mortgage on their home; (2) they

had a legal right to rescind "this transaction," without cost,

within three days; and (3) if they were to rescind the transaction,

the mortgage that would have been created by the refinancing

transaction would also be cancelled. Because the form clearly

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stated that rescission was available only as to "this transaction,"

Doral clearly and conspicuously informed plaintiffs that any

rescission would only operate as to the current refinancing

transaction.

In addition, the form that plaintiffs received satisfied

12 C.F.R. § 226.23(d), which details the effects of rescission that

must be disclosed. Most importantly, Doral's disclosure form

informed plaintiffs that, "If you cancel the transaction, the

mortgage, lien or security interest is also cancelled." This

statement fulfilled the regulatory requirement that the lender

disclose that, upon rescission of the current transaction "the

security interest giving rise to the right of rescission becomes

void." 12 C.F.R. § 226.23(d)(1). Contrary to plaintiffs'

assertion, this disclosure is accurate even in same-lender

refinance transactions such as those at issue here, because

rescission of a refinance transaction does indeed cancel the entire

security interest contemplated by the refinance agreement. In

addition, rescission of the refinance transaction does not impact

the lender's security interest under the original loan, which is

held in abeyance until the rescission period has expired. See 12

C.F.R. § 226.23(c) ("Unless a consumer waives the right of

rescission . . . no money shall be disbursed other than in escrow,

no services shall be performed and no materials delivered until the

rescission period has expired and the creditor is reasonably

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satisfied that the consumer has not rescinded."). Here, because

Doral's disclosure correctly stated that rescission of the

refinance loan would cancel the security interest contemplated by

that loan, and would impact only the refinance transaction, it

satisfactorily disclosed the effects of rescission as required by

12 C.F.R. § 226.23(d).7

That said, it is true that the disclosure statement

plaintiffs received did not affirmatively inform them, as the H-9

form would have, that rescission of the refinance transaction would

not also rescind their original mortgage.8 However, we do not

require perfect disclosure. The question before us is not whether

7
In its 1996 commentary to the revised regulations, the FRB
clarified that Model Form H-9 could be used for same-lender
refinances where "the original note and mortgage are extinguished
and new documents are executed to cover both the outstanding debt
and the amount borrowed in the new transaction." 61 Fed. Reg.
49,237-02 (1996). However, the FRB's statement that Model Form H-9
could be used in such a transaction does not mean that use of that
form is required. Indeed, because the TILA does not require
lenders to use the model forms, the only test for compliance is
whether the notice actually given informed the consumer clearly and
conspicuously of his rights and obligations, consistent with
Regulation Z.
8
Model Form H-9 explains, in part:

If you cancel this new transaction, it will
not affect any amount that you presently owe.
Your home is the security for that amount.
Within 20 calendar days after we receive your
notice of cancellation of this new
transaction, we must take the steps necessary
to reflect the fact that your home does not
secure the increase of credit.

See 12 C.F.R. § 226.23 (app. H-9).

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the notification in Form H-9 would have been more complete than the

notification plaintiffs actually received, but only whether the

notification plaintiffs actually received met the requirements of

the clear and conspicuous standard laid out in Regulation Z.

Evaluating, as we must, Doral's disclosure from the vantage point

of the hypothetical average consumer, see Palmer, 465 F.3d at 28,

we conclude that because plaintiffs were told, clearly and

conspicuously, that rescission would only operate as to their

pending refinance transaction, any conclusions that they might have

drawn from that disclosure about their previously existing

mortgages were unreasonable (and, thus, not a valid basis for any

TILA claim).9 See Gambardella v. G. Fox & Co., 716 F.2d 104, 118

(2d Cir. 1983) (TILA disclosure that "requires the consumer to

exercise some degree of care and study" suffices and "perfect

disclosure" is not required). Two other circuits (albeit only one

9
Plaintiffs cite two cases in an attempt to rebut this
conclusion. Neither is helpful to their cause. The first, Handy
v. Anchor Mortgage Corp., 464 F.3d 760 (7th Cir. 2006), is not
persuasive for two reasons. First, Handy adopts a hyper-technical
compliance requirement, a position we have rejected. See McKenna,
475 F.3d at 424. Second, Handy's facts are quite different from
those here. In Handy, the court concluded that the consumer was
not clearly informed of her rescission rights where she received
both Model Form H-8 and H-9, and her loan was an original
transaction, rather than a refinance. 464 F.3d at 764. Plaintiffs
also cite our recent decision in Palmer, 465 F.3d at 24. However,
our conclusion here is consistent with Palmer, which held that we
review the adequacy of a lender's notice under the standard of
objective reasonableness. Id. at 28 ("[W]e, like other courts,
have focused the lens of our inquiry on the text of the disclosures
themselves rather than on plaintiffs' descriptions of their
subjective understandings.").

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in a published opinion) have reached this same conclusion, where

Model Form H-8, or a form patterned on it, was used for a same-

lender refinancing transaction. See Veale, 85 F.3d at 580 ("We

hold that . . . the H-8 form provides sufficient notice that the

current transaction may be canceled but that previous transactions,

including previous mortgages, may not be rescinded.");10 Mills v.

EquiCredit Corp., 172 Fed. Appx. 652, 656 (6th Cir. 2006)

(approving of the district court's conclusion that "assuming that

the form used by EquiCredit was technically incorrect . . . the

form nonetheless informed Appellants of their right to cancel the

loan transaction") (unpublished opinion). Doral's disclosures were

not perfect in this case, but they were sufficient to meet the

statutory and regulatory requirements of the TILA and Regulation Z.

See Palmer, 465 F.3d at 29 ("[A]ny creditor who uses plain and

legally sufficient language ought to be held harmless.").

III. Conclusion

For the reasons given above, we AFFIRM the district

court's dismissal of plaintiffs' claims.

10
Plaintiffs assert that Veale is no longer good law because
subsequent amendments and regulatory changes have overruled Veale.
This argument is unpersuasive. Plaintiffs maintain that the 1995
congressional amendments to the TILA meant that "a creditor's use
of the wrong model disclosure form . . . would not be protected."
This is incorrect, for the simple reason that the TILA does not
require use of the model forms at all. In addition, as noted
earlier, supra n.6, the 1995 amendments were intended to reduce,
not increase, lender liability for minor violations.

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