Filed: March 7, 2008
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 06-1720
(1:05-cv-01090-CMH-TC)
JAMES ALEXANDER CETTO, II; ELIZABETH ANN
CETTO,
Plaintiffs - Appellants,
versus
LASALLE BANK NATIONAL ASSOCIATION, as Trustee
for Structured Asset Investment Loan Series
2003-BC9 by Wilshire Credit Corporation, its
Authorized Servicing Agent,
Defendant - Appellee,
versus
SAVINGS FIRST MORTGAGE, LLC,
Party in Interest.
O R D E R
The court amends its opinion filed February 29, 2008, as
follows:
On page 4, line 15, the symbol “÷” is added in the
parenthetical between the numbers “$12,169” and “$153,378.71.”
For the Court - By Direction
/s/ Patricia S. Connor
Clerk
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
JAMES ALEXANDER CETTO, II;
ELIZABETH ANN CETTO,
Plaintiffs-Appellants,
v.
LASALLE BANK NATIONAL
ASSOCIATION, as Trustee for
Structured Asset Investment Loan
Series 2003-BC9 by Wilshire Credit No. 06-1720
Corporation, its Authorized
Servicing Agent,
Defendant-Appellee,
v.
SAVINGS FIRST MORTGAGE, LLC,
Party in Interest.
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Claude M. Hilton, Senior District Judge.
(1:05-cv-01090-CMH-TC)
Argued: October 30, 2007
Decided: February 29, 2008
Before NIEMEYER, SHEDD, and DUNCAN, Circuit Judges.
Affirmed by published opinion. Judge Niemeyer wrote the opinion,
in which Judge Shedd and Judge Duncan joined.
2 CETTO v. LASALLE BANK
COUNSEL
ARGUED: Thomas Ray Breeden, Manassas, Virginia, for Appel-
lants. Paul Wilbur Jacobs, II, CHRISTIAN & BARTON, L.L.P.,
Richmond, Virginia, for Appellee. ON BRIEF: Nichole Buck
Vanderslice, CHRISTIAN & BARTON, L.L.P., Richmond, Virginia,
for Appellee.
OPINION
NIEMEYER, Circuit Judge:
James and Elizabeth Cetto seek to rescind the refinancing of their
Virginia home based on their claim that the total points and fees
charged in the transaction qualified the loan as what is commonly
referred to as a "high-cost mortgage" under the Truth in Lending Act
("TILA") as amended by the Home Ownership and Equity Protection
Act ("HOEPA"), which entitled them to specific disclosures and
terms that they were not afforded.1 A high-cost mortgage is one in
which the "points and fees" exceed 8% of the "total loan amount." See
15 U.S.C. § 1602(aa)(1)(B)(i). To support their claim, the Cettos con-
tend that title search and title binder fees charged by the settlement
agent at closing, which are usually not includable as "points and fees,"
should be included in the calculation of "points and fees" in this case
because (1) the settlement agent was affiliated with the mortgage bro-
ker on the transaction and (2) the mortgage broker in turn was a
"creditor" on the loan, as they claim that term is defined in 15 U.S.C.
§ 1602(f). They argue that the mortgage broker was a "creditor"
because the mortgage broker had served as a lender on previous occa-
sions in unrelated transactions, thus falling within their definition of
"creditor," which is based on their interpretation of the last sentence
of § 1602(f).
1
The purpose for enacting TILA and HOEPA was to provide economic
stabilization in consumer credit lending by assuring meaningful disclo-
sure of credit terms and thus permitting consumers to make an informed
use of credit. See 15 U.S.C. § 1601(a).
CETTO v. LASALLE BANK 3
It is undisputed by the parties that the settlement agent in this case
was affiliated with the mortgage broker and that if the mortgage bro-
ker meets the definition of "creditor" in § 1602(f) and Regulation Z
under it, the fees paid to the settlement agent for the title search and
title binder would have to be included as part of the "points and fees"
charged on the transaction, making the loan a high-cost mortgage.
We conclude, as did the district court, that the mortgage broker in
this case was not a "creditor" as defined in § 1602(f), and therefore
the title search and title binder fees paid to the settlement agent were
not includable as part of the "points and fees" charged. Without the
inclusion of the title search and title binder fees, the loan to the Cettos
was not a "high-cost mortgage" and therefore did not require the addi-
tional disclosures and protections of TILA and HOEPA. Accordingly,
we affirm the judgment of the district court.
I
Following a solicitation from Savings First Mortgage, LLC, James
and Elizabeth Cetto decided to refinance their home in Dale City, Vir-
ginia, "so that [they could] cash out and have some money to do
whatever [they] needed to do in [Mr. Cetto’s] business and at home."
Savings First, functioning as a mortgage broker, obtained a 30-year
adjustable interest rate loan for the Cettos from MorEquity, Inc., at an
initial interest rate of 5.85%, subject to adjustments thereafter based
on market conditions. Savings First charged the Cettos $7,400 for
broker and processing fees.
Through the refinancing transaction, which closed on April 8,
2003, the Cettos borrowed $166,000, with which they paid off their
previous mortgage and debts recorded against their house, as well as
the costs and fees of the refinancing. They then took the balance in
cash. With the cash, they fixed up their house, paid some bills, and
took a vacation.
Settlement of the new loan was conducted by Accurate Settlement
Services, Inc., an "affiliate" of Savings First, as defined by 12 U.S.C.
§ 1841(k). The settlement sheet, which the Cettos signed and dated at
the closing on April 8, 2003, discloses that from the $166,000 pro-
ceeds of the loan, the Cettos paid:
4 CETTO v. LASALLE BANK
(1) the prior mortgage and other debts recorded against
their house in the amount of $103,191.52;
(2) amounts charged by third parties for appraisal, a title
search and title binder, insurance, tax stamps, and
property taxes, in the total amount of $3,226.83;
(3) prepaid finance charges of $12,169 (including a loan
discount, mortgage broker and processing fees, mort-
gage underwriting and administration fees, flood certi-
fication fee, and release fee); and
(4) interest for 17 days, in the amount of $452.29.
The $46,960.36 balance was paid to the Cettos. The settlement sheet
discloses, as significant to TILA and HOEPA, that the "total loan
amount" as defined by statute was $153,378.71 and that the "points
and fees" as defined by statute were $12,169. The cost of the loan
therefore was 7.93% ($12,169 ÷ $153,378.71), rendering the loan not a
high-cost mortgage because the "points and fees" were not greater
than 8% of the amount financed. See 15 U.S.C. § 1602(aa)(1)(B)(i).
About three months after the refinancing closed, on July 1, 2003,
MorEquity sold the loan and mortgage to Lehman Brothers as part of
a package of 286 loans bundled for investment purposes, denominated
as "Structured Asset Investment Loan Series 2003-BC9," and LaSalle
Bank National Association was appointed the trustee of the bundled
asset. For purposes of the Cettos’ claims in this case, LaSalle Bank
stands in the place of MorEquity, the original lender. See 15 U.S.C.
§ 1641(d)(1).
The refinancing increased the Cettos’ monthly payment on their
home from $866 per month to $1,199 per month (including real estate
taxes and insurance), which the Cettos found stressful. Mr. Cetto said
he knew his monthly payment would go up, but he did not know that
it would be that much. In addition, after reviewing the closing costs,
Mr. Cetto observed that they were unexpectedly high. As he testified
in deposition, "After [the three-day cancellation period had elapsed
when he reviewed the loan papers] I noticed, you know, wow, this is
high."
CETTO v. LASALLE BANK 5
By letters dated September 14 and 17, 2004, some 17 months after
closing, addressed to the servicing agent for the bundled loans asset,
Mr. Cetto stated that he was rescinding the refinancing transaction,
claiming violations of TILA, HOEPA, and the Real Estate Settlement
Procedures Act, as well as "other consumer protection statutes."
When his demand for rescission was rejected on the basis that the
Cettos’ loan did not qualify for the more generous rescission provi-
sion of HOEPA, the Cettos commenced this action against LaSalle
Bank, as assignee of the loan and mortgage.
In their complaint, the Cettos alleged that the $166,000 refinancing
loan was a high-cost mortgage, as defined by 15 U.S.C.
§ 1602(aa)(1)(B)(i), because, according to their calculation, the total
"points and fees" exceeded 8% of the total loan amount. To support
their claim that the loan cost them more in "points and fees" than 8%,
they included as "points and fees" $1,274.48 paid to Accurate Settle-
ment, the settlement agent, for its title search and title binder. They
claimed, therefore, that federal law entitles them to disclosures and
terms that were not provided. Based on these violations, they alleged
that they are entitled to rescission, statutory damages and other dam-
ages, attorneys fees, and costs.
LaSalle Bank denied that the settlement agent’s fees were properly
includable as "points and fees" to determine whether the transaction
qualified as a high-cost mortgage, and it also filed a cross-claim for
$188,669.44, plus interest, attorneys fees, and costs, alleging that the
Cettos failed to make payments on the loan since August 11, 2004,
and that the loan therefore is in default.
On cross-motions for summary judgment, the district court denied
the Cettos’ motion and granted LaSalle Bank’s motion. The court
concluded that Savings First was not a "creditor" on the transaction
but rather acted only as the mortgage broker in that it did not lend any
money to the Cettos. Therefore the fees paid to Accurate Settlement,
an affiliate of Savings First, for its title search and title binder were
not "points and fees" charged by a "creditor" or one affiliated with a
"creditor." From the district court’s judgment dated June 1, 2006, the
Cettos filed this appeal.
The only issue raised on appeal is whether, under TILA and
HOEPA, the definition of "creditor," as set forth in 15 U.S.C.
6 CETTO v. LASALLE BANK
§ 1602(f), includes a person who acted only as a mortgage broker in
the particular transaction, but who had acted as a lender in the past
for unrelated transactions. This issue, which requires a construction
of § 1602(f), is one of first impression.
II
In greater particularity, the Cettos seek rescission of their refinanc-
ing loan and damages because of various violations of TILA and
HOEPA, which require a lender to make certain disclosures and pro-
hibit certain loan terms if the loan qualifies as what is commonly
referred to as a high-cost mortgage. A loan is a high-cost mortgage
when "the total points and fees payable by the consumer at or before
closing" exceed "8 percent of the total loan amount." 15 U.S.C.
§ 1602(aa)(1)(B)(i). The Cettos maintain that the points and fees cal-
culation for their loan failed to include $1,274.48 paid to Accurate
Settlement for the title search and title binder. When those charges are
included as costs, the points and fees paid by the Cettos exceed 8%,
triggering the additional protections that HOEPA added when it
amended TILA.
The Cettos’ claim, therefore, depends on whether the title search
and title binder fees paid to Accurate Settlement at closing were prop-
erly excluded from the calculation of "points and fees" in determining
whether their loan was a high-cost mortgage. If those fees were prop-
erly excluded, the total points and fees charged were lower than 8%
of the total loan amount; but if those fees are includable, then the
points and fees exceed 8% and the Cettos would be entitled to relief.
The facts are not in dispute, and the question reduces to one of stat-
utory interpretation, which we review de novo. See Holland v. Pardee
Coal Co., 269 F.3d 424, 430 (4th Cir. 2001).
Under HOEPA, the threshold for the high-cost mortgage protec-
tions is determined by dividing the total points and fees payable by
the consumer by the total loan amount to determine whether that ratio
exceeds 8%. "Total points and fees" on a mortgage means:
(A) all items included in the finance charge, except inter-
est or the time-price differential;
CETTO v. LASALLE BANK 7
(B) all compensation paid to mortgage brokers;
(C) each of the charges listed in section 1605(e) of this
title (except an escrow for future payment of taxes),
unless —
(i) the charge is reasonable;
(ii) the creditor receives no direct or indirect com-
pensation; and
(iii) the charge is paid to a third party unaffiliated
with the creditor; and
(D) such other charges as the Board determines to be
appropriate.
15 U.S.C. § 1602(aa)(4) (emphasis added). Section 1605(e), in turn,
lists the following fees:
(1) Fees or premiums for title examination, title insurance,
or similar purposes.
(2) Fees for preparation of loan-related documents.
(3) Escrows for future payments of taxes and insurance.
(4) Fees for notarizing deeds and other documents.
(5) Appraisal fees, including fees related to any pest infes-
tation or flood hazard inspections conducted prior to
closing.
(6) Credit reports.
15 U.S.C. § 1605(e) (emphasis added). Accordingly, fees for title
searches and title binders are not included in the calculation of "points
and fees" unless they are unreasonable, the creditor receives direct or
indirect compensation in respect to them, or the third party to whom
the fees are paid is affiliated with the creditor.
8 CETTO v. LASALLE BANK
In this case, the parties agree that if the $1,274.48 in fees paid to
Accurate Settlement are included in the calculation of "points and
fees payable by the consumer," the cost of the Cettos’ loan would
exceed 8% of the total loan amount. The Cettos argue that the fees
paid to Accurate Settlement should be included because Accurate Set-
tlement was affiliated with "the creditor," namely Savings First. La-
Salle Bank agrees that Accurate Settlement is affiliated with Savings
First, but it contends that Savings First was not "the creditor," as
required by the statute. The statute includes title search and binder
fees only if Accurate Settlement was affiliated "with the creditor." See
15 U.S.C. § 1602(aa)(4)(C)(iii).
The issue thus reduces to the question of whether Savings First was
"the creditor" on the refinancing transaction. If it was, then the Cettos
properly claim that fees paid to an affiliate of Savings First must be
included in the points and fees charged to the Cettos.
The TILA, as amended by HOEPA, defines "creditor" as follows:
The term "creditor" refers only to a person who both (1)
regularly extends, whether in connection with loans, sales of
property or services, or otherwise, consumer credit which is
payable by agreement in more than four installments or for
which the payment of a finance charge is or may be
required, and (2) is the person to whom the debt arising
from the consumer credit transaction is initially payable on
the face of the evidence of indebtedness or, if there is no
such evidence of indebtedness, by agreement. Notwithstand-
ing the preceding sentence, in the case of an open-end credit
plan involving a credit card, the card issuer and any person
who honors the credit card and offers a discount which is a
finance charge are creditors. For the purpose of the require-
ments imposed under part D of this subchapter and sections
1637(a)(5), 1637(a)(6), 1637(a)(7), 1637(b)(1), 1637(b)(2),
1637(b)(3), 1637(b)(8), and 1637(b)(10) of this title, the
term "creditor" shall also include card issuers whether or not
the amount due is payable by agreement in more than four
installments or the payment of a finance charge is or may be
required, and the Board shall, by regulation, apply these
requirements to such card issuers, to the extent appropriate,
CETTO v. LASALLE BANK 9
even though the requirements are by their terms applicable
only to creditors offering open-end credit plans. Any person
who originates 2 or more mortgages referred to in subsec-
tion (aa) of this section in any 12-month period or any per-
son who originates 1 or more such mortgages through a
mortgage broker shall be considered to be a creditor for
purposes of this subchapter.
15 U.S.C. § 1602(f) (emphasis added). It is undisputed that Savings
First is not a "creditor" according to § 1602(f)’s first sentence,
because Savings First is not "the person to whom the debt arising
from [the loan] is initially payable" on the face of the loan documents.
The transaction documents show that the Cettos’ loan was initially
payable to MorEquity, not Savings First. The Cettos argue, however,
that the last sentence of § 1602(f) provides a stand-alone alternative
definition of "creditor," under which Savings First qualifies because
it originated two or more high-cost mortgages in a 12-month period,
albeit not the mortgage in this case. They maintain that because Sav-
ings First originated unrelated high-cost loans to other borrowers in
the past, Savings First, even though only acting as the mortgage bro-
ker in this transaction, should be considered a "creditor" for all of its
transactions, including this one.
The language of the first sentence of § 1602(f) is unambiguous in
defining "creditor" to refer "only to a person who both (1) regularly
extends . . . consumer credit . . . and (2) is the person to whom the
debt arising from the consumer credit transaction is initially payable
on the face of the evidence of indebtedness . . . ." 15 U.S.C. § 1602(f)
(emphasis added). The definition given in this sentence is restrictive
and precise, referring only to a person who satisfies both require-
ments. Thus, even if an institution were to extend consumer credit
regularly — however "regularly" might be defined — it still would
not be a "creditor" under the first sentence of § 1602(f) unless it was
also the one to which the debt was initially payable. Because a mort-
gage broker is not one to whom the initial debt is payable, neither it
nor its affiliates are "creditors" under this definition. Fees paid to the
mortgage broker’s affiliates for title search and binders would accord-
ingly not be included in the calculation of total "points and fees." See
15 U.S.C. § 1602(aa)(4); id. § 1605(e).
10 CETTO v. LASALLE BANK
The last sentence of § 1602(f), which the Cettos contend provides
an alternative stand-alone definition of "creditor," refers only to a per-
son who has originated two or more high-cost mortgages in a 12-
month period or one such mortgage if through a mortgage broker. If
the Cettos are correct in their construction, the last sentence would so
extend the class of "creditors" as effectively to include any participant
in a loan transaction who has ever made one or two high-cost loans
in the past, eliminating the requirement for that person that it be the
one to whom the debt in the given transaction is initially payable.
Such a construction would not only broaden the definition of "credi-
tor" to unworkable limits, but it would also make an arbitrary distinc-
tion between persons, based on irrelevant aspects of their lending
history. Thus, in any given transaction, a mortgage broker lending no
money in the transaction but who had previously made a thousand
loans in which the costs were no more than 8.0% of the loan amount
would not be a "creditor," but a mortgage broker who had previously
made two loans in which the costs were 8.1% of the loan amount
would be a "creditor," regardless of whether it was lending any money
in the current transaction. But the statutory language does not support
the Cettos’ construction.
First, because the first sentence of § 1602(f) requires that both ele-
ments of the two-part test be met for determinations of "creditor" sta-
tus, we should not automatically construe the last sentence of
§ 1602(f) to override either part of the first sentence by implication.
To avoid this result, the last sentence must be read to provide addi-
tional particularization to the first sentence, clarifying when a person
extending a high-cost mortgage "regularly extends" credit such that he
is "considered to be a creditor for purposes of this subchapter."
Second, the last sentence cannot stand alone from the first because
alone, it has no tie to any extension of credit in the current transac-
tion. Any person in the current transaction would be a creditor so long
as during some 12-month period in its business history it extended
two high-cost mortgages. The only way to give the content of
§ 1602(f) a coherent meaning is to take the last sentence as dealing
with the frequency with which a person extends installment credit to
become one who "regularly extends" credit, as that phrase is used in
the first sentence.
CETTO v. LASALLE BANK 11
Third, the last sentence speaks of "any person who originates 1 or
more [high-cost] mortgages through a mortgage broker," manifesting
the clear understanding that "a mortgage broker" in a transaction is
someone distinct from "the creditor." See 15 U.S.C. § 1602(f)
(emphasis added). Maintaining this distinction is confirmed elsewhere
in the statute as Congress included in the points and fees calculation
"all compensation paid to mortgage brokers," see 15 U.S.C.
§ 1602(aa)(4), making no mention of compensation paid to the bro-
kers’ affiliates, even though it clearly contemplated and included fees
paid to affiliates of the creditor. In arguing that the last sentence pro-
vides an alternative, stand-alone definition of "creditor" that includes
mortgage brokers who have in the past extended credit, the Cettos
have failed to address this language in § 1602(aa)(4) that clearly
includes the fees of "mortgage brokers" and the fees of affiliates of
creditors, while making no mention of the fees paid to affiliates of
mortgage brokers. Had it been Congress’ intent, that section could
have included fees "paid to mortgage brokers and their affiliates." But
it did not. Thus, Congress continued its distinction between mortgage
brokers and creditors and their respective duties and responsibilities
based on their roles in the particular transaction.
Fourth, the last sentence speaks of "any person who originates 1
or more [high-cost] mortgages," (emphasis added), again distinguish-
ing from a mortgage broker. The originator of a mortgage is not the
mortgage broker in the transaction because Congress would not have
used different terms to describe a single entity. Indeed, the one who
"originates" a mortgage is the same entity to whom the debt "is ini-
tially payable," as referred to in the first sentence.
Fifth, the Cettos’ argument that because the second and third sen-
tences of § 1602(f) create stand-alone definitions of "creditor," the
fourth sentence should also be treated as a stand-alone definition fails
to take into account the historical facts. The first three sentences were
stand-alone definitions in the pre-HOEPA version of TILA. HOEPA,
which added protections in circumstances when the creditor originates
a high-cost mortgage, added the last sentence of § 1602(f) as a patch
to extend the first-sentence definition of "creditor" in the context of
mortgages to include persons who have originated only two prior
high-cost mortgages.
12 CETTO v. LASALLE BANK
When enacting HOEPA in 1994 as amendments to TILA, Congress
amended the definition of creditor by adding the last sentence of
§ 1602(f). Home Ownership and Equity Protection Act, Pub. L. No.
103-325, § 152(c), 108 Stat. 2160, 2191 (1994). The Senate Report
explained the addition of that sentence as follows:
The current definition of creditor in Truth-in-Lending
excludes those who originate four or fewer mortgages per
year.[2] For High Cost Mortgages, the Committee has
extended coverage to anyone making a high cost mortgage
through a broker and anyone who makes more than one
High Cost Mortgage in a twelve month period. The Com-
mittee seeks to prevent brokers from evading the legislation
by matching each borrower with a different private individ-
ual acting as a lender.
S. Rep. No. 103-169, at 25 (1993) as reprinted in 1994 U.S.C.C.A.N.
1881, 1909. Thus, Congress was concerned with persons who were
evading the law by arranging high-cost loans through individual
investors who did not "regularly extend" credit as it was defined in
Regulation Z at the time. These individuals would serve as the lender
for only one or two mortgages, and so did not qualify as "creditors"
by the terms of § 1602(f)’s first sentence and Regulation Z’s defini-
tion of "regularly extend[ing]" credit, which required more than five
previous extensions of credit through mortgages. With no "creditor"
in these transactions, TILA would not apply at all. The 1994 amend-
ment, thus, was designed to reach such persons who arranged for a
group of smaller, less frequent investors to serve as lenders for high-
2
Here, Congress refers to Regulation Z’s numerical requirements for
determining when a lender "regularly extends consumer credit." These
numerical requirements were established in the Regulation in the 1980s,
after a decade under TILA in which courts had little guidance as to what
was meant by the phrase. Although Congress refers to "those who origi-
nate four or fewer" mortgages as being wholly exempt from the defini-
tion of creditor under TILA, Regulation Z actually states that a person
is a creditor only if he extended credit "more than 5 times" for transac-
tions secured by a dwelling, not "5 or more," as the Senate report errone-
ously reads Regulation Z. See 12 C.F.R. § 226.2(a)(17) n.3. The
discrepancy, however, is not material to the discussion here.
CETTO v. LASALLE BANK 13
cost mortgages, thereby avoiding the requirements of TILA simply
because they did not "regularly extend" consumer credit as it was then
defined. With the new language, the person making a high-cost mort-
gage loan becomes a "creditor" for future transactions in which he
extends credit even if he originated just two high-cost loans in 12
months or even a single high-cost loan through a mortgage broker.
See 15 U.S.C. § 1602(f).
In light of this history, nothing can be gained from blindly viewing
the structure of § 1602(f) alone, as the Cettos suggest.
Sixth, the Cettos’ structural argument that because the first three
sentences are stand-alone definitions, so must the last sentence be a
stand-alone definition also fails to consider the substance of each of
the sentences. The first sentence defines "creditor" for installment
loans involving both personal property and real property. The second
and third sentences define "creditor" in the credit card context to
include a merchant who honors the credit card and the issuer of the
card. Credit card loans, unlike the loans addressed in the first sen-
tence, are not installment loans (indeed, many borrowers pay off their
debt in one payment). The fourth and last sentence returns to the sub-
ject of the first, addressing creditors in the context of installment
loans involving property. The first and last sentences thus are linked
by their substantive content.
Finally, we believe that a less awkward and surely a less problem-
atic reading, indeed the more natural reading of the entire subsection
— one that construes the first and last sentences in harmony with each
other — would take the last sentence to define with more particularity
when a person who is making a high-cost installment loan "regularly
extends" credit, as that phrase appears in the first sentence.
In sum, the universal definition of "creditor" in the first sentence
of § 1602(f), the substantive and linguistic connections between the
first and last sentences, the differential terminology between "credi-
tor" and "mortgage broker," the history of the last sentence’s enact-
ment, and common sense directs us to conclude that the last sentence
is not a stand-alone definition, as argued by the Cettos, but rather a
particularizing clarification of the first sentence, which defines "credi-
14 CETTO v. LASALLE BANK
tor" in an installment loan as the person to whom the obligation is ini-
tially payable.
III
In addition to the unambiguous statutory language of TILA and
HOEPA, Regulation Z, promulgated by the Federal Reserve Board to
assist in applying § 1602(f), provides that "creditor" cannot include a
mortgage broker who does not extend credit in the transaction and
that the last sentence of § 1602(f) explains the first prong of the "cred-
itor" definition in the first sentence — what it means to "regularly
extend" credit — in circumstances when high-cost mortgages are
involved. Regulation Z defines creditor as:
(i) A person (A) who regularly extends consumer credit3 that
is subject to a finance charge or is payable by written agree-
ment in more than 4 installments (not including a downpay-
ment), and (B) to whom the obligation is initially payable,
either on the face of the note or contract, or by agreement
when there is no note or contract.
FN3: A person regularly extends consumer credit only
if it extended credit (other than credit subject to the require-
ments of § 226.32 [high-cost mortgages]) more than 25
times (or more than 5 times for transactions secured by a
dwelling) in the preceding calendar year. If a person did not
meet these numerical standards in the preceding calendar
year, the numerical standards shall be applied to the current
calendar year. A person regularly extends consumer credit
if, in any 12-month period, the person originates more than
one credit extension that is subject to the requirements of
§ 226.32 [high-cost mortgages] or one or more such credit
extensions through a mortgage broker.
12 C.F.R. § 226.2(a)(17)(i) (emphasis added). Footnote 3 of Regula-
tion Z states that the last sentence of § 1602(f) refers to and further
defines part (1) of the first sentence as to who "regularly extends"
credit. Thus, a person "regularly extends" credit as used in part (1) of
the first sentence of § 1602(f) when he has extended credit through
mortgages more than five times in the previous year or when he has
CETTO v. LASALLE BANK 15
made more than one high-cost mortgage previously (or just one, if
through a mortgage broker), as provided in the last sentence of
§ 1602(f).
Regulation Z thus confirms that the last sentence does not operate
as a stand-alone definition. Instead, the Regulation creates a two-
tiered structure to define a person who "regularly extends consumer
credit" in the mortgage context. On one level it defines "regularly" as
any person who has extended credit through more than five mortgages
(whether high-cost or not) in the preceding calendar year, and on the
other level it defines "regularly" as any person who has extended
credit through more than one high-cost mortgage (or one, if through
a mortgage broker) in any 12-month period. To be a "creditor," how-
ever, the person must also always fulfill the second prong of Regula-
tion Z’s definition (which tracks exactly the statutory definition in the
first sentence of 15 U.S.C. § 1602(f)) by being the one to whom the
obligation is initially payable on the face of the loan document.
Because the mortgage broker in a transaction is not the one to whom
the debt is initially payable, even if the broker extended credit on any
number of previous, unrelated transactions, it is not a "creditor" for
that particular transaction.
Based on both § 1602(f) and Regulation Z promulgated under it,
we hold that Savings First was not a "creditor" in the Cettos’ refinanc-
ing transaction, and thus we affirm the district court’s judgment
reaching this same conclusion.3
3
Although no other court of appeals has yet found it necessary to con-
strue the last sentence of § 1602(f), lower courts have done so, mostly
rejecting the position taken by the Cettos. See Viernes v. Executive Mort-
gage, Inc., 372 F. Supp. 2d 576, 582 (D. Haw. 2004) (finding that the last
sentence of 15 U.S.C. § 1602(f) does not create an independent definition
of "creditor" under TILA); Wilson v. Bel Fury Investments Group, LLC,
2006 U.S. Dist. LEXIS 35740, *9-13 (D. Neb., Feb. 6, 2006) (finding
that the final sentence of § 1602(f) is not a stand-alone definition of cred-
itor but simply expands on the definition to explain who "regularly
extends" consumer credit). But see Anderson v. Wells Fargo Home Mort-
gage, Inc., 259 F. Supp. 2d 1143, 1149 (W.D. Wash. 2003) (stating,
without referring to Regulation Z, that the final sentence of § 1602(f) is
a stand-alone definition of "creditor" but not relying on this statement in
the holding of the case).
16 CETTO v. LASALLE BANK
IV
Unable to provide any argument why Regulation Z does not dictate
the outcome of this case, the Cettos contend that Regulation Z itself
is invalid because it contradicts what they see as the "unambiguous"
meaning of § 1602(f) — that it contains a free-standing definition of
"creditor" in the last sentence.
To address the Cettos’ attack on Regulation Z, we must assess the
regulation under the familiar two-step framework set out in Chevron
U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837, 842-43 (1984), because Regulation Z resulted from the exercise
of the Federal Reserve Board’s congressionally delegated authority to
enact regulations that carry legal force. See 15 U.S.C. § 1604; House-
hold Credit Servs., Inc. v. Pfenning, 541 U.S. 232, 238-39 (2004)
(applying Chevron to Regulation Z). Indeed, the Supreme Court has
observed that "Congress has specifically designated the Federal
Reserve Board and staff as the primary source for interpretation and
application of truth-in-lending law." Ford Motor Credit Co. v. Milhol-
lin, 444 U.S. 555, 566 (1980). The Court in Milhollin stated,
"[b]ecause creditors need sure guidance through the ‘highly technical’
Truth in Lending Act, legislators have twice acted to promote reliance
upon Federal Reserve pronouncements." Id. at 566 (citation omitted).
First, Congress provided a good-faith defense to creditors who com-
ply with the Board’s rules and regulations, as set forth in 15 U.S.C.
§ 1640(f); and second, it expanded this good-faith defense to creditors
Several other courts have refused to deem mortgage brokers to be
"creditors," but there is no evidence in their opinions that they considered
past extensions of credit by the brokers that would fall within Regulation
Z, and the courts did not explicitly address § 1602(f)’s last sentence. See
Robey-Harcourt v. Bencorp Financial Inc., 326 F.3d 1140, 1142-43
(10th Cir. 2003); Wilson v. Homecomings Financial Network, Inc., 407
F. Supp. 2d 893, 896 (N.D. Ohio 2005); Noel v. Fleet, 971 F. Supp.
1102, 1109 (E.D. Mich. 1997); Sweeney v. Savings First Mortgage, LLC,
879 A.2d 1037, 1046-48 (Md. 2005) (finding that "[o]ne thing is certain,
mortgage brokers are not included in the definition of ‘creditor’ under
the TILA" and therefore holding that TILA does not preempt state laws
that regulate mortgage brokers).
CETTO v. LASALLE BANK 17
who conform to "any interpretation or approval by an official or
employee of the Federal Reserve System duly authorized by the
Board to issue such interpretations or approvals." 15 U.S.C.
§ 1640(f); Milhollin, 444 U.S. at 566-67. Thus, under specifically
applicable statutory provisions and Supreme Court holdings, we must
accord strong deference to Regulation Z.
The Cettos can succeed under the Chevron analysis only if they can
demonstrate that the text of the statute is unambiguous in favor of
their construction, in which case we would have to apply it as written,
regardless of what the agency regulation provides. See Chevron, 467
U.S. at 842-43; see also Estate of Cowart v. Nicklos Drilling Co., 505
U.S. 469, 476 (1992); cf. Milhollin, 444 U.S. at 566-67 n.9. Thus they
argue that because the last sentence of § 1602(f) does not explicitly
define a person who "regularly extends consumer credit" described in
part (1) of the first sentence, the last sentence must therefore be a
stand-alone definition of "creditor." They argue that this construction
is unambiguous and, accordingly, that the Federal Reserve Board’s
construction of § 1602(f) in Regulation Z is an impermissible one. See
Chevron, 467 U.S. at 843.
Inasmuch as we rejected the Cettos’ construction of § 1602(f) in
Part II, above, by drawing on a common sense reading of the lan-
guage used in the statute itself as well as the statutory structure that
distinguishes between mortgage brokers and creditors, we cannot
agree that the Cettos’ contrary construction is unambiguously correct
and that Regulation Z therefore is an impermissible construction of
§ 1602(f) because it is inconsistent with the Cettos’ construction.
But even if we restrict our focus to the last sentence of § 1602(f)
and the absence of explicit language indicating that the purpose of the
sentence is to modify further the first sentence, as the Cettos urge, we
could assume at most the existence of a technical gap or ambiguity
as to whether the last sentence modifies the first. Assuming that were
so, we would then determine, under Chevron’s second step, whether
Regulation Z is "based on a permissible construction of the statute."
Chevron, 467 U.S. at 843. In doing so, we would not need to conclude
that "the agency construction [is] the only one it permissibly could
have adopted to uphold the construction, or even the reading the court
would have reached if the question initially had arisen in a judicial
18 CETTO v. LASALLE BANK
proceeding." Id. at 843 n.11. Moreover, because a construction is per-
missible if it is reasonable, we would not be entitled "[to] substitute
[our] own construction of a statutory provision for a reasonable inter-
pretation made by the administrator of an agency." Id. at 844.
On the assumption of a technical gap or ambiguity in the statute,
we nonetheless conclude that Regulation Z is a reasonable construc-
tion of the statute.
Looking through the inquiring lens of reasonableness, we conclude
that Regulation Z’s interpretation — that the last sentence of
§ 1602(f) modifies the first sentence of that section — makes com-
plete sense. As we have already pointed out, the first sentence defines
a "creditor" as "only . . . a person" (1) who "regularly extends" credit
"and" (2) who is the person to whom the debt in the given transaction
is initially payable. The two requirements are mandatory and without
exception. Moreover, they make sense when reading a statute that
imposes disclosure requirements on the creditor in a given transac-
tion, because it is the creditor who lends the money in the transaction.
If one of the two requirements for defining a creditor in the first
sentence is eliminated by treating the last sentence as an independent
definition, the consequences are significant and, indeed, unreason-
able. First, the first sentence and the last sentence would have created
an arbitrary distinction regarding whether a transaction’s broker is a
creditor or not, without logic or reason. One mortgage broker, who is
not a lender in the current transaction, is deemed a "creditor" because
it made two loans in its history having costs exceeding 8%, and
another mortgage broker, who likewise is not a lender in the current
transaction, is excluded from the definition of "creditor" only because
all of its prior loans — no matter how many — had costs of 8% or
less. Second, mortgage brokers in a transaction would be regulated the
same as creditors, even though they extended no credit to the con-
sumer and even though the statute refers to mortgage brokers as per-
sons distinct from creditors. Third, the absurdity of such a
construction would be that the TILA and HOEPA would regulate
mortgage brokers as creditors, not because the mortgage brokers
extended any credit to the consumer, but because they had at some
time in the past extended credit as a lender. Common sense suggests
that TILA and HOEPA were enacted to protect consumers from credi-
CETTO v. LASALLE BANK 19
tors in specific consumer loans, not from non-lenders who may have
served as creditors in some other transaction years before.
Avoiding these consequences, Regulation Z reads the first and last
sentences of § 1602(f) in a natural way that lets them stand in har-
mony.
Accordingly, we conclude that the Federal Reserve Board’s inter-
pretation of "creditor" in Regulation Z is, if not the correct one, cer-
tainly a permissible one. First, as shown above, it is a logical
interpretation and fits into one of two possible interpretations of the
statute based on the plain meaning of the text. Second, the clause in
the last sentence of § 1602(f), making a creditor out of "any person
who originates 1 or more [high-cost] mortgages through a mortgage
broker," suggests that the mortgage broker is a person other than the
"creditor" in a mortgage transaction. See 15 U.S.C. § 1602(f) (empha-
sis added). Finally, it conforms to common sense. It would be strange
for a mortgage broker that merely arranged a particular loan to be
considered a "creditor" for the entire subchapter, 15 U.S.C. §§ 1601-
77 (Consumer Credit Cost Disclosure), just because it had originated
a mortgage and extended credit in some earlier, unrelated transaction.
Thus, the Federal Reserve Board’s interpretation — using the last
sentence of § 1602(f) to define further what is meant by "regularly
extend[ing]" consumer credit — is a reasonable and therefore permis-
sible construction of the statute.
V
As a final attempt to attack the validity of Regulation Z, the Cettos
contend that the Federal Reserve Board’s official staff interpretation
of Regulation Z contradicts the Regulation’s obvious meaning. The
inference to be drawn is that either the position taken in Regulation
Z or the position taken by the staff is an unreasonable construction
and therefore neither can be accorded deference as reasonable. See
Milhollin, 444 U.S. at 565 ("Unless demonstrably irrational, Federal
Reserve Board staff opinions construing the Act or Regulation should
be dispositive . . . ."); see also 15 U.S.C. § 1640(f) (good faith com-
pliance with a Board staff opinion is a shield to liability under certain
sections of TILA and HOEPA).
20 CETTO v. LASALLE BANK
The relevant staff interpretation notes that "[t]he definition [of
creditor] contains four independent tests. If any one of the tests is met,
the person is a creditor for purposes of that particular test." 12 C.F.R.
§ 226, Supp. I, at 374 (emphasis added). The Cettos argue that this
statement refers to the statutory definition of "creditor" located in 15
U.S.C. § 1602(f). Because there are four sentences in § 1602(f), the
Cettos reason that each sentence must therefore amount to an individ-
ual definition of "creditor" and therefore that the staff interpretation
supports their view that the last sentence of § 1602(f) is a free-
standing definition — the "fourth definition" under the staff interpre-
tation.
The Cettos’ understanding of the Federal Reserve Board’s staff
interpretation is patently wrong. The staff interpretation refers to Reg-
ulation Z’s definition of "creditor," located in 12 C.F.R.
§ 226.2(a)(17), not to the statutory definition, located in 15 U.S.C.
§ 1602(f). Indeed the introduction to the Board’s staff interpretation
states: "This commentary is the vehicle by which the staff of the Divi-
sion of Consumer and Community Affairs of the Federal Reserve
Board issues official staff interpretations of Regulation Z . . . ." 12
C.F.R. § 226, Supp. I, at 368 (emphasis added).
Regulation Z’s definition of "creditor" does indeed contain four
independent tests, the first reciting the two-part test explained in the
first sentence of 15 U.S.C. § 1602(f) and interpreting the last sentence
of § 1602(f) to describe what it means to "regularly extend consumer
credit" when a high-cost mortgage is involved. See 12 C.F.R.
§ 226.2(a)(17)(i). The three additional definitions in Regulation Z
deal with various methods of becoming a "creditor" by extending
credit through the issuance and acceptance of credit cards. See 12
C.F.R. § 226.2(a)(17)(ii)-(iv). In neither Regulation Z nor the staff
interpretation is there any stand-alone definition of "creditor" con-
forming to § 1602(f)’s last sentence. Regulation Z’s definition makes
clear that, in this context, a creditor must be one to whom the debt
is initially owed. Thus, the official staff position, which is consistent
with Regulation Z, actually undermines rather than advances the Cet-
tos’ position. Moreover, it confirms further our understanding that the
final sentence of § 1602(f) must be read to explain what it means to
"regularly extend" consumer credit, as that phrase appears in the first
sentence.
CETTO v. LASALLE BANK 21
Because the Federal Reserve Board, through both Regulation Z and
its staff interpretation, provides a consistent, rational, and therefore
permissible explanation of the definition of "creditor" in § 1602(f), we
are not free to ignore the construction made by the agency tasked with
providing guidance on the statute.
VI
Were we to construe § 1602(f) to make any mortgage broker a
"creditor," simply because the mortgage broker on a few occasions
earlier was a creditor in unrelated transactions, we would broaden sig-
nificantly the duties imposed on persons participating in loan transac-
tions, with untold and unknown consequences that cannot now be
fully foreseen. The TILA as amended by HOEPA is a detailed and
complex statute concerned with balancing the benefits of disclosure
requirements with the burdens that such disclosure would impose on
various parties to credit transactions. To expand the disclosure
requirements to persons who are not clearly creditors would be anti-
thetical to the clear, permissible, and authoritative interpretation given
by the agency experts in this area and would introduce undefinable
instability to an area in which Congress sought to introduce stability.
In addition, denying Savings First the ability to rely on the Board’s
permissible Regulation Z would lead to widespread confusion. Mort-
gage brokers would be unsure of their status under lending laws and
would be punished for relying on the very regulations on which they
have been encouraged by Congress in the statute to rely. See, e.g., 15
U.S.C. § 1640(f); Milhollin, 444 U.S. at 566-67. Regulation Z pro-
vided the necessary "sure guidance" through the "highly technical"
mortgage lending laws, see id. at 566, and Savings First relied on this
recognized guidance.
Therefore, we hold that the definition of "creditor" in § 1602(f),
based on traditional notions of statutory construction, the Federal
Reserve Board’s Regulation Z, and common sense, does not reach
mortgage brokers in transactions in which they act only in the role of
broker, even though they may have acted as a statutorily-defined
"creditor" in prior unrelated transactions.
The judgment of the district court is
AFFIRMED.