When a bank sells a mortgage to another creditor or lending institution, a 2009 amendment to the Truth in Lending Act requires them to inform the borrower in writing no later than 30 days after the date on which the loan is sold or transferred. But can homeowners sue retroactively for damages because the bank neglected to send such notice before TILA made it a requirement?

On December 14, 2015, the three-judge panel of the Ninth Circuit Court of Appeals ruled unanimously that they cannot. Read on to learn more about this important decision and how it affects investors in the foreclosure note market.

Talaie v. Wells Fargo Bank

The Talaies took out two Wells Fargo loans on their Calabasas, California home totaling $1.3 million dollars. The lender sold one of these notes to U.S. Bank in 2006, and the Talaies defaulted on both notes in 2009. Three years later, the couple sued Wells Fargo, claiming that the adjustment from a loan modification done in 2010 was not approved by U.S. Bank and ended up costing them more than $19,000 in payments. Because Wells Fargo had already returned their payments, the couple apparently hoped to sue for damages under the FILA amendment.

A key feature of the lawsuit was the plaintiff’s allegation that Congress intended for the FILA amendment to apply retroactively. However, the Ninth Circuit held that statutes are rarely applied retroactively. Using principles established by the Supreme Court’s decision in Landgraf v. USI Film Productions, the Ninth Circuit also argued that imposing the law retroactively would increase Wells Fargo’s liability for past conduct and impose new duties with respect to those transactions that were already completed.

Implications of the Ninth Circuit Court’s Ruling

The decision comes as a relief to both financial institutions and investors who have non-performing notes in their portfolios. Coming on the heels of several identical rulings in the lower court, this case puts the issue firmly to rest.

As the Ninth Circuit decision notes, damages resulting from a retroactive application of the TILA amendment would have been unfairly punitive to lenders and have had a potentially devastating effect on investors in the scratch and dent market, to whom the cost of regulatory compliance would be passed on. TILA allows individuals to sue for actual loses and attorney’s fees; it imposes a statutory penalty of up to $4,000 dollars for individual claims and $1 million in class action suits. With an unknown number of notes tied up in this market, the risk was just too great for the market to bear.

Peak Foreclosure Services, Inc. specializes in a wide range of default servicing solutions to support and meet the needs of banks, private investors, servicers, and sub-servicers. The company offers non-judicial foreclosure services and post-sale foreclosure services in eight states –- Arizona, California, Idaho, Montana, Nevada, North Carolina, Oregon, Texas, and Washington. They also offer national foreclosure referral services through carefully selected counsel, handling everything from payment processing to foreclosure and bankruptcy processing, REO repair, and disposition services. They are a true one-stop solution for all their clients’ foreclosure servicing needs.