By Richard A. Roth
When a creditor provides a payoff statement for a homeowner’s mortgage loan, the Truth in Lending Act requires the creditor to account for insurance claim proceeds it is holding, a federal district court judge has decided. Noting that the appellate court has not considered the issue, the judge determined that under TILA, funds that could be applied to the loan balance must be credited in the payoff statement (McLaughlin v. Wells Fargo Bank, NA, Oct. 26, 2015, Alsup, W.).
The homeowner received an insurance payment of more than $16,000 due to flood damages and, as required, tendered that amount to her creditor, Wells Fargo Bank. When she later asked for a payoff statement, Wells Fargo did not account for that money even though the bank still held the funds.
Accounting for funds. The judge noted that the loan documents gave the bank two options for handling insurance claim proceeds. Payments either could be credited to what was owed under the loan or they could be used to repair the property. Either way, the $16,000 had to be credited to the account in some way. After all, if the homeowner paid off the loan balance, the money would not be used for repairs, the judge pointed out.
Under Reg. Z—Truth in Lending, a payoff statement must be accurate “based on the best information available” (12 CFR 1026.36(c)(3)). In these circumstances, the payoff statement should have deducted the insurance proceeds from the loan balance due and added that the amount was available for repairs if the loan was not paid off, according to the judge. As a result, he denied the bank’s request for dismissal of the homeowner’s suit over the payoff letter.
Judicial skepticism. The judge’s concern that the misleading payoff statement could cause future difficulties for the homeowner seems to have influenced his decision. “Overly-cautious and under-informed bank employees would forever resort to the payoff statement’s bottom line and inflate the true amount needed to pay off the loan,” he worried. The homeowner’s claims about the insurance payment “would fall on deaf ears.” “Plaintiff would get a run-around and forever be fighting with low-level bank staff insisting that the bank already had other funds available for a credit while the staff shrugged their shoulders and pointed to the misleading payoff statement,” the judge predicted.
For more information about the Truth in Lending Act and Reg. Z, subscribe to the Banking and Finance Law Daily.
