E*TRADE Loses Lock Fee Appeal

U.S. Appeals Court rules on case filed by Larry and Janet Jones

April 27, 2005

By PATRICK CROWLEY

According to the court ruling, here is what happened in the case.

In September of 2001 consumer Larry Jones and his wife, Janet, contacted E*TRADE to refinance their home mortgage. On Sept. 15 the Jones were sent five loan documents to fill out, among them a 40-day lock-in disclosure agreement.

The Jones signed the papers and in doing so agreed to pay a $400 lock-in fee to secure a 7.25% interest rate on their 30-year, $201,000 second mortgage.

“The agreement…provided for a ‘Rate Lock Fee’ that would be refunded at the close of escrow,” according to the court documents.

The agreement also stated that if the borrower did not qualify for the loan the lock-in fee would be returned; the money would not be returned if the loan did not close for any other reason, including the applicant’s cancellation of the deal.

The Joneses were approved on Sept. 21. E*TRADE sent the couple a standard Notice of Right to Cancel document. It stated that under Regulation Z of the federal Truth in Lending Act, the borrowers had the right to cancel the loan within three business days.

The day before the notice expired the Joneses found a lower advertised interest rate and asked E*TRADE to reprice the loan.

E*TRADE refused and told the Joneses that if the rescinded, they would lose the $400 lock-in fee.

Larry Jones brought up Regulation Z of the Truth in Lending Act, but a mortgage sales manager told him E*TRADE was not governed by the regulation.

The couple proceeded with the loan at the original rate, but then complained to the U.S. Comptroller of the Currency.

The U.S. Department of Treasury Office of Thrift Supervision contacted E*TRADE in January of 2002. The company told regulators that it’s policy “is to refund the deposit only in cases when the loan applicant does not qualify.”

But that wasn’t good enough for the Joneses. In March of 2002 they filed suit against E*TRADE in U.S. District Court in the Northern District of Illinois. Their claim was that E*TRADE “failed to provide ‘clear and conspicuous’ disclosure of rescission rights” under the Truth in Lending Act, according to court documents.

The court sided with E*TRADE and dismissed the suit in March of 2003.

The Joneses appealed to the Ninth Circuit, which ruled in their favor. The case has been sent back to the Illinois district court.

“The purpose of the Truth in Lending Act is to ensure that users of consumer credit are informed as to the terms on which credit is offered them,” the appeals court held.

“The statue is implemented by Regulation Z, which requires creditors to describe the effects of rescission, including the creditor’s obligation to ‘return any money or property that has been given to anyone in connection the transaction,” the court said in the ruling.

The court went on to say that the lock-in fee appears to be part E*TRADE’s credit application that is given to potential borrowers.

“It is difficult to see this agreement as a separate transaction to be distinguished from the loan itself,” the court said. “It is step one in the several steps in obtaining this particular loan from E*TRADE.

“E*TRADE cannot be allowed to subvert the rescission right, including the right to the return of all the property and money tendered in this transaction,” the court found.

“E*TRADE makes the argument that if the loan had never closed, the Joneses would not have had the right to rescind,” the court said. “The argument is irrelevant to this case. The loan did close. Jones did have a right to rescind. What the right included was not clear to him because of (E*TRADE’s) representations and what now appears to have been the corporate policy of E*TRADE.”

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: pcrowley@enquirer.com