Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil Action No. 06-cv-00651) District Judge: Honorable Timothy J. Savage.
The opinion of the court was delivered by: Ambro, Circuit Judge
Argued September 22, 2008
Before: BARRY, AMBRO, and GARTH, Circuit Judges.
The Truth in Lending Act, 15 U.S.C. § 1601, et seq., imposes disclosure requirements on creditors, exposing them to such penalties as money damages, attorney's fees and recission for failure to disclose finance charges accurately. See § 1635(a) & (g); § 1640(a). However, in 1995, in an effort to prevent creditors from being subject to "extraordinary liability" for small disclosure discrepancies, Congress amended the Act to include a "tolerances for accuracy" provision. 141 Cong. Rec. H9514-01 (daily ed. Sept. 27, 1995) (statement of Rep. Leach). Under that provision, a creditor is not liable for undisclosed finance charges if those charges fall within a specified range of error. 15 U.S.C. § 1605(f). We decide whether a Truth in Lending Act defendant who does not specifically defend on the ground that any inaccuracies in its disclosure fell within the tolerance range waives the protection that provision provides. In procedural parlance, we decide whether a tolerances for accuracy defense is affirmative (requiring that it be pled specifically) or general (thus not requiring that it be pled specifically).
We hold that the defense is general, and that a defendant need not specifically raise the Act's tolerances provision in order to avoid liability for disclosure errors that fall within its range. We thus affirm the ruling of the District Court.
I. Facts and Procedural History
In February 2001, Gaye L. Sterten secured a loan in the amount of $132,000 from Option One Mortgage Corporation.
The purpose of the loan was to refinance the second mortgage on her home and to consolidate her medical and credit card bills. Sterten obtained the loan through a mortgage broker, Main Line Capital, working with one of Main Line's owners, Thomas Girone. Girone was also the President of the title insurance agency used in the transaction, Village Land Transfer, Inc. The closing for the loan took place at Sterten's home with only Sterten and Girone present. Girone helped Sterten execute an Adjustable Rate Note in favor of Option One and a mortgage granting Option One a lien on her real property to secure the loan. Sterten signed, among other documents, a HUD-1 Settlement Statement, the mortgage, a Truth in Lending Disclosure Statement, and a mandatory Notice of Right to Cancel.
Nearly two years later, Sterten sent a letter to Option One contending that the closing of the loan had not been done in accordance with the requirements of the Truth in Lending Act and requesting a recission of the loan. On March 18, 2003, after Option One had disputed her right to rescind, Sterten filed a Chapter 13 bankruptcy petition in the Bankruptcy Court for the Eastern District of Pennsylvania. Option One then filed a proof of claim. In response, Sterten filed an adversary proceeding in her bankruptcy case, seeking recission of the loan along with various statutory penalties.*fn1 Sterten alleged two specific Truth in Lending Act violations: (1) that she was never provided with either her Truth in Lending disclosure statement or her Notice of Right to Cancel form; and (2) that the finance charges were not accurately disclosed. Option One denied both allegations, maintaining specifically with respect to its disclosure of the finance charges that it "acted at all times relevant hereto in full compliance with all applicable laws and/or acts." Option One's Answer ¶ 9.
A trial was held, at which both Sterten and Girone testified. The Bankruptcy Court found Girone more credible than Sterten on whether she had received the required forms and ruled in Option One's favor on that claim. With respect to the adequacy of Option One's disclosure, the parties agreed that ten specific fees and charges listed on the HUD-1 Settlement Statement, totaling roughly $2,000, had not been included as part of the "Finance Charge" disclosed in the Truth in Lending Disclosure Statement. The Court examined each fee and concluded that only two of them-a $25 "mark up" in the appraisal fee and $32 charged for notary services-qualified as "finance charges" under the Truth in Lending Act.*fn2 The Court then sua sponte applied the Act's tolerances for accuracy provision, 15 U.S.C. § 1605(f), concluding that, because the $57 in nondisclosed finance charges were within the tolerance range, the disclosure was "accurate as a matter of law." It thus entered judgment in favor of Option One on both the recission and the damages claims.
Sterten then filed a Motion to Alter or Amend the Bankruptcy Court's order. She argued that the Court should not have applied the Act's tolerances for accuracy provision because Option One had failed to raise it as an affirmative defense and had therefore waived it.*fn3 On January 4, 2006, the Bankruptcy Court granted Sterten's motion, concluding that § 1605(f) is an affirmative defense and that, because "Option One failed to raise § 1605(f) in its pleadings, at trial, or at any other point in th[e] proceeding," it waived the defense. Sterten v. Option One Mortgage Corp. (In re Sterten), Bankr. No. 03-14014, 2006 Bankr. LEXIS 4130, at *10--11 (Bankr. E.D. Pa. Jan. 4, 2006). The Court declared recission and awarded Sterten $2,000 in statutory damages along with reasonable attorney's fees. Id. at *11.
Option One then appealed to the District Court.*fn4 On March 22, 2007, the District Court reversed the Bankruptcy Court's amended judgment, holding that "[b]ecause the 'tolerances for accuracy' provision is not an affirmative defense, the Bankruptcy Court's original verdict in favor of Option One was correct and should not have been disturbed." Sterten v. Option One Mortgage Corp. (In re Sterten), 479 F. Supp. 2d 479, 485 (E.D. ...