751 F.

2d 815

Margie COX, Plaintiff-Appellant,

v.
FIRST NATIONAL BANK OF CINCINNATI, DefendantAppellee.
No. 83-3834.

United States Court of Appeals,

Sixth Circuit.
Argued Sept. 26, 1984.
Decided Jan. 2, 1985.

Frank J. Wassermann (argued), Legal Aid Society of Cincinnati,

Cincinnati, Ohio, for plaintiff-appellant.
Paul J. Vesper, Covington, Ky., for defendant-appellee.
Before CONTIE, Circuit Judge, PHILLIPS, Senior Circuit Judge, and
GILMORE, District Judge.*
CONTIE, Circuit Judge.

Plaintiff Margie Cox appeals the district court's grant of summary judgment in
favor of Defendant First National Bank of Cincinnati in this Truth in Lending
Act case. We reverse and remand to the district court because it applied the
wrong law.

The general problem in this case is whether the Truth in Lending Act as it
existed before Congress amended it in 1980, with the Truth in Lending
Simplification and Reform Act, see Truth in Lending Simplification and
Reform Act, Pub.L. No. 96-221, 94 Stat. 168 (1980), or the Act as amended or
selected provisions of both the amended and unamended Acts must govern this
case. Similarly, it must be determined which interpretive regulation, the one
commonly known as Regulation Z or the one known as Revised Regulation Z,
is to be applied. The problem occurs because Congress, when amending the
Act in 1980, provided that creditors could choose to comply with the amended
Act, rather than the presimplification Act, prior to the effective date of the

amendments. A period of alternative compliance was thus created. The

disclosures which underlie this case occurred during this transitional period.
I.
3

In October 1981 Cox entered into a contract with Cincinnati Home Insulation in
which Home Insulation undertook to perform certain improvements on Cox's
residence. The cost of the goods and services to be supplied by Home Insulation
was financed by that company. The total cost, excluding finance charges, was
$4,500. Cox alleges that she made a $400 downpayment, but the contract and
accompanying disclosure statement did not mention any downpayment and
provided that the entire bill, $4,500, was to be financed. Home Insulation
obtained a second mortgage on the residence and the contract provided for a
waiver of Cox's homestead exemption.1 The statement disclosed that Cox's
residence might become subject to "construction liens."2 At some later date,
Home Insulation assigned the contract and mortgage to First National Bank of
Cincinnati.

On July 12, 1982 Cox sent First National formal notice of her desire to rescind
the contract, a remedy available for certain violations of the Truth in Lending
Act. On July 16, 1982 Cox filed the instant action. Her complaint alleged three
violations of the Act: the failure to disclose the downpayment, the failure to
disclose properly a security interest created by the waiver of Cox's homestead
exemption and the failure to disclose properly and fully possible security
interests in the nature of mechanics' and materialmen's liens. Cox subsequently
filed a supplemental complaint under Federal Rule of Civil Procedure 15(d) to
add a claim for wrongful failure to allow rescission.

Cox sought the following relief. Under the presimplification version of 15

U.S.C. Sec. 1640, a successful plaintiff could receive statutory damages equal
to twice the finance charge, but not less than $100 nor greater than $1,000, for
"any" violation of the relevant portions of the Act. See Truth in Lending Act,
Pub.L. No. 90-321, Sec. 130, 82 Stat. 146, 157 (1968), amended by Pub.L. No.
93-495, Sec. 408(a), 88 Stat. 1500, 1518 (1974), amended by Pub.L. No. 94240, Sec. 4, 90 Stat. 257, 260 (1976) (current version at 15 U.S.C. Sec. 1640(a)
(2)).3 Cox sought to impose this statutory liability. Cox also sought rescission,
which, under both the presimplification and current version of 15 U.S.C. Sec.
1635, is available in any transaction in which a security interest is retained in
the consumer's residence. The right of rescission must be exercised within three
days of the later of the consummation of the transaction or the delivery of all
"material disclosures" and notice of the consumer's right to rescind. See 15
U.S.C. Sec. 1635(a); Truth in Lending Act, Pub.L. No. 90-321, Sec. 125, 82

Stat. 146, 153 (1968), amended by Pub.L. No. 93-495, Sec. 404, 88 Stat. 1500,
1517 (1974). When there is a failure to make all material disclosures, the
consumer has a continuing right of rescission which does not lapse until the
residence is sold or three years have elapsed from the consummation of the
transaction, whichever is earlier. See id., added by Pub.L. No. 93-495, Sec.
405, 88 Stat. 1500, 1517 (1974) (current version at 15 U.S.C. Sec. 1635(f)).
Finally, Cox sought costs and attorneys' fees. See 15 U.S.C. Sec. 1640(a)(3);
Truth in Lending Act, Pub.L. No. 90-321, Sec. 130, 82 Stat. 146, 157 (1968).
6

In determining whether the presimplification or current Act applied, the district

court relied on a stipulation which provided that Cox's "contract is subject to
the federal Truth-In-Lending Act, 15 U.S.C. Sec. 1601 et. seq. and Federal
Reserve Board Regulation Z, 12 C.F.R. Sec. 226.01 et seq." The court held that
"[c]learly, under this stipulation, the provisions of TILA, not TILSRA, govern
the Court's decision."4 The district court also relied on the fact that the current
version of the Act was not effective "until approximately one year after the
transaction herein."5 The district court also held, however, that the stipulation
did not clearly resolve whether Regulation Z or Revised Regulation Z was to
apply. It therefore held that,

7
conduct
that conforms with the requirements of either Regulation Z or Revised
Regulation Z is acceptable. It would be anomalous to find that defendant violated
TILA when its conduct in fact conformed to at least one set of regulations in effect
thereunder. As long as defendant can point to one or more subsections of Regulation
Z, old or new, under which its actions are proper, it will not be held liable.
8

The district court then proceeded to dismiss Cox's claims in reliance on the
presimplification Act, Regulation Z and Revised Regulation Z. On the
downpayment issue, the court held that Cox could receive no damages because
the presimplification Act provided that an assignee is liable only for violations
which are "apparent on the fact of the instrument assigned." 6 The district court
did not clearly explain why a failure to disclose a downpayment does not give
right to a continuing power to rescind. Rather, it merely stated that "a failure to
disclose a downpayment is not among the circumstances giving rise to a right
of rescission. See 15 U.S.C. Sec. 1635(a)."

The district court relied on Revised Regulation Z to dismiss Cox's security

interest claims. Revised Regulation Z expressly excludes "incidental interests"
from the definition of security interests, see 12 C.F.R. Sec. 226.2(a)(25) (1984),
and the Federal Reserve Board's Official Staff Commentary indicates that an
"incidental interest" includes a "[w]aiver of homestead or personal property
rights," see 46 Fed.Reg. 50288, 50296 (Oct. 9, 1981).7 Thus, creditors have no

duty to disclose such a waiver and Cox could base neither her damages nor
rescission claim on this nondisclosure. Similarly, the district court noted that
for purposes of disclosure Revised Regulation Z also excludes "interests that
arise solely by operation of law" from the definition of a security interest. See
12 C.F.R. Sec. 226.2(a)(25) (1984). Since disclosing the possibility of
mechanics' or materialmen's liens is not required,8 this nondisclosure provided
no support for either the damages or rescission claim.
II.
10

There are three distinct errors in the district court's resolution of this case.
Although any of these errors standing alone would require reversal, we believe
that the interplay between the presimplification Act and the current version of
the Act can be fully understood only through explaining each error.

11

First. Although the court determined that, by force of the stipulation, the
presimplification Act applied, it also held that the regulation interpreting the
current version of the Act applies.9 This necessarily leads to incongruous
results.

12

Cox's claim that the disclosure statement inadequately disclosed the possibility
of mechanics' and materialmen's liens provides an example of the confusion
that can result from wedding the revised regulation to the presimplification Act.
The presimplification Act required a "description of any security interest" and a
"clear identification" of the subject property. See Truth in Lending Act, Pub.L.
No. 90-321, Sec. 128, 82 Stat. 146, 155 (1968) (formerly 15 U.S.C. Sec.
1638(a)(10) (current version at 15 U.S.C. Sec. 1638(a)(9)). The term "security
interest" was not defined in the prior version of the Act, but the original
Regulation Z defined the term to include "mechanic's, materialmen's, artisan's,
and other similar liens." See Regulation Z Sec. 226.2(gg). See also Rudisell v.
Fifth Third Bank, 622 F.2d 243 (6th Cir.1980). Although the current version of
the Act still requires a disclosure of security interests, the requirement has been
relaxed. A creditor need now disclose only,

13
[w]here
the credit is secured, a statement that a security interest has been taken in
(A) the property which is purchased as part of the credit transaction, or (B) property
not purchased as part of the credit transaction identified by item or type.
14

See 15 U.S.C. Sec. 1638(a)(9). The legislative history makes it clear that this
language was intended to limit the type of security interests which are to be
disclosed.

When a security interest is being taken in property not purchased as part of the credit
15
transaction, the Committee intends this provision to require a listing by item or type
of property securing the transaction, but not a listing of related or incidental interests
in the property. For example, a loan secured by an automobile (not being purchased
with the proceeds of the loan) would require a statement indicating that the loan is
secured by an automobile but would not require a listing of incidental related rights
which the creditor may have, such as insurance proceeds or unearned insurance
premiums, rights arising under, or waived in accord with state law, accessions,
accessories, or proceeds.
16

S.Rep. No. 73, 96th Cong., 2d Sess. 16, reprinted in 1980 U.S.Code Cong. &
Ad.News 236, 280, 293-94.

17

The intent of Congress was to change the law to not require disclosure of
"rights arising under ... state law," such as mechanics' and materialmen's liens.
In accordance with the amendment, Revised Regulation Z expressly states that
"an interest that arises solely by operation of law" does not have to be disclosed
as a security interest. See 12 C.F.R. Sec. 226.2(a)(25) (1984); Official Staff
Commentary, 46 Fed.Reg. 50288, 50296 (Oct. 9, 1981).10 That Revised
Regulation Z follows the intent of the amendments is not surprising. What
would be surprising is if the revised regulation, promulgated to interpret an
amendment which sought to change the law to remove the requirement that this
type of security interest be disclosed, has any bearing on the presimplification
Act's requirement that it be disclosed. In short, if the presimplification Act
applies, so does Regulation Z; if the current version of the Act applies, Revised
Regulation Z also applies.

18

Second. The conclusion that a creditor may select beneficial provisions from
both Regulation Z and Revised Regulation Z--and in the absence of a
stipulation such as the one in this case might apparently do the same with the
former and current versions of the Act--is wrong. The notice accompanying the
promulgation of Revised Regulation Z stated:

19

Creditors may not, however, "mix and match" requirements from the current
and the revised regulations in making the disclosures for a single transaction.
For example, all the disclosures for a closed-end credit transaction must be
made in accordance with the current regulation or all of them must be made in
accordance with the revised regulation.

20

See 46 Fed.Reg. 20848, 20849 (April 7, 1981). Similarly, the Official Staff
Commentary explains:

In general, however, a creditor may not mix the regulatory requirements when
21
making disclosures for a particular closed-end transaction or open-end account; all
the disclosures for a single closed-end transaction (or open-end account) must be
made in accordance with the previous regulation, or all the disclosures must be made
in accordance with the revised regulation.
22

See 46 Fed.Reg. 50288, 50290 (Oct. 9, 1981).

23

The same is true of the statute itself. The Simplification Act contained the
following provisions for its effective date.

24

(a) except as provided in Sec. 608(b), the amendments made by this title shall
take effect upon the expiration of two years after the date of enactment of this
title.

25

....

26

(c) Notwithstanding subsections (a) and (b), any creditor may comply with the
amendments made by this title in accordance with the regulations, forms and
clauses supplied by the Board prior to such effective date. Any creditor who
elects to comply with such amendments and any assignee of such a creditor
shall be subject to the provisions of sections 130 and 131 of the Truth In
Lending Act [15 U.S.C. Secs. 1640, 1641], as amended by sections 615 and
616, respectively, of this title.

27

Truth in Lending Simplification and Reform Act, Pub.L. No. 96-221, Sec. 625,
94 Stat. 168, 185-86, amended by Pub.L. No. 97-25, Sec. 301, 95 Stat. 144, 145
(1981).

28

The legislative intent behind these provisions on the effective date of the
Simplification Act is fairly clear. The Senate Report states that "either all the
provisions of the old act or all the provisions of the new act will be applicable
for any single transaction." See S.Rep. No. 23, 97th Cong., 1st Sess. 5,
reprinted in 1981 U.S.Code Cong. & Ad.News 74, 78.

29

Thus, a creditor may not comply in part with the old law and in part with the
new law but must instead comply in full with either old or new law. See Huff v.
Stewart-Gwinn Furniture Co., 713 F.2d 67, 68 n. 1 (4th Cir.1983); Mars v.
Spartanburg Chrysler Plymouth, Inc., 713 F.2d 65, 66 n. 1 (4th Cir.1983).11

30

Third. The district court erred in applying Revised Regulation Z not only

30

Third. The district court erred in applying Revised Regulation Z not only
because it is improper to wed the requirements of the revised regulation to the
presimplification Act, but also because, even in the absence of the stipulation,
the presimplification Act and the former Regulation Z would have applied to
this transaction.

31

The Simplification Act does not clearly explain how a creditor is to exercise its
option to comply with the 1980 amendments. The provision concerning the
effective date quoted above merely states that a "creditor may comply" with the
amendments prior to their effective date and that "any creditor who elects to
comply" will be subject to the amended provisions on liability. See Pub.L. No.
96-221, Sec. 625(c). The regulations, however, clarify the procedure. The
notice accompanying the promulgation of Revised Regulation Z states that a
"creditor may avail itself of the new tolerances only if it complies with the
revised regulation." See 46 Fed.Reg. 20848, 20849 (April 7, 1981). Similarly,
the Official Staff Commentary states that a "creditor is not required to take any
particular action beyond the requirements of the revised regulation to indicate
its conversion to the revised regulation." See 46 Fed.Reg. 50288, 50290 (Oct. 9,
1981). Thus, a creditor exercises his option to comply with the amendments by
complying with the amendments.

32

The mere fact, however, that a creditor fails to make disclosures which were
required by the presimplification Act but are not required by the current version
of the Act does not indicate an election to comply with the latter. In addition to
the instances of purported noncompliance with the presimplification Act, there
are several instances in which the disclosure statement is facially deficient
under the new Act. These variations between the instant disclosure statement
and the requirements of the new Act reveal that Home Insulation and First
National did not "elect" to comply with the Simplification Act.

33

The new Act requires that creditors use terminology somewhat different from
that required in the former Act. For example, a creditor must now disclose the
"total sale price, using that term." See 15 U.S.C. Sec. 1638(a)(7); 12 C.F.R.
Sec. 226.18(j) (1984) (emphasis added). This term was not used in the
disclosure statement issued to Cox. The absence of this term is entirely
consistent, however, with disclosure under the presimplification Act. Moreover,
the amended Act, unlike the former Act, requires that "descriptive
explanations" accompany the key terms, "amount financed," "finance charge,"
"annual percentage rate," "total of payments" and "total sale price." See 15
U.S.C. Sec. 1638(a)(8). In a manner consistent with the presimplification Act
and inconsistent with the current version of the Act, the disclosure statement
does not contain these brief descriptions. Additionally, the notice of the right to

rescind stated that the creditor is required by law to take action to effect a
rescission within ten days of its receipt of notice that the consumer is exercising
its right to rescind. This disclosure correctly stated a creditor's obligations under
the presimplification Act. See Truth in Lending Act, Pub.L. No. 90-321, Sec.
125(b), 82 Stat. 146, 153 (1968), amended by Pub.L. No. 93-495, Sec. 404, 88
Stat. 1500, 1517 (1974) (current version at 15 U.S.C. Sec. 1635(b)). This
statement is incorrect, however, under the amended Act. 15 U.S.C. Sec.
1635(b) now gives a creditor twenty days to comply with a request for
rescission.
34

The above examples are specific instances in which the disclosures deviated
from the requirements of the amended Act. The disclosure statement as a whole
reveals that it was made in attempted compliance with the presimplification
Act, not the current Act.12 Since a creditor must comply with the new law in
order to "avail itself of the new tolerances," and since the present disclosure,
considered as a whole, did not purport to comply with the new Act, First
National's liability in this case is governed by the presimplification Act. Both
because Revised Regulation Z does not implement the presimplification Act
and because the disclosure did not purport to comply with Revised Regulation
Z, the former version of Regulation Z similarly applies to this case.

III.
35

First National argues that the district court's judgment is supported by Anderson
Bros. Ford v. Valencia, 452 U.S. 205, 101 S.Ct. 2266, 68 L.Ed.2d 783 (1981).
Valencia does not hold, however, that a creditor can mix and match provisions
of old and new Truth in Lending law. It merely holds that Revised Regulation Z
can, in certain narrow circumstances, be used to interpret the provisions of the
presimplification Act even though the amended Act and Revised Regulation Z
do not directly apply to a given disclosure. Although Valencia does not
generally sanction the district court's application of Revised Regulation Z to
this case, we do conclude that the Valencia analysis applies to one of Cox's
claims.

36

The debtor in Valencia claimed that the creditor's right to unearned insurance
premiums amounted to an undisclosed security interest. See id. at 208-09, 101
S.Ct. at 2268-69. The disclosure occurred prior to the enactment of the
Simplification Act and it was therefore clear that the presimplification Act
applied to the transaction. By the time the case reached the Supreme Court,
however, the Act had been amended and Revised Regulation Z issued. The
Court noted a nonfinal Federal Reserve Board interpretation which had
determined that a creditor's right of this type is not a security interest under the

Act. See id. at 212, 101 S.Ct. at 2270. Because the interpretation was never
adopted as final, however, the Court did not rest its conclusion on that ground.
Id. at 213, 101 S.Ct. at 2270. Rather, it concluded that the presimplification
Act, interpreted in light of the amended Act and Revised Regulation Z, did not
include such interests.
37

The Court's analysis proceeded as follows. The term "security interest" is

defined in neither version of the Act. Id. at 214, 101 S.Ct. at 2271. Although the
former Regulation Z did generally define the term "security interest," see
Regulation Z Sec. 226.2(gg), it did not refer specifically to the status of rights in
unearned insurance premiums. Revised Regulation Z, however, specifically
states that security interests do "not include incidental interest such as [an]
interest in ... insurance proceeds." See 12 C.F.R. Sec. 226.2(a)(25) (1984). The
Court found that Revised Regulation Z and the reasoning behind it "applies to
the TILA as well as to the 1980 Act," see 452 U.S. at 216, 101 S.Ct. at 2272,
because the matter in issue was not specifically addressed in the
presimplification Act, the amended Act, or the original Regulation Z. The
Court summarized its analysis as follows:

38 Board's revised regulation construes the statutory term "security interest" which
The
appears undefined, in both the TILA and the 1980 Act; it also defines the term
"security interest" appearing in the revised regulation. The same term had been used
in the original Regulation Z, and it seems to us that the Board's definition of
"security interest" in the revised regulation is persuasive authority as to whether an
interest in unearned insurance premiums should be disclosed as a "security interest"
under the unrevised regulation. As we see it, the term "security interest" as used in
both the revised and unrevised versions of Regulation Z does not include an interest
in unearned insurance premiums in a transaction such as this.
39

Id. at 216-17, 101 S.Ct. at 2272-73.

40

Thus, although this case is governed by the presimplification Act and

Regulation Z, it is possible that Revised Regulation Z may be of use in
interpreting the requirements of the former law. Specifically, Revised
Regulation Z may be used as an interpretive aid when a particular disclosure is
not addressed in either the presimplification Act or in the former Regulation Z
and when the 1980 amendments do not change the requirements of the
presimplification Act with respect to the disclosure in question.

41

Clearly, the Valencia analysis has no bearing on Cox's downpayment claim.

Unlike the situation in Valencia, the presimplification Act expressly required
the disclosure of a downpayment. See Truth in Lending Act, Pub.L. No. 90-

321, Sec. 128(a)(2), 82 Stat. 146, 155 (1968) (formerly 15 U.S.C. Sec. 1638(a)
(2)). It cannot be said, therefore, that the amended Act did not change the
requirements of the presimplification Act in this respect and that the more
particular requirements of Revised Regulation Z may be used to supplement the
general contours of the presimplification Act.13
42

The same is true of mechanics' and materialmen's liens. Although neither

version of the Act defines the term "security interest," the former Regulation Z
expressly provided that such liens are within the scope of required
disclosures.14 In Valencia, the Court could accurately state that "there is no
indication that the definition [of the term "security interest"] was being changed
with respect to unearned premiums." See Valencia, 452 U.S. at 214-15, 101
S.Ct. at 2271. This statement cannot be accurately made with respect to
mechanics' and materialmen's liens. Regulation Z directly conflicts with
Revised Regulation Z.15 The former may not, therefore, be interpreted by
refering to the latter. The presimplification Act and Regulation Z required
disclosure of these liens16 and nothing in Valencia changes this result.

43

We conclude, however, that the Valencia analysis does apply to waivers of

homestead exemptions. These interests, like the interests in insurance premiums
discussed in Valencia, were not expressly addressed in either Act or in the
original Regulation Z. Revised Regulation Z, however, provides that
"incidental" interests need not be disclosed. See 12 C.F.R. Sec. 226.2(a)(25)
(1984). The Official Staff Commentary makes it clear that "[i]ncidental
interests in property that are not security interests include, among other things
... [w]aiver of homestead or personal property rights." See 46 Fed.Reg. at
50296. Since both insurance proceeds and waivers of homestead exemptions
come under the general rubric of "incidental interests," since neither the
presimplification Act nor the former Regulation Z dealt specifically with
waivers of homestead exemptions, and since there is no indication that the 1980
amendments changed the law regarding waivers of homestead exemptions, we
conclude that waivers of homestead exemptions need not be disclosed under the
presimplification Act, interpreted in light of Valencia.17

IV.
44

Two issues yet remain. First National argues that two statutory provisions, each
of which appears in both versions of the Act, insulate it from liability even if
the disclosure was inadequate. We consider these in turn.

45

First, the bank relies on 15 U.S.C. Sec. 1640(f), which continues substantially
unchanged the presimplification Act's preclusion of liability for,

46 act done or omitted in good faith in conformity with any rule, regulation, or
any
interpretation thereof by the Board or in conformity with 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 under such procedures as the
Board may prescribe therefor, notwithstanding that after such act or omission has
occurred, such rule, regulation, interpretation, or approval is amended, rescinded, or
determined by judicial or other authority to be invalid for any reason.
47

See 15 U.S.C. Sec. 1640(f); Truth in Lending Act, Pub.L. No. 90-321, Sec. 130,
82 Stat. 146, 157 (1968), added by Pub.L. No. 93-495, Sec. 406, 88 Stat. 1500,
1518 (1974), amended by Pub.L. No. 94-222, Sec. 3(b), 90 Stat. 197, 197
(1976) (formerly 15 U.S.C. Sec. 1640(f)).

48

This defense is available to a creditor only if he acts "in conformity" with

certain official interpretations of the Truth in Lending Act. It does not protect a
creditor who fails to conform with a regulation or interpretation through an
honest, good faith mistake. In other words, Sec. 1640(f) does not protect a
creditor from its own mistaken interpretation of the law. See Valencia v.
Anderson Bros. Ford, 617 F.2d 1278, 1287 (7th Cir.1980), reversed on other
grounds, 452 U.S. 205, 101 S.Ct. 2266, 68 L.Ed.2d 783 (1981) ("[A] creditor's
mistaken interpretation of Regulation Z, even if honest and reasonable, is not a
defense under section 1640(f)."); Kessler v. Associates Financial Services Co.,
573 F.2d 577, 579 (9th Cir.1977) ("Section 1640(f) creates no good faith
defense based on the creditor's honest and reasonable, but mistaken
interpretation of the Regulation Z."); Pearson v. Easy Living, Inc., 534 F.Supp.
884, 895 (S.D.Ohio 1981) ("honest and reasonable" misinterpretation of official
pronouncement "is not a defense"). But see Charles v. Krauss Co., 572 F.2d
544, 549 (5th Cir.1978). 18

49

Although First National argues that Sec. 1640(f) provides a "complete bar to
recovery," it fails to identify with what "rule, regulation, or interpretation" it
acted "in conformity." As the preceding discussion reveals, First National did
not comply with Revised Regulation Z or any staff interpretation. It could have
elected to comply with the amended Act and the revised regulation, but nothing
in Revised Regulation Z gave it the authority to select congenial provisions of
the new law for use with other provisions from the presimplification law. The
defense that First National seeks to assert is that it made an honest mistake in
determining the applicability of Revised Regulation Z. This is legally
insufficient under Sec. 1640(f).

50

Second, First National argues that since it is an assignee, it is not liable for
damages for the failure to disclose the downpayment because assignees are

liable only for violations which are "apparent on the face" of the relevant
document. See 15 U.S.C. Sec. 1641(a); Truth in Lending Act, Pub.L. No. 90321, Sec. 115 (1968), added by Pub.L. No. 93-495, Sec. 413(a), 88 Stat. 1500,
1520 (1974) (formerly 15 U.S.C. Sec. 1614). The district court found that the
failure to disclose the downpayment was not apparent on the face of the
disclosure statement and Cox concedes that this is correct. She relies, however,
on a provision of the contract to overcome this defense. The contract provided:
51
Notice:
Any holder of this consumer credit contract is subject to all claims and
defenses which the Debtor could assert against the Seller of goods or services
obtained pursuant hereto or with the proceeds hereof. Recovery hereunder by the
Debtor shall not exceed the amounts paid by the Debtor hereunder.
52

Cox argues that this provision allows her to assert her downpayment claim
against First National because she could have asserted it against Home
Insulation.

53

First National does not respond to this argument on the merits, but rather argues
that Cox did not raise this argument below. This is incorrect. Cox clearly and
unambiguously raised this argument and quoted the relevant language from the
contract in her Reply Memorandum in support of her motion for summary
judgment. The district court failed to address this argument. Since First
National has not briefed this issue on the merits and since this case must be
remanded to the district court, we will allow the district court to determine the
effect of this contractual language upon First National as an assignee in the first
instance.

V.
54

In conclusion, this case is remanded to the district court to apply the

presimplification Act and Regulation Z to Cox's downpayment and mechanics'
and materialmen's liens claims. Under Valencia, Cox may obtain no relief on
her claim regarding the waiver of her homestead exemption. Accordingly, this
case is AFFIRMED in part, REVERSED in part and REMANDED for
proceedings consistent with this opinion.

The Honorable Horace W. Gilmore, United States District Judge for the
Eastern District of Michigan, sitting by designation

This provision of the contract provided:

Buyer hereby waives presentment, demand for payment, protest, notice of

protest, notice of non-payment and all exemptions, whether homestead or
otherwise, and all rights to a judicial or other hearing as to possible seizure or
repossession of Buyer's property securing this contract and obligation, to which
Buyer may now or hereafter be entitled under the laws of Ohio or any other
state.
2

The disclosure statement and contract provided that "[t]he aforesaid real
property may also be subject to construction liens under Ohio or other
applicable state law."

The current version of the Act provides that statutory liability is available only
for specified nondisclosures. See 15 U.S.C. Sec. 1640(a)

The district court referred to the presimplification Act as "TILA" and the
current version of the Truth In Lending Act as "TILSRA" throughout its
opinion

The district court apparently overlooked the provision in the 1980 amendments
which allowed creditors to comply with those amendments prior to their
effective date. See infra

See Truth In Lending Act, Pub.L. No. 90-321, Sec. 115 (1968), added by
Pub.L. No. 93-495, Sec. 413(a), 88 Stat. 1500, 1520 (1974) (formerly 15
U.S.C. Sec. 1614). The current version of the Act carries forward this
provision. See 15 U.S.C. Sec. 1641(a)

The commentary is reprinted in 12 C.F.R. Part 226, Supp. I (1984)

The staff commentary makes it clear that the phrase "interests that arise solely
by operation of law" is a generic term which includes interests such as
mechanics' and materialmen's liens. See infra note 10

Revised Regulation Z clearly addresses the current version of the Act, not the
presimplification Act. Revised Regulation Z "implements the Truth in Lending
Simplification and Reform Act ... and substantially alters the requirements and
the structure of the current regulation." See 46 Fed.Reg. 20848, 20848 (April 7,
1981)

10

The staff commentary, in discussing interests that arise solely by operation of

law, states that "[e]xamples of such interests are mechanics' and materialmen's
liens." See 46 Fed.Reg. at 50296

11

In Mars and its companion case, Huff, the Fourth Circuit held:

Compliance with those amendments was optional with the creditors until
October 1, 1982. During the transition period, as a general rule, all disclosures
were to be made either in accordance with the previous regulation or in
accordance with the revised regulation, but a creditor could not mix the
regulatory requirements.
See 713 F.2d at 66 n. 1.
12

Indeed, the disclosure statement closely tracks the sequence of disclosures

mandated by the former Regulation Z Sec. 226.8(c)

13

Congress clearly thought that it was changing the law as to downpayments. The
Senate Report states that the "number of disclosures given the consumer would
be reduced" and, more specifically, that "the bill would eliminate disclosure of
the ... 'down payment'." See S.Rep. No. 73, 96th Cong., 2d Sess. 3, reprinted in
1980 U.S.Code Cong. & Ad.News 280, 282

14

"Security interest" and "security" means any interest in property which secures
payment or performance of an obligation. The terms include, but are not limited
to ... mechanic's, materialmen's, artisan's, and other similar liens
See Regulation Z Sec. 226.2(gg).

15

The revised regulation clearly provides that mechanics' and materialmen's liens
need not be disclosed. See 12 C.F.R. Sec. 226.2(a)(25) (1984); Official Staff
Commentary, 46 Fed.Reg. at 50296

16

A general discussion of this disclosure requirement is found in Rudisell v. Fifth

Third Bank, 622 F.2d 243 (6th Cir.1980)

17

We recognize that there is authority for the proposition that waivers of

homestead exemptions are security interests which must be disclosed under the
presimplification Act. See, e.g., Hamilton v. Southern Discount Co., 656 F.2d
150 (5th Cir.1981); Elzea v. National Bank of Georgia, 570 F.2d 1248 (5th
Cir.1978). Because these cases were decided before Valencia, we decline to
follow them

18

In Krauss, the creditor relied on an official interpretation which the court

construed narrowly to avoid finding it invalid. Under this narrow construction,
the creditor did not comply with the interpretation, even though it had complied
with "the literal language of the only directive clause" in the interpretation. See
572 F.2d at 549. In this circumstance, which "amount[ed] to a judicial
determination that the exception's literal terms are invalid," see id., the court
allowed the creditor to maintain a Sec. 1640(f) defense even though it had

failed to act "in conformity" with the interpretation, properly construed