The opinion of the court was delivered by: Savage, J.
This bankruptcy appeal arises out of James and Viola Escher's ("the Eschers") claims that the lender failed to include certain fees in the finance charge calculation in violation of the Truth in Lending Act ("TILA") when they refinanced a mortgage loan. The Eschers are appealing from the grant of summary judgment in favor of the defendants and the denial of their request for leave to amend their complaint. Two issues pertain to the Bankruptcy Court's rulings with respect to the TILA claims challenging the reasonableness of a yield spread premium ("YSP") and a title insurance fee; and two relate to the denial of the Eschers' request to amend the complaint to expand the TILA claim to include three additional fees charged and to add Bank of New York ("BONY") as a defendant.
We shall affirm the Bankruptcy Court's judgment in part and vacate it in part for the following reasons. First, based on the plain language of the TILA and its implementing regulations, and on the reasoning of the Federal Reserve Board and courts in this Circuit, the Bankruptcy Court correctly held that the YSP in this case was not required to be separately disclosed as a finance charge because it was already included in the interest rate. Second, although it followed several district court opinions, the Bankruptcy Court did not apply the correct legal standard to determine whether the borrowers were entitled to the discounted refinance rate of title insurance. Third, because one of the reasons the Bankruptcy Court denied the Eschers' motion for leave to amend the complaint to add BONY as a defendant was futility and we have determined that the Eschers can proceed with one of the TILA claims, the Bankruptcy Court must reconsider its ruling on the motion for leave to amend only as to adding BONY as a defendant. Therefore, except with respect to the TILA claim relating to the title insurance charge, we shall affirm the Bankruptcy Court and remand the case for proceedings consistent with this memorandum opinion.
Procedural History and Factual Background
On November 5, 2003, through mortgage broker Mortgage Management Specialists ("MMS"), James and Viola Escher obtained a $238,500 mortgage loan from Decision One. They refinanced an existing mortgage held by BNC Mortgage. One month later, Decision One sold the loan to Countrywide, which ultimately transferred its ownership interest to a trust for which the Bank of New York ("BONY") is a trustee. Countrywide continued to service the loan.
On July 29, 2005, Mortgage Electronic Registration Systems, Inc. ("MERS"), as Countrywide's nominee, filed a foreclosure action. On September 1, 2005, James Escher filed a Chapter 13 bankruptcy petition. On September 29, 2005, he and his wife, Viola, filed an adversary proceeding against Decision One, Countrywide, MMS and MERS. They sought: (1) rescission and damages under TILA for the defendants' failure to include certain unreasonable or excessive fees in the finance charge, namely, the YSP, the title insurance fee and the notary fee; (2) actual and statutory damages under the Real Estate Settlement and Procedures Act ("RESPA") for failing to timely respond to the Eschers' request for information about their loan; (3) damages under the Pennsylvania Credit Services Act ("CSA"), Pennsylvania Loan Brokers Trade Practices Regulations ("LBTPR"), and the Unfair Trade Practices and Consumer Protection Law ("UTPCPL").
Decision One, Countrywide and MERS moved for summary judgment. In their opposition, the Eschers abandoned several claims. They withdrew their RESPA claim, limited their CSA and LBTPR claims to the broker, and withdrew their claim that the notary fee was excessive under TILA. For the first time, in their opposition brief, the Eschers identified three charges they contended should have been disclosed as finance charges: a $25 document preparation fee; a $40 tax certification fee; and a $235 title endorsement fee. See Eschers' Opp. Br. at 3, 12-13.
After holding oral argument, the Bankruptcy Court issued its Opinion and Order granting the summary judgment motions in their entirety. See In re Escher, 369 B.R. 862 (Bankr. E.D. Pa. 2007) ("Escher I"). The court held that the defendants did not violate the TILA because the YSP and the title insurance charge were accurately disclosed and because the Eschers raised their new TILA claims improperly in response to a summary judgment motion. Id. at 878-79, 882. It also granted the motions on the UTPCPL claim because there were no underlying claims remaining upon which UTPCPL liability could be based. Id. at 881-82.
Almost one month after the Bankruptcy Court granted summary judgment in favor of the lender, assignee and nominee, the Eschers moved for leave to amend the complaint. They sought to: add BONY as a defendant; add three new TILA claims they first mentioned in their opposition brief to the summary judgment motions; reassert the TILA claims regarding the unreasonableness of the YSP, title insurance and notary fees, which were dismissed against the defendants in Escher I; reassert their UTPCPL claim, which was dismissed against the defendants in Escher I; and reassert their RESPA claim, which they had withdrawn in their response to the summary judgment motions.
The Bankruptcy Court held oral argument on the motion for leave to amend. On September 28, 2007, the Bankruptcy Court issued an Opinion and Order denying the motion, except it allowed the Eschers to amend their UTPCPL claim against the broker (who was the only remaining defendant in the case). See In re Escher, 2007 WL 2892008 (E.D. Pa. Sept. 28, 2008) ("Escher II"). The Bankruptcy Court determined that the Eschers' dilatory conduct and questionable tactics in filing the motion to add new TILA claims and reassert old claims dictated that it be denied. Id. at *1. It also denied the request to add BONY as a defendant because the claims to be asserted against BONY had been dismissed, which rendered amendment futile. Id. at *8.
On September 4, 2008, the Bankruptcy Court approved the Eschers' settlement with the broker. A week later, the Eschers filed their notice of appeal.
Specifically, the issues that the Eschers raise in this appeal are:
1. Whether the Bankruptcy Court improperly entered summary judgment in favor of the defendants on the Eschers' claim that the mortgage broker compensation paid in the form of a YSP should have been disclosed as part of the finance charge;
2. Whether the Bankruptcy Court improperly entered summary judgment in favor of the defendants on the Eschers' claim that the Eschers were overcharged for title insurance, thereby requiring the title insurance fee to have been disclosed as part of the finance charge;
3. Whether the Bankruptcy Court abused its discretion in denying the Eschers' request to amend the complaint to expand their TILA claim to include three additional charges (a $25 document preparation fee; a $40 tax certification fee; a $235 title endorsement fee) that should have been disclosed as part of the finance charge; and
4. Whether the Bankruptcy Court abused its discretion in denying the Eschers' request to amend the complaint to add Bank of New York as a defendant.
A district court reviews a bankruptcy court's "legal determinations de novo, its factual findings for clear error, and its exercise of discretion for abuse thereof." In re Reilly, 534 F.3d 173, 175 (3d Cir. 2008) (citing In re Trans World Airlines, Inc., 145 F.3d 124, 130-31 (3d Cir. 1998)). Where the bankruptcy court's decision involves a mixed question of law and fact, we must break down the determination and apply the appropriate standard of review to each. In re Montgomery Ward Holding Corp., 326 F.3d 383, 387 (3d Cir. 2003).
In this case, we review the Bankruptcy Court's legal determinations regarding the TILA violations, the YSP and the title insurance fees, de novo.
The Truth in Lending Act aims to ensure meaningful disclosure of credit terms and to protect consumers from inaccurate and unfair credit billing practices. 15 U.S.C. § 1601(a). The TILA requires lenders to disclose the cost of credit to borrowers as a dollar amount. This is done by disclosing, among other things, the amount financed, the finance charge, the annual percentage rate, and the total sale price. 15 U.S.C. § 1638(a); 12 C.F.R. § 226.18. The "amount financed" and the "finance charge" together constitute the "total of payments." 15 U.S.C. § 1638(a)(5). The "finance charge" is the sum of all charges, minus certain exclusions, payable by the borrower and imposed by the creditor incident to the extension of credit. 15 U.S.C. § 1605(a).
The TILA and its implementing regulation, Regulation Z,*fn1 identify what fees are included in and excluded from the finance charge. 12 C.F.R. § 226.4. Examples of fees included in the finance charge are interest, points, credit report fees, and borrower-paid mortgage broker fees. 15 U.S.C. § 1605(a); 12 C.F.R. § 226.4(b). Examples of fees that are excludable from the finance charge are certain real-estate related fees, such as charges for title insurance, property appraisals and notary reports, provided they are bona fide and reasonable. 15 U.S.C. § 1605(e); 12 C.F.R. § 226.4(c)(7). Because only reasonable fees are excludable, any unreasonable amount must be included in the finance charge. 12 C.F.R. § 226.4(c)(7).
The disclosure requirements are strict. Failure to fully and accurately disclose has significant consequences. A borrower may rescind a loan when there has been an improper disclosure. 12 C.F.R. § 226.23(a).
The Eschers contend that Decision One should have included the yield spread premium and the title insurance fee in the prepaid finance charge, and that because these fees were not disclosed, they are entitled to rescission of the loan and damages resulting from the rescission. The Bankruptcy Court held that there was no obligation to disclose those fees. We shall consider each charge separately.
The Eschers argue that the $2,385 yield spread premium ("YSP") paid by Decision One to the broker was a component of the finance charge and, accordingly, should have been included in the disclosed pre-paid finance charge. They contend that the Bankruptcy Court erred when it determined that the ...