The mere assignment of a deed of trust without a transfer of the underlying mortgage debt does not trigger a lender's obligation under the Truth in Lending Act (TILA) to notify the borrower of the assignment, according to a decision of the U.S. District Court for the District of Maryland.

In Barr v. Flagstar Bank, the plaintiffs alleged that the lender failed to comply with Section 1641(g) of TILA, which requires lenders to notify borrowers within 30 days that their mortgage loan has been sold or transferred to a third party. The lender argued that Section 1641(g) did not apply because the plaintiffs alleged that only the deed of trust—not the underlying debt—had been assigned. The court agreed, and dismissed the borrowers' claims.

The court ruled that the plain language of Section 1641(g) requires disclosure when a new creditor acquires a borrower's "mortgage loan" or "debt." Section 1641(g), however, makes no mention of instruments that secure debt, such as a deed of trust. In addition, the definition of "mortgage loan" distinguishes between the debt and the security instrument, further supporting the conclusion that disclosure is required for assignments of one but not the other, the court observed.

The court rejected the borrowers' argument that Section 1641(g) applies to assignments of deeds of trust "because the security instrument is the 'operative document which enables the true secured party to foreclose.'" This argument is contrary to the plain language of Section 1641(g), the court found.

Finally, the court rejected the plaintiffs' insistence that adherence to the statute’s plain language would gut TILA’s purpose. The court concluded that "if [TILA] is intended to protect the consumer by increasing transparency in consumer credit transactions, then limiting disclosure to transfers of the debt underlying that transaction furthers that goal," since the borrower "makes payments on the loan to the holder of that debt, not to the holder of the security instrument." Because the concepts of debt and security for debt are distinct, "both in theory and within the clear language of Section 1641(g)," the court granted Flagstar's motion to dismiss.