This page will discuss Truth in Lending issues (TILA) that may present themselves in a bankruptcy setting, including loan rescission and challenging the validity of alleged liens in a bankruptcy court. Here is some basic information on TILA.
We have been getting more and more questions about TILA (Truth in Lending Law) and the extended three year right of rescission. Here is one of our write-ups that discusses this concept in general terms. THE FOLLOWING IS NOT LEGAL ADVICE OR TO BE CONSTRUED AS LEGAL ADVICE OR A SUBSTITUTE FOR LEGAL ADVICE. FOR SPECIFIC INFORMATION ON YOUR CASE CONTACT A FORECLOSURE DEFENSE OR TILA LAWYER.
DEFENDANTS (THAT’S THE LENDERS/LOAN SERVICERS AND THEIR “INVESTORS”) SHOULD NOT BE PERMITTED TO FORECLOSE ON THE SUBJECT PROPERTY WHERE PLAINTIFF HAS EXERCISED ITS VALID RESCISSION RIGHTS UNDER FEDERAL TRUTH IN LENDING LAW. IN EXERCISING ITS RESCISSION RIGHTS, THE SECURITY INSTRUMENT ON THE PROPERTY IS NULL AND VOID AND THERE IS NOTHING TO FORECLOSE ON.
FEDERAL TRUTH IN LENDING LAW
The Truth in Lending Act (TILA) is a cornerstone of consumer credit legislation. The Statute is Congress’s effort to guarantee the the accurate and meaningful disclosure of the costs of consumer credit and thereby to enable consumers to make informed choices in the marketplace. See 15 U.S.C. § 1601(a).
The Act is designed to protect borrowers who are not on an equal footing with creditors either in bargaining power or with respect to the knowledge of credit terms. In other words, TILA was passed to aid the unsophisticated consumer. SeeThomka v. A.Z. Chevrolet, Inc. 619 F.2d 246 (3d Cir. 1980). The Act is also remedial and must be liberally construed in favor of borrowers. See King v. California, 784 F.2d 910 (9th Cir. 1986). Except where Congress has relieved lenders of liability for noncompliance, it is a strict liability statute. Courts should continue to assure that consumers are accorded the full remedies available under the Act for violations found, even if they might seem technical. See Rodash v. AIB Mortgage Co., 16 F.3d 1142, 1145, 1149 (11th Cir. 1994).
Although Congress permitted the Federal Reserve Board to issue regulations implementing TILA (Reg Z), and to issue interpretations and official staff commentary that the Courts consider to be persuasive authority, the FRB’s authority is not without limits, and a regulation that conflicts with TILA cannot stand. See Fabricant v. Sears, Roebuck, Clearinghouse No. 54,563 (S.D. Fla. Mar. 5, 2002).
NOTICE OF RIGHT TO CANCEL – DISCLOSURE REQUIREMENTS
Under Federal Truth in Lending Law, each Borrower, or person with ownership interest in the property, (in a non-purchase loan or other exempt transaction) in which a security interest, including any such interest arising by operation of law, is or will be retained or acquired in any property which is used as the principal dwelling, shall be provided with TWO (2) COMPLETED copies EACH of a notice of right to rescind (cancel). It is the lender’s obligation to complete these forms and deliver TWO copies to each Borrower or person with Ownership interest in the Property. 15 U.S.C. § 1635(a), Reg. Z §§ 226.5(b), 226.23(b). If each borrower or person with ownership interest is not provided two adequate copies of this Notice, an extended three year right to rescind is permitted under the Federal Truth in Lending Law.
The notice shall identify the transaction or occurrence and clearly and conspicuously disclose the following:
- The retention or acquisition of a security interest in the consumer’s principal dwelling.
- The consumer’s right to rescind, as described in paragraph (a)(1) of this section.
- How to exercise the right to rescind, with a form for that purpose, designating the address of the creditor’s place of business.
- The effects of rescission, as described in paragraph (d) of this section.
- The date the rescission period expires. (See Reg. Z §§ 226.15(b)(5) and 226.23(b)(5))
The plain-meaning implication of this statutory provision is clear (and therefore is controlling), the lender has the obligation to complete these forms, it is not the borrowers duty to determine what dates to insert into the forms, much less at the direction of a mobile notary. In fact, the escrow instructions and lender’s instruction sheet for the notice of right to cancel form set forth the requirement that the dates be inserted before the borrower was to be asked to sign all copies.
This reading of the law (that it is the lender’s obligation to insert the dates, and not the borrowers) is also consistent with the requirement #5 (set forth above) that “the lender shall clearly and conspicuously identify the date the rescission period expires.” In fact, at least two courts have held in the First and Second circuit: “the complexity of business transactions under TILA means that the average consumer cannot figure out when TILA rights expire…..” See Bonney v. Wash. Mutual Bank, No. 08-30087 (D. Mass. July 30, 2008).
(2) The Lender is required to provide TWO copies of the notice of right to cancel to EACH borrower along with a copy of all of the material TILA disclosures. Failure to meet these requirements also provides an extended three year right to rescind the loan transaction. See 15 U.S.C. § 1635(a); Reg. Z §§ 226.15(b), 226.23(b) and Webster v. Centex Home Equity Corp. (In re Webster), 300 B.R. 787 (Bankr. W.D. Okla. 2003).
THREE YEAR EXTENDED RIGHT TO RESCIND
(a) Consumer’s right to rescind. (1) “In a credit transaction in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction….”
(b) Exercising the right of Rescission: 226.23(3) – “The consumer may exercise the right to rescind until midnight of the third business day following consummation, delivery of the notice required by paragraph (b) of this section, or delivery of all material disclosures, whichever occurs last. If the required notice or material disclosures are not delivered, the right to rescind shall expire 3 years after consummation, upon transfer of all of the consumer’s interest in the property, or upon sale of the property, whichever occurs first. In the case of certain administrative proceedings, the rescission period shall be extended in accordance with section 125(f) of the Act.” There is also legal precedence for “tolling” the statute beyond three years where fraudulent concealment is shown. See Bank of New York v. Waldon, 751 N.Y.S.2d 341 (Sup. Ct. 2002).
226.23(2): (2) “To exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram or other means of written communication. Notice is considered given when mailed, when filed for telegraphic transmission or, if sent by other means, when delivered to the creditor’s designated place of business.”
EFFECTS OF RESCISSION
(d) Effects of rescission. (1) When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void and the consumer shall not be liable for any amount, including any finance charge.
(2) Within 20 calendar days after receipt of a notice of rescission, the creditor shall return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest.
ASSIGNEE LIABILTY FOR RESCSSION
While assignees are only liable for TILA “statutory damages” that are “apparent on the face of the loan documents” assignees are subject to the rescission right to the same extent as the original creditor. 15 U.S.C. §1641(c) states: “Any consumer who has the right to rescind a transaction under section 1635 of this title may rescind the transaction as against any assignee of the obligation. See also the case of Ocwen Fed. Bank v. Russell, 53 P.3d 312 (Haw Ct. App. 2002) which rejected the assignees holder in due course argument as being no defense to rescission. As other courts have held: “without such protection for the consumer the right of rescission would provide little or no effective remedy.” See Stone v. Mehlberg, 728 F. Supp. 1341, 1348, (W.D. Mich 1989). A loan servicer is deemed an assignee if it “is or was the holder of the obligation.”