subject: Truth in Lending Rescission Rights [print this page] Truth in Lending Rescission Rights Truth in Lending Rescission Rights
Consumers have begun to demand modification or they will exercise their right to rescission in court. The consumer has a powerful tool if they are able to rescind the loan, however there is a huge qualification to a consumer's right of rescission.
Truth in Lending Rescission Rights
The Truth in Lending Act (TILA) is designed to provide consumers with accurate information about loan transactions in order to facilitate informed use of credit. TILA requires a creditor to disclose certain important information about the credit terms to the consumer in writing, prior to consummation of a credit transaction.
The provision of TILA that is most relevant to foreclosure defense is the right of rescission. This right applies to consumer credit transaction in which a nonpurchase money lien or security interest is or will be placed on the consumer's principal dwelling. 15 U.S.C. 1635(a). Home equity loans, transactions that refinance purchase money mortgages, and home improvement loans or credit sales are common examples of rescindable transactions. The right to rescind does not apply, however, to transactions for the purchase of the home.
The rescission right is absolute for 3 days, but it is extended for up to 3 years if certain material TIL disclosures were not provided correctly at the time of the original credit transaction or a proper notice of the right to cancel was not given. Therefore, any credit transaction involving a home (other than for its purchase) should be examined for TIL violations, which may provide a continuing opportunity to rescind the transaction.
Inaccuracies in certain disclosures are actionable only if they exceed tolerances set by the statute. 15 U.S.C. 1605(f). However, when rescission of a transaction after initiation of a judicial or non-judicial foreclosure proceeding is based on an error in disclosing the finance charge, the tolerance is just $35.
When evaluating a mortgage transaction for TIL rescission, timing is critical. The right to rescind expires 3 years after consummation of the transaction, with almost no exceptions. If the loan is almost 3 years old, the possibility of rescinding the transaction should be determined without delay.
The TIL rescission provisions reflect Congress's desire to keep homeowners from placing their homes in jeopardy without a clear understanding of the risks and benefits of the transaction. TIL rescission can be a powerful tool, providing an extremely beneficial remedy for consumers facing foreclosure or struggling to meet payments on a home equity loan with onerous terms.
Grounds for Extended Rescission
As noted previously, the right to rescind normally lasts 3 days after consummation of the transaction, but can be extended for up to 3 years if the creditor fails to give the consumer all material disclosures or fails to provide proper notice of the right to rescind. For closed-end credit, the material disclosures are defined as the annual percentage rate, the finance charge, the amount financed, the total of payments, and the payment schedule. 12 C.F.R. 226.23. In addition, if the loan is a high rate loan covered by HOEPA, failure to make the special "advance look" disclosures or inclusion of a prohibited term extends the rescission period.
The creditor must give each consumer 2 copies of a notice of the right to rescind. The Federal Reserve Board's regulations specify the content of this notice. Many courts have held that errors of omissions in the notice, or failure to provide the proper number of copies, extends the right to rescind.
Effects of Rescission on Creditor's Right to Foreclose
Once notice of rescission is given, the lien on the consumer's home becomes void, taking away the creditor's foreclosure remedy, and its leverage. The homeowner is entitled to a return, or a credit against the balance of the debt, of all finance, interest, and other charges, such as closing costs and broker fees. Semar v. Platte Valley Federal Savings & Loan Ass'n, 791 F.2d 699 (9th Cir. 1986). This can dramatically reduce the consumer's debt if the interest rate or charges were high or substantial payments had been made. In certain circumstances the consumer may even have the right to retain the proceeds or goods purchased.
The consumer may bring suit in federal district court, bankruptcy court or state court to enforce these rights. Federal courts can enjoin state non-judicial foreclosure proceedings during the pendency of a TIL rescission claim, and may, depending on the stage of the foreclosure, be able to enjoin judicial foreclosure proceedings as well. Rescission can also be raised in state court in response to the foreclosure, as rescission is a complete defense to foreclosure on the property. Albano v. Norwest Fin. Haw., Inc., 244 F.3d 1061 (9th Cir. 2001).
In addition, the creditor's failure to perform it's TIL rescission obligations may be a separate TIL violation entitling the consumer to actual and statutory damages and attorney fees. Aquino v. Pub. Fin. Consumer Discount Co., 606 F. Supp. 504 (E.D.Pa. 1985). If the loan if covered by the Home Ownership and Equity Protection ACT (HOEPA), the consumer is entitled to not only statutory damages and actual damages, but also special enhanced damages in the amount of all finance charges and fees paid by the consumer. 15 U.S.C. 1640(a)(4). This award can make a substantial reduction in the balance. The consumer may also recover damages for other TIL violations even when the transaction is canceled. The one-year statute of limitations for TIL damage claims runs from the date of the violation in the case of violations of the creditor's rescission obligations, but it runs from the date of consummation of the transaction for disclosure violations.
