Many homeowners often wonder what is TILA and how it applies to them.
The Truth in Lending Act (TILA) (Subject to Update)
This post is designed to enlighten homeowners about the benefits of TILA in their foreclosure defense.
Some of the things homeowners should be aware of is that, Under TILA, a debtor has a right of rescission as to nonpurchase residential
mortgages that lasts for three days after completion of the transaction or delivery of the disclosure, which ever occurs later. It is required that each debtor receives two copies of the notice of their right of rescission. According to Rodriguez v. U.S. Bank (In re Rodriguez), 278 B.R. 683 (Bankr. D.R.I. 2002), the date of the expiration of the right of
rescission must be filled in. If the notices are not given or other material disclosures are not made, the rescission right is extended from three days to three years from the completion of the transaction. See In re Lombardi, 195 B.R. 569 (Bankr. D.R.I. 1996).
Any extension of the right of rescission beyond the three-year period provided by TILA must come from state law. The Supreme Court in Beach v. Ocwen Fed. Bank, 523 U.S. 410 (1998), held that federal law does not provide an extension of more than three years, and that equitable tolling does not apply because the three year limit is a statute of repose, not a statute of limitations. Some states allow rescission in recoupment beyond the TILA’s three-year extension period. See, Fidler v. Cent. Coop.
Bank, 336 B.R. 734 (Bankr. D. Mass. 1998)
TILA §1635(b) provides a three-step rescission process:
1. The debtor must first give notice of the rescission. By invoking rescission, the debtor is relieved of liability for any finance or other charge, and the security interest becomes void.
2. The creditor must return any money paid or property given, including the down payment.
3. The debtor must tender any property received or the value of it.
Courts have considerable discretion concerning the three-step process, and are able to circumvent the process if they see fit. See, Williams v. BankOne, N.A. (In re Williams), 291 B.R. 636 (Bankr. E.D. Pa. 2003); Bell v. Parkway Mortgage, Inc. (In re Bell), 309 B.R. 139, 167 (Bankr. E.D. Pa. 2004).
In the event a court requires that the principal debt be repaid in Chapter 13 bankruptcy, the rescinding borrower/debtor still receives a considerable benefit. In this case, the creditor must reduce the obligation by the amount the borrower has paid through any down payment, closing costs, insurance premiums and by the amount of the finance charges. The obligation to repay only the principal over the life of a Chapter 13 plan is an unsecured claim.
TILA § 1640(a) provides for damage actions for violations of its requirements. In an individual action relating to a closed-end credit transaction secured by real estate or a dwelling, statutory damages of not less than $200 and not greater than $2000 are recoverable. Damages can also be recovered where rescission is available. In cases
dealing with personal property loans, although rescission is not available, the statutory damages are twice the finance charge, with a minimum of $100 and a maximum of $1000. See, Koons Buick Pontiac GMC, Inc. v. Nigh, 125 S. Ct. 460 (2004).
TILA § 1640(e) actions for actual and statutory damages are subject to a one year statute of limitations, measured from the occurrence of the violation. This section also states it, “does not bar a person from asserting a violation of this title in an action to collect the debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such
action, except as otherwise provided by State Law.”
Courts recognize that debtors in bankruptcy can assert damages in recoupment by objecting to a creditor’s proof of claim. See, In re Coxson, 43 F.3d 189 (5th Cir. 1995); Roberson v. Cityscape Corp., 262 B.R. 312 (Bankr. E.D. Pa. 2001). Unlike the three-year right of rescission, the statute of limitations for TILA damage actions can be equitably tolled. Fraudulent concealment of a TILA violation is a basis for tolling the
one-year statute of limitations, however, mere failure to make disclosures is not enough. The consumer must prove the creditor concealed the violation and that the consumer exercised due diligence to discover the facts giving rise to the claim. See, Evans v. Rudy-Luther Toyota, Inc., 39 F. Supp. 2d 1177 (D. Minn. 1999).
The Truth in Lending Act requires disclosure of credit terms, applies to most extensions of consumer credit and frequently apply to restructured loans that meet the definition of a refinancing under the Act and Regulation Z. The Truth in Lending Act offers actual damages, statutory damages for some violations, and attorney’s fees. For second mortgage, home equity loans, and some other transactions secured by home,
rescission may be available.
– Citation: 15 U.S.C. §1601, et seq.
12 C.F.R- Part 226 (Regulation Z)
– Liable Parties: Creditor (generally the original lender) Assignee, if violation “apparent on face” of documents
– Actionable Wrongs: Failure to disclose credit information or cancellation
– Remedies: Rescission, unless transaction was for purchase or
construction of home, Actual damages, Statutory damages up to $2,000 (SEE UPDATE PER SUPPLEMENT), Attorney fees
– Limitations: 1 year to rescind under TILA, though limit does not apply to recoupment under state law
1 year to bring damages claim
3 year limitation if used defensively by way of recoupment,
unless effectively brought as a DUTPA claim
Matthews v. New Century Mortgage Corp., 185 F. Supp. 2d 874 (S.D. OH 2002). (An opinion which includes the facts and claims for a typical predatory lending case involving elderly homeowners. Claims include descriptions of TILA, HOEPA, Equitable Tolling, FHA, ECOA, Conspiracy, Fraud, Unconscionability, and Ohio’s Rico Statute.)
Anderson v. Frye, 2007 U.S. Dist. LEXIS 20935. Plaintiff must show each of the following: (1) that she is a member of a protected class; (2) that she applied for and was qualified for loans; (3) that the loans were given on grossly unfavorable terms; and (4) that the lender continues to provide loans to other applicants with similar qualifications,
but on significantly more favorable terms. Citing Matthews,.
In re Nat’l Century Fin. Enters., Inv. Litig., Fed. Sec. L. Rep. (CCH) P94,314 (May 2007) “[W]hile Plaintiff is required to prove the existence of some unlawful act independent of the civil conspiracy itself, that unlawful act does not need to be committed by each of the alleged co-conspirators.” Citing Matthews,.
Regulation Z Sec. 226.20 Subsequent disclosure requirements
(a) Refinancings. A refinancing occurs when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer. The new finance charge shall include any unearned portion of the old finance charge that is not credited to the existing obligation. The following shall not be treated as a refinancing:
(1) A renewal of a single payment obligation with no change in the original terms.
(2) A reduction in the annual percentage rate with a corresponding change in the payment schedule.
(3) An agreement involving a court proceeding.
(4) A change in the payment schedule or a change in collateral requirements as a result of the consumer’s default or delinquency, unless the rate is increased, or the new amount financed exceeds the unpaid balance plus earned finance charge and premiums for continuation of insurance of the types described in Sec. 226.4(d).
(5) The renewal of optional insurance purchased by the consumer and added to an existing transaction, if disclosures relating to the initial purchase were provided as required by this subpart.
Commentary to Section 226.20 Subsequent Disclosure Requirements
Paragraph 20(a) Refinancings.
1. Definition. A refinancing is a new transaction requiring a complete new set of disclosures. Whether a refinancing has occurred is determined by reference to whether the original obligation has been satisfied or extinguished and replaced by a new obligation, based on the parties’ contract and applicable law. The refinancing may involve the consolidation of several existing obligations, disbursement of new money to
the consumer or on the consumer’s behalf, or the rescheduling of payments under an existing obligation. In any form, the new obligation must completely replace the prior one.
– Changes in the terms of an existing obligation, such as the deferral of individual installments, will not constitute a refinancing unless accomplished by the cancellation of that obligation and the substitution of a new obligation.
– A substitution of agreements that meets the refinancing definition will require new disclosures, even if the substitution does not substantially alter the prior credit terms.
1. Annual percentage rate reduction. A reduction in the annual percentage rate with a corresponding change in the payment schedule is not a refinancing. If the annual percentage rate is subsequently increased (even though it remains below its original level) and the increase is effected in such a way that the old obligation is satisfied and
replaced, new disclosures must then be made.
2. Corresponding change. A corresponding change in the payment schedule to implement a lower annual percentage rate would be a shortening of the maturity, or a reduction in the payment amount or the number of payments of an obligation. The exception in §226.20(a)(2) does not apply if the maturity is lengthened, or if the payment
amount or number of payments is increased beyond that remaining on the existing transaction.
Court agreements. This exception includes, for example, agreements such as reaffirmations of debts discharged in bankruptcy, settlement agreements, and post judgment agreements. (See the commentary to §226.2(a)(14) for a discussion of court approved agreements that are not considered “credit.”)
Workout agreements. A workout agreement is not a refinancing unless the annual percentage rate is increased or additional credit is advanced beyond amounts already accrued plus insurance premiums.
Insurance renewal. The renewal of optional insurance added to an existing credit transaction is not a refinancing, assuming that appropriate Truth in Lending disclosures were provided for the initial purchase of the insurance.
This regulation limits refinancing to transactions in which the entire original obligation is extinguished and replaced by a new one. Redisclosure is no longer required for deferrals or extensions.
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