Truth in Lending Act  (TILA)

The purpose of the Truth in Lending Act is to require a meaningful disclosure of credit terms so that the borrower will be able to compare the terms of different loans available to him and to protect the consumer against unfair lending practices.

Sources of Law

15 U.S.C. § 1601, et seq.

Regulation Z (12 C.F.R. 226).

The Federal Reserve Board's Official Staff Commentary on Regulation Z (12 C.F.R. 226.36, Supplement I). Ford Motor Credit v. Milhollin, 444 U.S. 555, 565 (1980) ("Unless demonstrably irrational, Federal Reserve Board staff opinions construing the Act or Regulation should be dispositive").

Substantive Requirements

There must be clear, conspicuous, and accurate disclosures of loan terms as set forth in 12 C.F.R. 226.18 ("Content of Disclosures").

Every loan charge must be properly disclosed as either part of the "amount financed," which represents "the amount of credit provided to you or on your behalf," 12 C.F.R. 226.18(b), or as part of the "finance charge," which represents "the dollar amount the credit will cost you," 12 C.F.R. 226.18(d). The "annual percentage rate" (APR) combines the interest rate and additional up-front (prepaid) finance charges to yield the total "cost of your credit as a yearly rate." 12 C.F.R. 226.18(e).

The finance charge is computed according to the rules set forth in 12 C.F.R. 226.4 ("Finance Charge"). The finance charge includes "any charge payable directly or indirectly by the creditor as an incident to or a condition of the extension of credit," 12 C.F.R. 226.4(a), unless a charge is specifically excluded. The most pertinent exclusions in the context of real-estate loan transactions are as follows:

Some real-estate related fees are excluded from the finance charge "if the fees are bona fide and reasonable in amount" (e.g., title, document preparation, credit report, appraisal, and escrow fees). 12 C.F.R 226.4(c) (7).

Tip: This is where most TILA violations occur. If there is a misdisclosure, it is usually because of an understated finance charge, i.e., there was a charge which should have counted as a prepaid finance charge and was not (most common: an arbitrarily inflated appraisal fee [e.g., over $500] or a title insurance charge [e.g., over $600] which was therefore not "bona fide and reasonable.")

In deciding whether a title insurance charge is reasonable, the court should look to the fair market rate, and a refi rate should be cheaper than a purchase-money mortgage rate. Johnson v. Know Fin. Group, 2004 WL 1170335 (E.D. Pa. May 26, 2004);

Where information as to reasonability of the rate is more likely to be in the control of the lender, the lender has the burden of proof on that issue.

Where a fee is not bona fide or reasonable, the portion which is not bona fide or reasonable (i.e., the "up charge") is a finance charge, Credit insurance premiums are excluded from the finance charge if they are voluntary, if this fact and other specified information is disclosed to the borrower, and if the borrower signs that, having been given these disclosures, s/he still wants the insurance. 12 C.F.R. 226.4(d). In re Duffy, 32 B.R. 497 (D.R.I. 1983);

Taxes and fees "prescribed by law that are or will be paid to public officials," such as for a release of lien. 12 C.F.R. 226.4(e).

There must be delivery to each borrower of two copies of a 3-day notice of right to rescind the loan transaction (non-purchase money mortgages only). The notice must meet all the requirements specified in 12 C.F.R. 226.23(b) (1), including setting forth the date the rescission period expires, how to exercise the right, how to contact the creditor, and the effects of rescission. The three-day right to rescind is absolute; unless the borrower waives the right as set forth in 12 C.F.R. 226.23(e), the creditor cannot take any action to undermine that right. 12 C.F.R. 226.23(c). Rodash v. AIB Mort. Co., 16 F.3d 1142 (11th Cir. 1994); Jenkins v. Landmark Mortgage Co., 696 F. Supp. 1089 (W.D.Va. 1988).

The creditor must deliver TILA disclosures to each person whose ownership interest in a dwelling is subject to the security interest, and each such person has the right to rescind. 12 C.F.R. 226.2(a) (11), 226.15(a) and (b), 226.17(d), 226.23(a) (1). Westbank v. Maurer, 658 N.E.2d 1381 (Ill. 2nd Dist. 1995).

Remedies

Failure to deliver a proper 3-day notice of right to rescind triggers an extended right of rescission. 12 C.F.R. 226.23(a) (3). Westbank v. Maurer, 658 N.E.2d 1381 (Ill. 2nd Dist. 1995).

Failure to make clear, conspicuous, and accurate material disclosures also triggers an extended right of rescission. 12 C.F.R. 226.23(a) (3). Material disclosures include the: (1) annual percentage rate, (2) finance charge, (3) amount financed, (4) total payments, (5) or payment schedule. 12 C.F.R. 226.23(a) (3) n.48.

There are statutory "tolerances" for the APR and the amount financed and finance charge. Violations are deemed non-material if they fall within these tolerances.

The APR tolerance is .125% for regular loans and .25% for irregular (variable-rate) loans. 12 C.F.R. 226.22(a);

The finance charge tolerance for defendants in foreclosure actions is $35 (for rescission), 12 C.F.R. 226.23(h), and $100 (for monetary damages), 12 C.F.R. 226.18(d) (1)

The extended right of rescission lasts 3 years from the date of the closing of the loan. 12 C.F.R. 226.23(a) (3). Semar v. Platte Valley Fed. S&L. Assn., 791 F.2d 699 (9th Cir. 1986)

The rescission remedy runs against any assignee: "Any consumer who has the right to rescind a transaction under section 1635 of this title may rescind the transaction as against any subsequent holder of the mortgage.

Tip: It is crucial to comply with the technical TILA rescission procedures in full. First, the notice of rescission must be sent within 3 years of the loan closing--no exceptions. Second, you should send the notice of rescission all parties.

Upon rescission, "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" (step one). 12 C.F.R. 226.23(d) (1). Within 20 days the creditor must take any action required to cancel the security interest and must return any money paid on the loan (step two). 12 C.F.R. 226.23(d) (2). If and when the creditor does so, the consumer must tender to the creditor the value of the money or property received (step three). 12 C.F.R. 226.23(d) (3). The tender amount is reduced by any amount paid on the loan (unless previously returned). White v. WMC Mortgage, 2001 U.S. Dist. LEXIS 15907, at * 5 (E.D. Pa. July 31, 2001); Williams v. Gelt, 237 B.R. 590, 598-99 (E.D. Pa. 1999). Courts can modify steps two and three of the above rescission process. 12 C.F.R. 226.23(d) (4).

Tip: Once the right to rescind is affirmed by the court and amount owed (the "tender") is determined, borrower must pay tender within time frame set by court. All loan payments previously made by the borrower will reduce the tender amount--so, the more payments made, the better the case. Because tender is inevitable (the borrower doesn't just get to "walk away from the loan"), you have to start working on your proposed tender strategy from the very beginning of the case. This may be a good use of "Hard Money" lenders. The principle of the mortgage will be much less then the original mortgage and may make up for the increased rate. This is used as a bridge to a "real" loan after the credit is cleared from the offending bank.

Creditors are also liable for actual damages, statutory damages in the amount of twice the finance charge, up to $2,000, and attorney's fees and costs. 15 U.S.C. § 1640(a). Failure to respond to the rescission notice as spelled out above results in another violation and an addition award of statutory damages. White v. WMC Mortgage, 2001 U.S. Dist. LEXIS 15907, at * 5 (E.D. Pa. July 31, 2001); Mayfield v. Vanguard Savings & Loan, 710 F. Supp. 143, 145 (E.D. Pa. 1989).

Liability for TILA claims for monetary damages runs against assignees where the violation is apparent on the face of the loan documents. 15 U.S.C. § 1641(a).

To fulfill the congressional purpose of TILA, material violations, as set forth above, are to be "strictly construed": there is no such thing as a mere "technical" violation which does not give rise to liability: "[T]he Seventh Circuit, like most courts interpreting TILA, maintains that disclosures made pursuant to the statute should be viewed from the vantage point of an ordinary consumer as opposed to that of a skilled or informed business person. TILA is aimed at deceptive practices by lenders, not the subjective beliefs or actions of borrowers. Moreover, a plaintiff need not show actual harm to recover from technical violations of TILA, as they are strict liability offenses." Adams v. Nationscredit Financial Services Corp., 351 F. Supp.2d 829 (N.D. Ill. 2004) (citations omitted).

Statute of Limitations

1 year for affirmative claims. 15 U.S.C. § 1640(e);

3 years for rescission. Beach v. Ocwen, 523 U.S. 410 (1998); Unlimited as a defense to foreclosure in the nature of a recoupment or setoff.