August 13, 2008

The TILA rescission craze

We are hearing – or we should say, receiving emails – from borrowers who are being inundated with offers to save them from foreclosure through not only the scams we outlined in the last post, but through the Truth In Lending Act. There seems to be some misunderstanding not only about the outcome but the process.

Let’s start by quelling the rumor that you can get a house free-and-clear by just sending a letter rescinding your loan. It’s not that simple.

Keeping in mind our standard disclaimer about legal advice, understand that if you think you can get a TILA-based rescission, you’d better be ready to pay back the original principal balance. True, what you’ve paid (principal, interest, escrow) as well as the originating fees, points, etc., is going to be credited to you in the process. That will come in handy in reducing the original principal if the loan has been in force for a while.

Let's say you took out a $100,000 loan and over some time (less than three years) you've paid in about $12,500 in interest, principal, escrow, etc., and you paid a total of $2,500 in fees, points, etc. The letter goes out and the court battle ensues. If you prevail in that process, the loan may be rescinded, but there will still be the original principal balance to deal with MINUS the amounts you've paid, i.e., $15,000.

You bring $85,000 with you and wham, the loan will be rescinded. If you don't or you don't have a lender lined up it depends on the court. In the 3rd district, we know from an appellate court ruling that the loan won't be rescinded unless the borrower can pay off the principal.* We have heard from sources in others that the debt becomes unsecured. You need your own local legal counsel to navigate this one.

In general, the easiest way to view a TILA rescission is that the parties are put back to where they were before the transaction took place. It's as if the loan was never made. But you have to remember that to get back to where they were before, the lender would have to get back the principal they loaned. Obviously, they can't go after the previous lender/creditor and ruin their day - the principal is tied up in the homeowner's equity.

Now some of you may be thinking along the lines we've been talking to people about: Depending on the legal landscape where you live and the servicer/trustee you're facing, a viable TILA action may be the catalyst to get a major loan modification if you act before you're in default or foreclosure (once you're that far along the balance of power swings to their side. Remember a TILA case can also result in them paying your attorney's fees, so you may have some serious leverage if you have some bona fide TILA violations.

And just a note about timing: The statute of limitations on TILA doesn’t “toll” from the date you discover the flaws – you have three years, period.

“.... the three year limitation on actions for rescission is not a statute of limitations subject to tolling, but rather it is a statute of repose, which creates a substantive right, not subject to tolling”); Spann v. Community Bank of Northern Virginia, 2004 WL 691785, *4 (N.D. Ill. Mar. 30, 2004)

As always, there are more nuances than simple answers and we can't reiterate often enough that knowledgeable local legal counsel is the place to begin.

Craig & Dave

*More case law on rescission:

FDIC v. Hughes Dev. Co., (8th Circuit. 1991) District court did not err in conditioning rescission on tender of $100,000 principal within one year.

Williams v. Homestake Mortgage Co., (11th Circuit, 1992) Voiding of creditor’s security interest in home may be conditioned on consumer’s tender of amount owed to creditor after subtracting all finance charges and penalties.

Bustamante v. First Fed. Sav. & Loan Ass’n, (5th Circuit, 1980) Creditor’s TILA obligations were not automatically triggered until obligor tendered repayment.

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