TILA, Foreclosure Recovery

For homeowners facing foreclosure, many of whom have been the victim of a predatory loan, up until recently, the Federal Truth In Lending Act (“TILA”) served as the primary legal vehicle to help families obtain new loans and stay in their homes. This article examines challenges the practitioner faces under TILA and looks at recently enacted legislation, which should make it easier to obtain loan modifications for worthy borrowers.

The Truth in Lending Act

TILA is primarily a Federal disclosure statute, located at 15 USC 1601 and promulgated by Regulation Z, 12 CFR 226, et seq. TILA’s purpose is to assure a meaningful disclosure of credit terms so that borrowers will be able to compare more readily the various options available to them and avoid the uninformed use of credit.

When a borrower enters into a home mortgage, TILA requires the lender to disclose the material terms of the loan in a “clear and conspicuous” manner and in a way which accurately reflects the “legal obligation” the borrower has on the loan. 12 CFR 226.17(c)(1). Material terms include the annual percentage rate (“APR”), finance charge and the borrower’s three day right to cancel, among others. If the material terms are not disclosed in compliance with TILA, the borrower is entitled to rescind their mortgage for up to three years. Rescission is available with respect to any loan held by an assignee lender if the originating lender failed to make the required disclosures.

A rescission under TILA entitles the borrower to a reduction in the principal amount owed on their loan. The principal reduction is equal to all closing costs and all interest paid to date on the loan. 15 USC 1635(b), Regulation Z, 12 CFR 226.15(d)(2), 226.23(d)(2). For many borrowers, the potential reduction in principal can be in the tens or hundreds of thousands of dollars. Statutory damages and attorneys fees are also available. 15 USC 1635(g), 1640(a)(3), 1640(g).

The problem with the rescission remedy is that after the lender reduces the principal, the borrower is then required to “tender.” “Tender” under TILA usually means that the borrower must refinance and obtain a new loan to pay off the old predatory loan, albeit at the reduced TILA payoff amount. In other words, the borrower can not just simply start making payments to the existing lender, but instead must pay off the old loan by getting a new one. For example, if the original loan amount is $500,000 and the borrower has paid $100,000 in closing costs and interest only payments, then the lender is required to reduce the principal balance on the loan to $400,000.

Unfortunately, it is nearly impossible for most borrowers to tender, given that fair market values of their homes have dropped precipitously. In the example above, if the borrower’s home is now worth $350,000, the borrower will be unable to find a lender willing to loan them the required $400,000. There is a glimmer of hope for the borrower under TILA’s “equitable discretion” provision that empowers a judge to modify the rescission process. Regulation Z, 12 CFR 226.15(d)(4), 226.23(d)(4). Many plaintiffs’ counsel, however, have tried unsuccessfully to persuade a judge to allow the borrower to tender by making payments over time to the existing lender. Enter Loan Modifications.

Practically speaking, Loan Modifications have proven to be the most effective way to settle TILA claims for those borrowers who can afford to make a monthly mortgage payment, but who have been derailed by a temporary hardship or a predatory loan whose interest only or pay option periods have concluded. Although many lenders will try to get a TILA case dismissed for inability to tender, many judges have been reluctant to dismiss such cases based solely on the tender issue, because remaining claims of fraud or negligence survive.