Truth in Lending: 10.2.11 Interrelationship Between FTC Cooling-Off Period, State Cooling-Off Periods, and TILA Rescission
The Truth in Lending Act is not the only source of rescission rights, particularly in the area of home improvement sales.
The Truth in Lending Act is not the only source of rescission rights, particularly in the area of home improvement sales.
The purpose of TILA’s cooling-off period is to permit consumers to reflect without pressure on the risks of encumbering the family home and give them an opportunity to reconsider such a major decision.292 Thus the statute provides for an initial three-day period during which the consumers have an unconditional right to change their minds and cancel the transaction for any reason, or for no reason.
Sometimes creditors never properly deliver the rescission notice and all the material disclosures. In such cases, Congress has provided that the right to rescind is extended, though not for an unlimited time. Rather, where the mandatory information was not properly delivered,307 the right to rescind continues until whichever of the following events occurs first:
The extended rescission right is terminated when the secured property has been sold or transferred.320 The sale or transfer of the property need not be voluntary to terminate the right to rescind the transaction.321 For example, a foreclosure sale of the consumer’s principal residence will generally terminate the consumer’s right to rescind.322 A mere judgment of foreclosure does not, however, terminate the right to rescind where the ac
A consumer’s filing for bankruptcy relief does not constitute a transfer that cuts off the right to rescission.
One event that is notable by its absence from both the statutory and regulatory list of events cutting off the rescission right is payoff of the loan.351 This issue may arise when a consumer asserts the right to rescind a loan that has been refinanced or otherwise paid off. With one exception, all of the federal circuit courts and state appellate courts to have addressed this issue have held that satisfying a loan does not terminate the consumer’s right to rescind. The Ninth Circuit reached the opposite conclusion in King v.
As noted above, section 1635(f) provides that the obligor’s right of rescission expires, at the latest, three years after the date of consummation of the transaction. The Supreme Court has construed this limitation strictly. In Beach v. Ocwen Federal Bank,368 the Court held that, as a matter of federal law, there is no right to raise Truth in Lending rescission claims beyond three years even as a defense to a foreclosure or other collection action commenced by the creditor.
Creditors have twenty days to act upon a valid rescission notice.384 If a creditor violates section 1635 by refusing to follow the required steps to unwind the transaction, the consumer is entitled to at least two remedies: damages under section 1640(a) and a court order declaring that the mortgage lien is void under section 1635. Voiding the mortgage lien and unwinding the transaction often are the consumer’s most important goal, and this subsection discusses the time limits on doing so.
The Court in Beach gave a nod to an exception to the three-year rule in a cryptic footnote which states: “Since there is no claim before us that Florida law purports to provide any right to rescind defensively on the grounds relevant under the Act, we have no occasion to explore how state recoupment law might work when raised in a foreclosure proceeding outside the 3-year period.”413
Even if a state does not have a TILA-type statute that allows rescission by recoupment, the TILA violation may trigger a separate cause of action for rescission under the state’s UDAP statute.424 Since the Supreme Court in Beach specifically mentioned that the grounds for rescission under state law must be “relevant under” TILA, practitioners should consider pleading that the TILA violation constitutes either a per se violation of the state’s UDAP act (if applicable to credit transactions) or is an unfair or deceptive act prohibi
Bankruptcy law may give a short extension of the three-year rescission period for debtors who file bankruptcy just before it expires. 11 U.S.C. § 108(b) provides that if nonbankruptcy law or an agreement sets a deadline for the debtor to “file any pleading, demand, notice, or proof of claim or loss, cure a default, or perform any other similar act,” and the deadline has not passed as of the date of the filing of the bankruptcy petition, the trustee has sixty days or until the deadline, whichever is later, to take the step in question.
Another section of the Bankruptcy Code, 11 U.S.C. § 108(a), provides a two-year extension of the period within which the trustee may “commence an action” that the debtor could have filed, as long as the statute of limitations has not expired at the time of the bankruptcy filing.461 This provision should allow additional time to file a rescission case if the debtor has sent a timely rescission notice.
A different and narrower subsection of the Bankruptcy Code, 11 U.S.C. § 108(c), applies when the lender rather than the consumer files bankruptcy. This statute extends the time for taking certain acts until thirty days after the automatic stay is lifted or the expiration of the original nonbankruptcy deadline, whichever is greater.
Another circumstance in which the time for exercising the right to rescind is extended occurs if an agency with enforcement authority has commenced a proceeding to enforce TILA rescission rights within the three-year period. If the agency finds a violation of section 1635 and the consumer’s right to rescind is based in whole or in part on any matter involved in the proceeding, then the right to rescind extends for one year after the conclusion of the proceeding.467
The Supreme Court has held that the commencement of a class action suspends the running of a limitations period for all persons who would be members of the class if the action were certified.470 The Court recognized that, unless the statute of limitations was suspended, class members would not be able to rely on the existence of the class action to protect their rights, but would have to intervene or file separate suits before the limitations period expired.
The three-year period for rescission is measured from the date of consummation of the transaction.481 The date when consummation occurs is a question of state law.482 In some circumstances, consummation may not occur on the date the consumer signed the loan documents and received the TILA disclosures, but on some later date.483 In addition, the dates on the loan documents themselves may be incorrect.
There is virtually no dispute that TILA’s one-year statute of limitations for filing suit found in section 1640(e) can be equitably tolled.488 However, quite a few courts have construed Beach as holding that the three-year rescission period set by section 1635(f) is a statute of repose, and have concluded from that premise that it is not subject to equitable tolling.489 The Beach decision never characterizes the three-year rescission period as a statute of repose, howev
Regardless of whether rescission can be asserted by way of recoupment after the three-year period has passed, TILA damage claims continue to be available by way of recoupment, for example in foreclosure cases and in bankruptcy under section 1640(e).491 If the loan is a HOEPA loan, 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.
To the extent that rescission by recoupment is available in some states, it should be unaffected by whether the foreclosure is judicial or nonjudicial, even though the debtor must file an “affirmative” action to stop a nonjudicial foreclosure.495 This view is consistent with decisions outside the TILA context that recognize that contesting a nonjudicial foreclosure is as defensive as contesting a judicial foreclosure, and allow the homeowner to raise otherwise time-barred claims.496
The five material disclosures that must be properly provided for closed-end transactions in order to terminate the consumer’s cancellation rights after the initial three-day cooling-off period are:539
The material disclosures for open-end transactions are provided in the initial TILA disclosure statement:563
For high-cost mortgages covered by the Home Ownership and Equity Protection Act of 1994,567 materiality encompasses some additional requirements. The definition of material disclosures for regular closed-end transactions applies to HOEPA loans,568 but certain provisions applicable solely to HOEPA loans are also material.569