Search
Truth in Lending: 10.7.2.3 Official Interpretations on Modification
The official interpretations underscore the distinction between the voiding of the security interest and the procedures that can be modified.1151 The official interpretations make explicit what is implicit in Regulation Z’s treatment of this issue.
Truth in Lending: 10.7.3.1 Yamamoto v. Bank of New York
The Ninth Circuit’s decision in Yamamoto v. Bank of New York1157 has become one of the most widely debated decisions regarding the extent of courts’ power to modify the rescission process.
Truth in Lending: 10.7.3.2 Discussion of Yamamoto
Yamamoto’s most extreme holding is its approval of requiring tender as a preliminary matter and denying rescission on summary judgment. Prior to Yamamoto, no other court had required borrowers to prove ability to tender as a pre-trial matter, prior to adjudicating the validity of rescission.1164 In Rudisell v.
Truth in Lending: 10.7.3.3 Limits on Conditional Rescission in the Ninth Circuit
Other cases from the Ninth Circuit, since Yamamoto, have shown that there are limits to a court’s power to equitably modify the rescission process. In Causey v. U.S. Bank N.A.,1177 the Ninth Circuit considered a case in which the consumer cancelled within three days after the closing.
Truth in Lending: 10.7.4.2 American Mortgage Network v. Shelton
In 2007 the Fourth Circuit issued a decision, American Mortgage Network, Inc. v. Shelton, agreeing with Yamamoto.1207 The facts in Shelton were also unusual.
Truth in Lending: 10.7.4.3 Arguments For and Against Conditional Rescission
Courts have been debating their authority to modify the rescission process since the 1970s.1211 Though the 1980 amendments discussed above were intended to resolve the debate, courts have still not reached any semblance of a consensus.
Truth in Lending: 10.7.5.1 The Weight of Authority Holds That Consumers Need Not Plead Ability to Tender
The question of whether consumers must plead ability to tender as part of a prima facie case for TILA rescission is an outgrowth of the debate over whether courts can precondition rescission on ability to tender. There is nothing in TILA, the Regulations, or the official interpretations that requires consumers to plead ability to tender.1236 Rescission is a remedy, rather than an element of a cause of action, so consumers need do nothing more than request rescission as a form of relief.
Truth in Lending: 10.7.5.2 Reasons That Consumers Should Not Be Required to Plead Ability to Tender
Because the pleading requirement issue is not settled outside of the Ninth Circuit, it is important to remind courts that the pleading requirement is procedurally unfair as well as contrary to the statute. If courts may impose pleading requirements as part of their exercise of discretion, a consumer filing suit for rescission will have no way of knowing the pleading requirements in advance.1254 A court that chooses to exercise this discretion is, in effect, retroactively changing the rules.
Truth in Lending: 10.7.6.1 General Principles
In view of the uncertainty surrounding the courts’ equitable modification authority, it is incumbent upon the consumer’s lawyer to take care in formulating equitable arguments and making a record. There are several general underlying premises which should be consistently kept in view.
Truth in Lending: 10.7.6.2 Creditor Conduct
The larger context of the creditor’s conduct should not be overlooked in determining whether the equities demand changing the prescribed procedure.1294 Behavior that courts have cited as weighing against the creditor in the equitable balance includes refusing to pick up the property tendered by the consumer,1295 excessive refinancings or “loan churning” (which is normally extremely expensive for consumers),1296 “body-dragging,”
Truth in Lending: 10.8.1.1 Basic Calculations
Before embarking on a TILA rescission case, practitioners should take some care to plan for tender, evaluating the amount and means of making it. Although courts have sometimes held that the consumer need not tender anything for one reason or another,1316 these cases are rare, and many courts focus intently on the consumer’s ability to tender.
Truth in Lending: 10.8.1.2.1 Same-creditor refinance
If the rescinded loan refinanced a prior mortgage with the same creditor but a new advance was made, the consumer can rescind to the extent of the new advance.
Truth in Lending: 10.8.1.2.2 Series of refinance loans with different creditors
If the consumer refinanced several times, with a different lender each time, and is rescinding each of the loans in the series,1329 the tender amount for the earlier loans should be calculated the same as the tender amount for the most recent loan. However, since all but the most recent loan have been paid off by a refinancing, the amount that was paid by refinancing should be subtracted from the consumer’s tender amount. Usually the result will be that the consumer overpaid and is due a refund.
Truth in Lending: 10.8.1.2.3 Refinance of unsecured debt into mortgage debt
Creditors often “move up the food chain” by inducing consumers to refinance unsecured debt with a mortgage loan. For example, a finance company may persuade a consumer who has fallen behind on a personal loan to take out a mortgage to refinance it. In this situation, part of the proceeds of the mortgage loan go to the finance company to pay off the original debt. If the consumer then rescinds the mortgage loan, how should the amount paid to retire the original unsecured loan be treated?
Truth in Lending: 10.8.1.3 Tender in Foreclosure Rescue Scam Cases
Calculating the tender amount when a consumer rescinds a foreclosure rescue scam transaction is a little more complicated.1335 Since the rescuer typically does not characterize the transaction as a loan, it may not be immediately apparent what part of the obligation represents finance charges and fees that the consumer is no longer obligated to repay and what part represents the real proceeds.
Truth in Lending: 10.8.1.4 Strategic Considerations in Addressing Disputes About Calculation of Tender Amount and Offsets
After determining the basic tender obligation, the consumer’s attorney should, for planning purposes, also assess the potential damages which might be available under other legal claims and defenses available to the consumer.
Truth in Lending: 10.8.2.1 Strategic Considerations
Because the consumer’s obligation is triggered only after the creditor’s performance of its Step Two obligations, it seems perfectly logical that the consumer not tender until that step is completed.1348 However logical this might be, the muddled pronouncements on conditional rescission make it important, if possible, to have a plan in place if the court requires tender to occur earlier.1349
Truth in Lending: 10.8.2.2 Tender in Cash
Easiest, of course, are the rare instances when the loan proceeds are still available or the family has sufficient savings to tender with cash. In such a case, the creditor might be informed that the tender obligation is being placed in escrow pending confirmation that the creditor’s duties have been performed. If the consumers are planning to sell the house, the tender might be paid from the loan proceeds.1354
Payments into escrow (or directly to the creditor) while the case is pending will also build up cash for tender.
Truth in Lending: 10.8.2.3 Tender by Third-Party Refinancing
Some consumers may be in a position to refinance the rescinded credit transaction at more favorable terms from another lender, using the proceeds of the refinancing to fulfill the tender.1355 Even consumers in financial distress should be counseled to explore refinancing at better terms if their income is regular, since the more favorable terms may make their debt payments entirely manageable.1356 This is especially worth exploring where the loan being rescinded was a high-rate, heavily
Truth in Lending: 10.8.2.4 Tender Through a Reverse Mortgage for Older Homeowners
A reverse mortgage may be an appropriate option for an older consumer in some circumstances.1360 Reverse mortgages are secured loans designed to let older homeowners get the equity out of their homes without being saddled with monthly repayment demands on fixed incomes. In most cases, the homeowners do not have to repay the debt so long as they live in the home, and repayment comes solely from the property—the borrowers are not personally liable. As with any plan which sounds almost too good to be true, there are drawbacks.
Truth in Lending: 10.8.2.5 Tender Through a Loan Modification
The consumer also could use the rescission right to negotiate a new, affordable payment plan with the original creditor.1364 Lenders will often agree to a workable loan modification, refinancing, or other workout scenario, as long as it is presented in a way that illustrates the pragmatic benefits of such a settlement. For example, a reasonable compromise between the basic tender amount and what the lender would get in a chapter 13 proceeding may be appealing to all parties.
Truth in Lending: 10.8.2.6 Tender in Bankruptcy or by Installments
Making tender as part of a bankruptcy case opens up a number of possibilities, discussed at § 10.8.4, infra.
Truth in Lending: 10.8.2.7 Tender Through Sale of the House
Sometimes, no matter how low the tender amount goes, remaining in the home is no longer feasible for the borrower. This may be because the borrower has no funds to make any payments. It may be because the borrower’s health or the condition of the home has declined during the course of litigation.