Skip to main content

Search

Truth in Lending: 10.5.3.2 The “Two-Contract Dodge”

A variation on standard spiking is the “two-contract dodge,” which attempts to legitimize spiking by separating the contract for the work and a subsequent “direct loan” from a third party which then pays off the sales contract with a “refinancing” or “debt consolidation” loan. This dodge may work in different ways.

Truth in Lending: 10.5.3.3 Special Issue: Tender in a Spiking Case

In an ordinary spiking case, if the seller or its assignee demands the “reasonable value” of work done as tender,874 it is arguable that the consumer should be entitled to characterize that amount as actual damages arising out of the seller’s violation of the delay of performance rule.875 Had the seller not interfered with the cancellation right by premature performance, the consumer would have been able to cancel without obligation.

Truth in Lending: 10.5.3.4 Non-TILA Claims for Spiking

Practitioners should also consider raising claims beyond TILA rescission for spiking or for the two-contract variant. The consumer might also challenge the creation of a scheme to try to frustrate cancellation rights as a violation of a state unfair and deceptive acts and practices statute, or perhaps even a RICO claim in appropriate factual circumstances.880

Truth in Lending: 10.6.1 Introduction and Overview

The Act and Regulation Z set out in detail a simple, sequential, three-step process that is triggered when consumers exercise their cancellation right883 by sending written notice to their creditors.884 The goal is restoration of the status quo ante.885

Truth in Lending: 10.6.2.1 Basic Requirements

To exercise either the basic right or the extended right, the first step in the rescission process is for the consumer to send the notice informing the creditor that he or she is electing to cancel. The consumer must exercise the right in writing, either by notifying the creditor of the cancellation by mail, telegram, or other means.904 A rescission notice sent by the consumer’s attorney is effective.905

Truth in Lending: 10.6.2.2.1 Whether to specify the TILA violations and surrounding circumstances

As noted in the preceding subsection, all that is necessary to cancel the transaction is to say, in writing, that the consumer wishes to cancel.919 But when exercising the extended cancellation right, there may be tactical reasons to go beyond that. First, it may be important to educate the lender (and its lawyer), since extended rescission is still, comparatively speaking, a relatively unused remedy.

Truth in Lending: 10.7.2.2 Regulation Z

Regulation Z discusses rescission in two places—one for open-end credit,1141 and the other for closed-end credit.1142 The text of the two regulations, however, includes identical provisions regarding the effects of rescission, in subsection (d):

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: 10.7.5.1 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: 10.8.1.2.2 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: 10.8.2.1 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