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Truth in Lending: 10.2.10.3 Former Temporary Waiver Rules for Disaster Areas

On three occasions in the past, Congress authorized the FRB to make exceptions to TILA in disaster areas declared by the President, so that the bona fide personal emergency was assumed and the right to rescind could be waived via preprinted forms.279 That authority, and its renewals, expired more than ten years ago. Nevertheless, the text of the exceptions that the FRB adopted remained in Regulation Z for over a decade until they were deleted when the regulation was transferred to the CFPB.

Truth in Lending: 10.3.1 The Three-Day Unconditional Right; Trigger Times

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.

Truth in Lending: 10.3.2.1 General

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:

Truth in Lending: 10.3.2.2.1 General

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

Truth in Lending: 10.3.2.3 Payoff or Refinancing Should Not Terminate the Extended Right

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.

Truth in Lending: 10.3.3.1 Supreme Court Interpretations of the Three-Year Rule

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.

Truth in Lending: 10.3.3.2 When to File Suit to Enforce Rescission

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.

Truth in Lending: 10.3.3.3 Rescission by Recoupment Under State Disclosure Laws

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

Truth in Lending: 10.3.3.4 Rescission by Recoupment Under State UDAP Statutes

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

Truth in Lending: 10.3.3.6.1 Extension of rescission period

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.

Truth in Lending: 10.3.3.6.2 Extension of time to file suit to enforce rescission

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.

Truth in Lending: 10.3.3.6.3 Time limits when lender files bankruptcy

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.

Truth in Lending: 10.3.3.7 Extension of Rescission Period Due to Agency Enforcement Action

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

Truth in Lending: 10.3.3.8 Class Action May Suspend Running of Rescission Period

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.

Truth in Lending: 10.3.3.9 Extension of Rescission Period Due to Delay in Consummation of Transaction

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.

Truth in Lending: 10.3.3.10 Equitable Tolling

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

Truth in Lending: 10.3.3.11 Assertion of Damage Claims by Way of Recoupment

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.

Truth in Lending: 10.3.3.12 Recoupment in Nonjudicial Foreclosure States

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

Truth in Lending: 10.4.2 Strict Liability Standard

The consumer’s actual knowledge is irrelevant if the disclosures were not given in the proper form.509 TILA is a strict liability statute and courts do not have authority to create exceptions for consumers who have actual knowledge of their rights.510

Truth in Lending: 10.4.3.1 General

In a rescindable transaction, each consumer must be given a copy of the disclosure statement with all “material” information correctly disclosed.530 If these material disclosures are not properly supplied, the consumer has an extended right to rescind.531

Consumer Bankruptcy Law and Practice: Bibliography

Benjamin C. Ackerly, Tenants by the Entirety Property and the Bankruptcy Reform Act, 21 Wm. & Mary L. Rev. 701 (1980).

Alan M. Ahart, Whether to Grant a Hardship Discharge in Chapter 13, 87 Am. Bankr. L.J. 559 (2013).

Alan M. Ahart, The Liability of Property Exempted in Bankruptcy for Pre-Petition Domestic Support Obligations After BAPCPA: Debtors Beware, 81 Am. Bankr. L.J. 233 (2007).

Alan M. Ahart, The Inefficacy of the New Eviction Exceptions to the Automatic Stay, 80 Am. Bankr. L.J. 125 (2006).