Skip to main content

Search

Truth in Lending: 10.4.3.5 HOEPA Loans

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

Truth in Lending: 10.4.3.6 Higher-Priced Mortgage Loans

In rulemaking in July 2008, the FRB added a new category of mortgage loans that, like HOEPA loans, are subject to substantive prohibitions, effective October 1, 2009.575 These loans, called, higher-priced loans, were intended to cover the subprime market.576 The FRB defined practices that it believed were “so clearly injurious on balance to consumers within the subprime market that they should be categorically banned in that market.”577

Truth in Lending: 10.4.4.4 Physical Format of Notice

For closed-end transactions, the rescission right disclosures must be on a separate document.652 Placing them on the reverse side of the contract, for example, is inadequate.653 The open-end rescission notice may be physically separated from the material disclosures or combined with the material disclosures, as long as the information required to be included is set forth in a clear and conspicuous manner.654

Truth in Lending: 10.4.4.5 Unclear or Ambiguous Notice; Provision of Contradictory Supplemental Information

The notice of the right to rescind must be a clear and conspicuous notice of the borrower’s rescission rights.657 This is evident from the definition of “material disclosure,” which requires the material information to be disclosed “as required in this subchapter.”658 “This subchapter” requires that the disclosures be made clearly and conspicuously.659 The quoted language would be surplusage if those general requirements were not incorp

Truth in Lending: 10.4.4.6 Creditor’s Grant of Longer Right to Rescind

Some lenders attempt to burnish their public image by giving consumers a period that appears to be longer than three days to rescind the transaction. Because of different rules about the mailing date and about counting days, however, the ostensibly longer period may not actually be longer than TILA’s three-day period. For example, one subprime lender provided a seven-day rescission right, but it counted Sundays, all holidays, and the closing date itself toward the seven days. It also treated a rescission letter as effective only upon receipt rather than upon mailing.

Truth in Lending: 10.4.4.7.2 Specific errors that extend the rescission period

Since all three of the events from which the rescission period runs—consummation, delivery of the TILA disclosures, and delivery of the rescission notices—are entirely within the control of the creditor, it should not be difficult for creditors to fill in the proper deadline date. Creditors, moreover, are in a better position than consumers to understand the technical complexities surrounding the calculation of the rescission period. Nonetheless, errors and omissions in the completion of the rescission notice are common.

Truth in Lending: 10.4.4.7.3 Aberrant First and Eleventh Circuit decisions

In 2006, in Palmer v. Champion Mortgage,701 the First Circuit deviated from the weight of authority finding that misstatement or omission of the dates on the rescission notice extends the rescission period. The Palmer court held that a rescission notice was adequate even though it stated a deadline for rescission that had already passed by the time it was delivered to the consumer.

Truth in Lending: 10.4.4.8 Use of Premature Election Not to Cancel

It is a commonplace practice for creditors to have consumers sign a premature “election not to cancel” or similar document at the loan closing, prior to the expiration of the rescission period.723 While commonly signed at the same time as other documents, sometimes these statements are dated the same day, sometimes post-dated to the date after the three-day cancellation period ends, or undated.

Truth in Lending: 10.4.4.9 Use of Wrong Model Form

The appendices to Regulation Z include model forms that creditors may use to notify borrowers of their right to cancel.745 The Act provides that rescission rights do not arise from the form of the rescission notice as long as the creditor used the “appropriate” model form.746 The creditor need not use one of the model forms,747 although if it does not use the correct model form or a “comparable written notice” it loses the safe harbor.

Truth in Lending: 10.4.5.1 Creditor Has Burden of Showing Receipt in Absence of Signed Acknowledgment

Since there are serious consequences for failure to deliver required disclosures,777 disputes sometimes arise over whether they—or the correct number of copies—were given. Whether the consumer received the mandated information will frequently be a disputed question of fact.778 The duty to “deliver” the disclosures means the creditor must allow the consumer to retain possession of the documents after consummation.779

Truth in Lending: 10.4.5.2 Rebuttable Presumption of Receipt if Debtor Signed Acknowledgment of Receipt

If the debtor signed an acknowledgment of receipt, it creates a rebuttable presumption of delivery.787 If such a document is produced by the creditor, the burden of going forward with evidence of non-receipt is on the consumer, but the creditor still bears the ultimate burden of proving that the notice was given.788 At the motion to dismiss stage, the complaint need only allege sufficient facts to put the creditor on notice of the claim, and need not allege enough facts to rebut

Truth in Lending: 10.4.5.3 Rebutting the Presumption of Receipt

The consumer may rely on documentary evidence, testimony, or both to rebut the presumption of receipt that is created by a signed acknowledgment.798 A number of decisions hold that the debtor’s testimony of non-receipt may be sufficient in and of itself to rebut the presumption.799 It should certainly be sufficient at the pleading stage.800 At the summary judgment stage, an affidavit of non-delivery of the rescission notices should suff

Truth in Lending: 10.4.5.4 Tips on Preserving the Chain of Custody

Cooper v. First Gov’t Mortgage and Investors Corp.821 and the similar cases discussed in the preceding subsection illustrate the importance of treating the consumer’s papers as critical evidence. They should all be kept together, in their original order and in their original folders or envelopes. It is advisable to establish a written office protocol for receiving client documents.

Truth in Lending: 10.5.2 Does Violation of Delay of Performance Rule Extend the Right to Rescind?

Whether a creditor’s violation of the requirement that it delay performance during the rescission period (if there was no valid emergency waiver)838 gives rise to the extended right may depend upon the nature of the creditor’s violation. There is persuasive precedent for arguing that such a circumvention of the rescission right will trigger the extended time period, but the case law suggests that the practitioner should take care in framing the claim and stating the argument.

Truth in Lending: 10.5.3.1 Described

More than most types of premature performance, spiking849 in a home improvement transaction should be viewed as the type of egregious violation of the delay of performance rule which triggers the extended rescission right.850 It presents a classic example of how premature performance “effectively forecloses” the right to rescind and negates the written notice—for the right to reconsider away from the salesman’s pressures and decide against risking the home is seriously undermined when wo

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