Truth in Lending: 10.4.3.4 Material Disclosures in Open-End Transactions
The material disclosures for open-end transactions are provided in the initial TILA disclosure statement:563
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
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
In contrast to non-rescindable transactions, where required disclosures can be given to only one of multiple consumers,609 each person having a right to rescind must receive both notice of the right to rescind and the material TILA disclosures.610 Furthermore, each person must receive two copies of the notice,611 one to keep and one to use if the option is exercised.612 Thus i
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
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
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.
It should be obvious that misstatement or omission of the dates on the rescission notice extend the rescission period, and most courts have so held.680 However, faulty analysis by a First Circuit decision681 makes it necessary to walk through the statutory and regulatory provisions that mandate this result.
Regulation Z starts by providing:
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.
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.
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.
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.
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
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
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
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.
To facilitate TILA’s three-day cooling-off period, creditors are required to delay their own contractual performance until the rescission period has expired.
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.
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
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.
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.
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