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Truth in Lending: 10.2.7.6 Series of Advances

When a creditor makes a series of advances as part of a closed-end credit transaction, whether the right of rescission applies to each advance depends on the manner in which the creditor has structured the transaction. Sometimes the creditor will treat the series of advances as a single transaction for disclosure purposes. For example, a consumer may enter into a loan for the whole amount necessary for a home improvement job, but the creditor may pay out the proceeds in a series of advances as the work is done.

Truth in Lending: 10.2.8.1 Introduction

The previous sections have described the types of transactions in which the TILA rescission right arises automatically,195 and those which are, by statute or regulation, specifically exempt from that right.196 There are situations, however, in which lenders in transactions not otherwise subject to rescission (or subject to TILA at all) nonetheless provide their borrowers with TILA disclosures, including the notice informing them of the right to cancel the transaction.

Truth in Lending: 10.2.8.2 Incorporating Rescission Rights as a Contract Term

Even if the transaction is not within the scope of the statutory right, a creditor arguably may, by its own action, incorporate at least some measure of the rescission right into the transaction. In Mutual Life Insurance Co. v. Bernasek,198 the creditor provided a notice of right to rescind in a transaction exempt from TILA. The court noted that the borrowers could have rescinded within three days in accordance with that notice, though they did not do so.

Truth in Lending: 10.2.8.3 Equitable Estoppel

Even if the lender did not expressly incorporate TILA protections into the contract, it may be equitably estopped from denying that the right of rescission applies, though such an argument will be available only in certain factual situations.210 The doctrine of equitable estoppel is a principle of equity which in the absence of a right or an obligation, prevents an otherwise unjust result.211 While it generally requires a showing that there was a misrepresentation and detrimental relianc

Truth in Lending: 10.2.9.3 Standing to Rescind

Occasionally the question arises as to whether there is standing to rescind.

The question of standing in bankruptcy is discussed in detail elsewhere in this treatise.253 Generally speaking, the consumer still has standing, because she still retains an interest in the property.254 These issues are complex, however.255

Truth in Lending: 10.2.10.1 General

The consumer may modify or waive the right to rescind if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency.261 Under this provision, the consumer must give the creditor a dated written statement (and not a form printed for this purpose)262 that:

Truth in Lending: 10.2.10.2 Rescission Cannot Be Revoked or Waived

Once a consumer rescinds a transaction, the security interested is voided and cannot be ratified or reawakened by later acts such as accepting the proceeds or a loan modification.274 Nor does signing a document renouncing rescission revive the voided security interest.275 Giving the consumer a second Notice of Right to Cancel or having the consumer sign an election not to cancel after having rescinded, without consummating a new transaction, should not bring a rescinded transaction back

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.