The Truth in Lending Act (TILA) is a federal law that was created to ensure that consumers receive accurate information when they enter into credit transactions. TILA covers most consumer credit loans, including mortgages, credit cards, and home equity loans, and was designed so that the disclosures given to consumers would be consistent and standardized. This law requires a creditor to disclose certain information in writing regarding the terms of a credit transaction.
There are two main types of TILA violations that can provide relief to borrowers when a creditor does not adhere to the law: violations for damages and violations that allow rescission. Rescission is the remedy that might help if you're facing foreclosure, as you'll see below.
TILA lists a number of disclosures that must be provided to the borrower and if the creditor does not do so, it will be liable to pay damages in an amount equal to the sum of the following:
Material violations that are grounds for damages include, but are not limited to, improper disclosure of amount financed, finance charge, payment schedule, total of payments, annual percentage rate, and security interest disclosures. Under TILA, a creditor is considered strictly liable for any violations. This means money damages are imposed for the violations, regardless of the creditor’s intent.
The more significant TILA violation for borrowers, especially those facing foreclosure, is the right of rescission. “Rescinding” the loan means the borrower can void the loan as if it was never made. A borrower’s right to rescind applies to consumer credit transactions in which a non-purchase money lien or security interest exists on the consumer's principal dwelling. (15 U.S.C. § 1635[a]). In order for the right to rescind to apply in any given situation, the lien must be on a borrower’s primary residence and the transaction must involve a non-purchase money loan. The most common kinds of rescindable loans are home equity mortgages and refinances.
A loan can be rescinded for three days after origination and, in some cases, is extended up to three years if material TILA disclosures were not provided in the correct manner when the loan was taken out or the notice of the right to rescind was not given at all. (15 U.S.C. § 1635[a],[f]). The right to rescind terminates when the creditor cures the violation unless the borrower has already mailed a rescission notice to the creditor.
Incorrect disclosures can also be grounds to rescind a loan. For example, a finance charge error that exceeds 0.5% to 1% of the total loan amount (or 1% of the total amount, in certain refinancing transactions) can provide the basis for rescission in most cases. (15 U.S.C. § 1605). If a borrower is in foreclosure, there is a lower threshold for errors. In that case, the allowance for a finance charge error is only $35. (15 U.S.C. § 1635[i]). The right of rescission can be a powerful weapon against foreclosure. Rescission voids a creditor’s lien, which eliminates the creditor’s foreclosure remedy and ultimately takes away that creditor’s leverage.
However, this does mean that rescission is a slam-dunk method to save a home from foreclosure. With a rescission, the lender must give back closing costs and finance charges, while the borrower must return the present balance of the mortgage. In a thriving real estate market, the borrower could refinance or sell the property to pay off the obligation to the lender. But with a property that is underwater (where the value of the home is less the amount owed), this probably is not possible and a court may require that the borrower demonstrate that he or she can actually complete a valid tender before allowing the rescission to void the security interest in the property.
For more detailed information on TILA, refer to title I of the Consumer Credit Protection Act, as amended (15 U.S.C. § 1601, et seq.). See also Regulation Z (12 C.F.R. Part 226), which implements TILA. If you need professional assistance, talk to a local foreclosure attorney.