Did your mortgage lender violate TILA? You might be able to sue for money damages or even void your loan.
The Truth in Lending Act (TILA) is a federal law 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.
The two main types of TILA violations that can provide relief to borrowers when a creditor doesn't adhere to the law are violations for damages and violations that allow rescission. Rescission is a remedy that might help if you're facing foreclosure, as you'll see below.
In addition, if a lender used unethical, deceptive, unfair, or fraudulent activity during your loan origination process, it might have engaged in predatory lending. You might be able to challenge a foreclosure if your mortgage lender used predatory lending practices when you took out the loan.
TILA Violations for Damages
TILA lists several disclosures that must be provided to the borrower, and if the creditor doesn't do so, it will be liable to pay damages in an amount equal to the sum of the following:
- any actual damages sustained by a person as a result of the failure, and
- statutory damages (limited to twice the finance charge, but not less than $400 and not more than $4,000). (15 U.S.C. § 1640[a][1],[2]).
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.
TILA Violations Allowing Rescission
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.
The right of rescission can be a powerful weapon against foreclosure. Rescission voids a creditor's lien, eliminating the creditor's foreclosure remedy and ultimately taking away that creditor's leverage.
When Rescission Is Applicable
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]). 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.
Rescission Period
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 Be Grounds for Rescission
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 error threshold. In that case, the allowance for a finance charge error is only $35. (15 U.S.C. § 1635[i][2]).
How Rescission Works
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 isn't possible, and a court may require that the borrower demonstrate that they can actually complete a valid tender before allowing the rescission to void the security interest in the property.
Predatory Lending Practices
"Predatory lending" is a term typically used to describe unconscionable lending practices where a borrower is provided with an unfair loan. The Office of the Comptroller of the Currency (OCC), which regulates and supervises all national banks and federal savings associations, has described predatory lending as the disregard of basic principles of loan underwriting.
Federal Laws That Protect Borrowers From Predatory Lending Practices
Federal laws that protect borrowers against predatory lending practices include:
- TILA, as discussed above, which requires lenders to disclose the terms and costs associated with a mortgage loan, and
- the Home Ownership and Equity Protection Act (HOEPA), which is an amendment to TILA.
The federal Fair Housing Act (FHA) can also be used to combat predatory lending, and state law often restricts the terms or provisions of certain loans.
What Is Predatory Lending?
Federal law doesn't explicitly give a definition of "predatory lending," and state laws describe predatory lending in different ways. But courts generally consider a loan to be predatory if the lender:
- used pushy and deceptive sales tactics to get a vulnerable or unsophisticated borrower to agree to unfavorable terms
- charged a very high interest rate to someone who's likely to default
- misrepresented the actual costs, risks, or appropriateness of the loan terms, or
- charged excessive amounts for tasks or expenses like appraisals, closing costs, and document preparation.
If a lender used unethical, deceptive, unfair, or fraudulent activity during your loan origination process, it might have engaged in predatory lending.
What Are Common Predatory Lending Practices?
Predatory lending encompasses several different types of abuses that loan originators might engage in. According to the OCC, the fundamental characteristic of predatory lending is "the aggressive marketing of credit to prospective borrowers who simply cannot afford the credit on the terms being offered."
The following are a few situations that could constitute predatory lending:
- packing of excess or hidden fees in the amount financed
- loan flipping (frequent refinancings that result in little or no economic benefit to the borrower but generate loan fees, prepayment penalties, and other fees for the lender)
- targeting residents within a particular area, usually a low-income neighborhood, for unfair loans
- pushing a borrower into taking out a risky, high-cost loan, even when the borrower has good credit and should qualify for a low-cost, conventional loan, and
- targeting certain borrowers, such as older, low-income, and minority borrowers, for abusive loan products.
Ultimately, there's no bright line that a loan must cross to be considered predatory; an assessment must be made on a case by case basis. In court cases, the court will look at each of the factors making up the loan and decide whether the factors, taken as a whole, constitute predatory lending. If a court determines that a loan was predatory, it could order the lender to modify the terms of the loan or cancel the debt, or take any other equitable action.
And, again, if your lender used unfair lending practices when you got your mortgage loan, you might be able to fight a foreclosure.
More Information
For more detailed information on TILA, refer to title I of the Consumer Credit Protection Act, as amended (15 U.S.C. § 1601 and following). See also Regulation Z (12 C.F.R. Part 226), which implements TILA. If you need help challenging a foreclosure based on TILA, talk to a local foreclosure attorney.
If you think you're a victim of predatory lending, consider talking with a foreclosure defense lawyer experienced with anti-predatory lending laws. You can also file a complaint about a predatory lender with the Consumer Financial Protection Bureau or your state Attorney General's office.
