Consumer Finance Insights
June 30, 2014

Seventh Circuit Rules Borrowers Must Tender BEFORE Lender Releases Its Interest

On May 28, the U.S. Court of Appeals for the Seventh Circuit affirmed a decision requiring two borrowers who prevailed on their TILA rescission claims to tender the principal loan balance before the lender would release its security interest and return the borrowers’ prior loan payments. Iroanyah v. Bank of Am., No. 13-1382 (7th Cir. May 28, 2014).  After the borrowers defaulted on their home loans, the lender initiated foreclosure proceedings.  The borrowers sent the lender a notice of rescision, and the lender offered to rescind the loan if the borrowers first tendered $169,015.30.  The borrowers rejected the offer.  At the close of discovery in the TILA rescission action, all parties moved for summary judgment and the defendants also requested in the alternative that the court set reasonable rescission procedures.

The default procedure under TILA § 1635(b) and Regulation Z requires the creditor to release its interests before the borrower is required to tender full repayment.  But in this case, the district court decided in its discretion to modify the rescission process by requiring that the borrowers tender first.  The district court also rejected the borrowers’ proposal that they be allowed to tender in installments over the life of the original loans, finding that would effectively reform the loans into zero interest loans.  Alternatively, the borrowers requested six months to obtain financing in order to make tender.  Defendants requested that the borrower be given only one month.  The district court split the difference and gave the borrowers 90 days to tender.

The Seventh Circuit upheld the district court’s exercise of discretion in requiring the borrowers to tender before the lender releases its interests “[b]ecause rescission is an equitable remedy involving mutual obligations.”  The Court joined the First, Fourth, and Eight Circuits in holding that “a borrower’s inability to satisfy his tender obligations may make rescission…impossible” even where borrowers have prevailed in court on their TILA rescission claim.

The Seventh Circuit also upheld the district court’s 90-day tender deadline based on six factors: (1) defendant assignees were not the “wrongdoers” that had sent deficient disclosure notices; (2) the TILA violations were “hyper-technical”; (3) the borrowers suffered no “actual harm”; (4) the TILA litigation had allowed the borrowers to remain in their home for years without making mortgage payments; (5) allowing tender in installments over the life of the loan and thereby making the loan interest-free would have been “extremely inequitable for the [d]efendants”; and (6) that installment plan would have created a “windfall” for the borrowers.  The Seventh Circuit further held that “[t]he district court was not required to create an installment plan,” but noted that “courts have imposed repayment periods ranging from less than one month to more than a year.”

In this case, the Court observed that “neither party provided a compelling reason for their [repayment] proposal.”  But, the district court chose 90 days because “thirty days would be too short for most borrowers [to obtain financing], while six months would be too long, for if the [borrowers] cannot obtain refinancing in three months, it is unlikely they could do so in six.”