Alert August 07, 2012

Tenth Circuit Rules Failure to Plead Ability-To-Pay Loan Not a Hurdle to TILA Rescission Claim

The United States Court of Appeals for the Tenth Circuit ruled that a borrower need not affirmatively plead the ability to repay the loan as a condition of seeking rescission under the Truth in Lending Act.  Reversing a district court ruling that dismissed plaintiffs’ TILA rescission claim, the Tenth Circuit held that the district court had exceeded the rescission framework set out under TILA by creating a pleading rule that would require all consumers who seek to compel rescission to plead their ability to repay the loan.  Of note, the Tenth Circuit commented that while the TILA rescission process “functions well” where a borrower elects to rescind within the initial three day period, it “does not work well” in cases where the creditor has disbursed funds and perfected its lien following the three day period.  Arguably a borrower-friendly ruling in its reversal of an order dismissing plaintiffs’ TILA claims, the Tenth Circuit’s opinion does offer a measure of comfort to creditors.  While holding that a consumer need not plead the ability to repay the loan, the Tenth Circuit stated in no uncertain terms that a district court may “use its equitable powers to protect a creditor’s interests during the rescission process,” and specifically held that a borrower may not satisfy his tender obligations under the TILA framework by simply conveying the property to the creditor—a critical point where the property has depreciated in value since the inception of the loan.  On these two points, the Tenth Circuit ruled strongly in favor of creditors, affirming that TILA rescission remains an equitable process intended to restore the “status quo ante” that cannot be used to create a windfall for borrowers at the expense of creditors.