Alert June 10, 2014

Seventh Circuit Rules on Right to Rescind under the Truth in Lending Act

The United States Court of Appeals for the Seventh Circuit affirmed a lower court’s ruling conditioning a borrower’s right to rescission under the Truth in Lending Act on the borrowers’ tendering repayment of the principal loan balance. After the borrowers defaulted on their two mortgage loans, the lender initiated foreclosure proceedings. The borrowers sent a notice of rescission for the first loan citing that the servicer failed to provide the required disclosure statements in violation of TILA. The lender agreed to rescind the first loan if the borrowers tender amounts advanced to them. The borrowers refused and sent a notice of rescission for their second mortgage loan. The borrowers subsequently filed suit alleging violations of TILA. In particular, the borrowers alleged that the lender failed to properly respond to its initial notice of rescission. The lender moved for summary judgment or in the alternative for the lower court to “set reasonable rescission procedures.” The lower court ruled that it was proper to require the borrowers to tender amounts advanced to them in return for a rescission of their mortgage loan. The borrowers sought to: (1) tender the amounts advanced to them by making installment payments over the life of the loan or (2) be allowed six months to obtain financing to make the tender. The lender requested that the borrowers tender the amounts advanced within 30 days. The lower court required the borrowers to tender amounts advanced within a certain time period or the court would rule in favor of the servicer on the borrowers’ rescission claim. The borrowers were unable to tender the amount advanced to them and the lower court entered judgment in favor of the lender. The borrowers appealed.

Citing Regulation Z, the Seventh Circuit recognized that courts are allowed to define procedures for implementing the rescission process under TILA, including procedures to “determine the amounts owed” before rescission can proceed. “Tender is inherently part of rescission,” the Court ruled, and the borrowers were not entitled to rescission without it. The Seventh Circuit also agreed with the lower court that allowing the borrowers to tender the amounts advanced to them over the life of the loan with no interest as inequitable to the lender. The Seventh Circuit noted that the lender in this case was an assignee of the loan, and thus not directly responsible for the violations of TILA that resulted in the borrowers’ rescission rights, a violation the Court described as “hyper-technical.” In general, a borrower’s right to rescind his or her loan under TILA has been at the forefront of recent circuit decisions and advocacy by federal consumer protection agencies. In particular, the United States Supreme Court granted certiorari of an appeal from the Eighth Circuit involving a dispute as to whether notice alone was sufficient to effectuate a rescission under TILA (see April 29, 2014 Alert).