Violations of the Truth in Lending Act (“TILA”) as a Defense to Mortgage Foreclosure Limited to Three Years After the Date of the Loan

The Truth in Lending Act (“TILA”) was enacted by Congress “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available . . . and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing . . . .”  Beach v. Ocwen Fed. Bank, 523 U.S. 410 (1998).

TILA allows a borrower to rescind a loan “Consumers have an absolute right to cancel – “rescind” – a loan for three business days after closing on the loan. Id. § 1635(a). Put another way, during the three-day period, a borrower may rescind a loan for any reason or no reason.  As stated by the Court, “To exercise this ‘no questions asked’ right of rescission, the obligor on the mortgage note must simply notify the creditor of his intention to do so, consistent with the applicable regulations. Id. § 1635(a), (b).  No court filing is necessary to effectuate this right.” Sherzer v. Homestar Mortg. Servs., 707 F.3d 255 (3d Cir. Pa. 2013).

A TILA violation may be used by a borrower as a defense in a foreclosure action.  If a lender does not provide a consumer with the required disclosures, the right to rescind the loan continues for a three year period which begins on the date on which the loan was made.  One of our clients was able to avoid foreclosure because TILA requires that lenders must have borrowers sign an acknowledgement that they have received written notice of their right to rescind a mortgage loan they received at the time it is received.  Because of the apparent negligence of the mortgage lender, our client had never been asked to sign the required acknowledgement. Thereafter, our client experienced serious debt problems and  was threatened with foreclosure.  Under the provisions of TILA, they were able to rescind the loan which transformed the purchase money loan they received from a loan secured by their home to an unsecured debt.  As a result, the  Chapter 13 Bankruptcy they filed treated the funds they had received as an unsecured debt subject to modification.

However, TILA can only be raised as a defense to foreclosure within a three year period which begins on the date the mortgage loan which violated TILA was received by the borrower.  In Sheedy v. Deutsche Bank Nat’l Trust Co. (In re Sheedy), a Chapter 13 Debtor filed an adversarial proceeding in which she claimed that the lender had violated TILA when she obtained her residential mortgage and attempted to use the TILA violation to prevent the loss of her home.  Her complaint was dismissed because, even assuming that TILA had been violated, the violation had taken place more that three years prior to the time she filed suit.  The Court stated: ”This three year period is not a statute of limitations, but a statute of repose, acting to bar any claims arising after three years, and is not subject to equitable tolling or the discovery rule.” See Footnote at end of Post.

It is unfortunate that the provisions of  TILA – which give homeowners the right to bring a claim that a lender has violated their rights – expires after three years.  Homeowners often do not learn that the entity from whom they obtained the loan to purchase their home did not comply with TILA for many years.  Often this occurs when they consult with an experience attorney about debt problems which result in a foreclosure proceeding being brought against them.

Footnote:  Equitable tolling is a judge-made remedy. It is used when someone – for no fault of their own –  misses that date for initiating a legal proceeding or taking an appeal or some other affirmative act. It is very sparingly granted.  Showing up in court and claiming that the dog ate the paper on which the correct date was written almost certainly will not result in the grant of equitable tolling.

The discovery rule is used by courts when – in simple English – there was no way the plaintiff could have known about the conduct which is the basis for the complaint made against the defendant. The best and perhaps most will known example of the discovery rule is a case brought against a surgeon who forget to remove a sponge from the body of a patient before sewing him back up.  The error was only discovered many years after the statute of limitations for filing suit against the surgeon had passed.

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