Watershed Truth in Lending Act (“TILA”) Case Handed Down by 10th Circuit in Sanders v. Mountain America et. al.

The 10th Circuit Court of Appeals struck a blow against the gradual erosion by United States District Courts regarding Truth in Lending Act (“TILA”) rescission.  The Opinion acknowledges many of the out right ridiculous and illogical decisions made by many U.S. courts that have been nothing more than pocket vetoes of the rescission process by activist judges unwilling to recognize the plain meaning of the TILA rescission statute and corresponding Regulation Z.

Sanders v. Mountain America et. al.

In my opinion the two main blows to lender arguments which were resolved by the 10th Circuit involve; 1) Whether the TILA requires a borrower to plead in his or her complaint ability to tender, and 2) If the borrower is willing walk away from the house to satisfy at least some part of his or her tender obligation-when that obligation does arise-the value of the house must be taken into account, which will serve to help the borrower meet some part of his or her tender obligation.

What lenders were doing, with the tacit approval of District Courts, was to put the borrower in a box where they could not succeed.  For example, there is nothing the TILA or Regulation Z that requires the borrower to tender until the creditor fulfills its duty and releases its security interest.  This is the default rescission process and can only be overcome if the court believes equity requires the borrower to tender first before the creditor releases its security interest.  The problem arises where courts began ruling that equity automatically requires the reordering of the rescission steps merely because the creditor would be left unsecured.  This is nonsense, and the 10th Circuit finally said so.  The equity to be considered is not merely that the creditor is going to be left unsecured, it is the other collateral issues of the case that determine whether the borrower is going to tender first such as whether the borrower committed loan fraud, the type of TILA violation(s) and how grievous etc. The mere fact that the creditor is going to be unsecured is not an “equity” to be considered because that is the whole point of the TILA rescission steps and why they are ordered the way they are.  TILA rescission turns common law rescission on its head, and for decades District Courts were turning TILA rescission into common law rescission.  The 10th Circuit finally stopped this erosion of the statute.

The next issue had to do with how the borrower could tender.  Creditors loved to dictate how the borrower could meet his or her tender obligation.  This is on purpose and deliberate, because if the courts limit how the borrower could tender it pigeon toes the borrowers into a box that they simply cannot meet the tender obligation.  TILA rescission contemplates that the borrower is going to get another loan to pay off the rescinded lender, but if the borrower is in default this simply isn’t going to happen even if the borrower makes enough money to qualify for the loan.  This is because lender’s require a “verification” form from the old creditor or some kind of proof that the borrower is current.  If the borrower is not, the borrower is not getting another federally backed loan, period.  In other words, the entire lending industry (and government!) vetoed rescission behind closed doors.

If the borrower is willing to walk away from the house and give it back to the lender, whatever the value of the house is must be seen as a credit against the amount to be tendered.  What TILA rescission really does is gives the borrower a forced principle rate reduction on the loan.  Hypothetically, if the house is worth $300,000 and the tender obligation of the original note is $350,000 and the borrower paid the lender $60,000 over the previous 2.5 years, the creditor actually owes the borrower $10,000.  If the house is worth $400,000 and the original note was $350,000, but the borrower has made $10,000 in payments and then gone into default resulting in default interest and arrears ballooning the obligation to $400,000, the tender of the house could satisfy the borrowers obligation to tender and the borrower should be awarded a judgment against the bank for $60,000 (value of house of $400,000 plus the $10,000 paid less the original note amount of $350,000).  The point is the only right the original creditor has is getting paid back its original note amount, not in how it gets paid or by what means.  Now you can see why creditors wanted to force the borrower to actually go get another loan…because they can’t due to the back room veto authored by yours truly at HUD, FHA, VA, FNMA, FREDDIE MAC and all of the other platonic guardians that are supposed to “protect” us.

It was truly and honor to appear before the 10th Circuit and argue against some of the absolute legal rubbish being thrown around the country by District Court judges on the topic.  Having done 1000’s of foreclosures for national lenders, I am not a pure consumer protection attorney and I try to have some balance in how I view the law.  I know many want TILA to be used as a means to get a house free and clear, but that just isn’t right and TILA rescission serves a very legitimate purposes in our lending industry.  Had our District Courts actually interpreted the plain language of the statute in favor of consumers rather than lenders I believe the last 5 years would have come out very differently and you would see a lot more negotiation by banks with modifications and such; the 10th Circuit discussed this in its Opinion as well and said in plain language that TILA rescission was meant to be the sling and stone for consumers in their fight against the Goliath lending industry, and force lenders to the table to work out solutions outside the courtroom.  Because District Courts have obliterated the TILA rescission process by consistently interpreting the statute in favor of lenders rather than consumers, lenders believed that they could treat consumers like surfs.   The 10th Circuit brought lenders down to Earth a little and the case has huge ramifications in TILA jurisprudence.

Matt Wadsworth is a partner at the law firm of Arnold, Wadsworth & Coggins Attorneys.

Written by Arnold Wadsworth Coggins

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