Judges generally don’t like TILA because it contains remedies that “go against the grain.” Specifically TILA and REG Z from the Federal Reserve contain strict guidelines on the form and content of disclosures to borrowers. These laws and regulations went into effect after the Savings and Loan scandal and other evidence surfaced as to deceptive lending practices. The problem for the banks is that they are not satisfied with the small profits they earn on conventional loans.
So they have pushing and crossing the line for decades tricking borrowers into loans that produced short-term “profit” but long term losses when the unbalanced loans went into default. Then they started fooling investors who saw short term “profits” and long term losses — many times total losses — on loans that were supposedly originated or acquired through the use of a REMIC Trust; but it turned out the trust was ignored and the money was not subject to the industry standard lending practices. The profits on these unconventional investments and loans were staggering because the intermediaries got to keep much of what was invested. And that accounts for the hundreds of millions of dollars spent on advertising “low-interest” or “alternative” or “option” loans — where the apparent interest rate charged to borrowers was as low as 1% but the profits claimed on the loan were far higher, even exceeding the loan itself.
So people started sending rescission letters. The Federal law says that sending the rescission letter is effectively a nullification of the mortgage and requires the “lender” to return all money paid to anyone in connection with the loan. In a normal rescission the party rescinding must return whatever they received.
Borrowers thinking that they had to “return” the house failed to understand the law and many lawyers didn’t get it either. In fact, the only thing that had to be “returned” was the loan of money. In a conventional loan that would have been easy to do logistically. But in the case of loans subjected to false claims of securitization, and where the investor money was thrown around like a drunken sailor, it is not so easy to figure out who gets the “return” of the money loaned (AFTER the lender returns to the borrower all money and compensation paid by borrower directly or indirectly including all parties who received compensation whether disclosed or not at closing of the loan).
In fact, many times the reason that borrowers rescinded was because of inadequate disclosure (like a loan that resets to twice the household income after a term of months or years) and because they were being contacted or accosted by companies that were claiming rights to collect the loan when the borrower had never entered into any agreement with those entities and those entities refused to state the basis of claiming the right to collect.
Still the issue of repayment remains at least theoretically, if the net amount due to the actual lender is above zero. But the issue is if the “lender” did not loan the money in the first place, and the mortgage names that “lender”the repayment to that lender would expose the borrower to a second debt owed to the investors whose money was used directly or indirectly to fund the loans. Trusting the loan originator to send the funds to the investors does not appeal to anyone. By and large it won’t happen. In fact many originators were naked nominees — empty shells — that went out of business long before the borrower realized it had a right to rescind that the borrower wanted to exercise.
In order to actually “return” the loan, the borrower needed to clear title and secure a more conventional loan from an alternative source. That is why the statute and regulations state that the security instrument is void by operation of law upon notice from borrower of their exercise of the right of rescission. This feature bugs judges on trial and appellate benches because they are confusing common law rescission with the specific rules of statutory rescission provided in TILA and Reg Z. They want a tender of the money before the rescission is final. But that is not possible without clearing title. So the courts are vacillating between what kind of tender is required — upfront cash, a plan of repayment, or leaving it as an open ended claim. The last one is what was intended by the statute because most lending banks would have required payment of the prior debt, whether secured or not.
That would have worked out well but for one thing — appraisal fraud. The new lending institution who was making an actual loan of their own money or credit was hiring appraisers within standard industry practices — to find out the real fair market value so that the new and real lender could minimize its risk. THAT put the borrower further behind the eight ball, because they could not get an affordable loan for a principal amount that would cover the prior unconventional loan clouded by false claims of securitization. The rescinded loan was falsely inflated by a false appraisal for which the “lender” was responsible under all state and federal laws. Thus no new loan could cover the prior “debt” that was created under false pretenses.
Thus we have a conflict in the actual application of the laws and rules, which the US Supreme court agreed to hear and which hopefully will be cleared up by the Supremes without further complications and confusion. The link above is a transcript of oral argument. It is a good read.
Hopefully the court will understand that this problem was neither invented nor caused by the borrowers. The Federal statute must be cleared for use by borrowers or the entire legislative intent will be defeated. A decision that dilutes the right of rescission will deprive borrowers of the only tool they have for effectively pushing back against deceptive lending practices.