William M. LeRoy - Moderator
President & CEO
American Legal & Financial Network “ALFN”
Matthew C. Abad, Esq. - Panelist
Head of Operations - Indiana
Blommer Peterman, S.C.
James V. Noonan, Esq. - Panelist
Principal
Noonan & Lieberman, Ltd.
Nancy M. Wilson, Esq. – Panelist
Partner / Supervising Attorney, Litigation Department
South and Associates, PC
2

Webinar Introduction

Attack the remedies

Persons to whom claim or defense is directed

Standing
3

TILA claims and defenses are oftentimes plead in a deliberately
vague and general manner. Examples:

a mortgagor will allege that the APR was overstated, but not
explain how.

a mortgagor will allege that certain charges should not be
exempt from the finance charge calculation but not identify
which ones or why they should not be exempt

a mortgagor will allege that a fee is not exempt because it is not
“reasonable and bona fide” 12 C.F.R. § 226.4(c)(7)) but not
identify which fee, why it should not be exempt, or conflate
“reasonable” or “bona fide” and leave the mortgagee to figure it
out.

a mortgagor will allege that he or she was not given proper
notice of right to cancel, but will not explain if the form was
defective, if it was not provided in a timely manner, or if the
required number of copies were not provided.
4

The strategy of pleading TILA claims this way is to
avoid early dismissal and summary judgment.

It makes defending the claims on substantive grounds
expensive and time consuming

From the mortgagors perspective it pressures
mortgagees to modify the mortgage or agree to another
loan work out solution just to avoid the cost and time of
litigation.
5
Mortgagee’ Strategy:
Attack the remedies and the parties at whom
the claim or defense is directed.
At the pleading stage, if you cannot
successfully dispose of a counterclaim or
affirmative defense on the merits then try
attacking the remedies and/or the person at
whom the claim or defense is directed.
6

Is the Mortgagor able to tender the Proceeds?

Yamamoto v. Bank of New York, 329 F.3d 1167 (9th Cir.
2003)
 Judicially created pleading requirement that the
mortgagor have the means to tender before
considering the substance of the rescission claim
 Dismissed a TILA claim because the
 Mortgagors could not provide proof of ability to repay
 Several California courts have extended this analysis
 Some require the mortgagee to plead ability to
tender
7

Garza v. American Home Mortg., 2009 WL
188604 (E.D.Cal. Jan.27, 2009)
“[r]escission is an empty remedy without
[plaintiff]'s ability to pay back what she has
received”);

Carlos v. Ocwen Loan Servicing, LLC, No. CV F
09-0260LJOGSA (E.D.Cal. May 08, 2009)

Sitanggang v. Indymac Bank, F.S.B., No. CVF090367LJOSMS (E.D.Cal. May 06, 2009)
8

Guerrero v. Citi Residential Lending, Inc., No.
CVF08-1878 LJO GSA (E.D.Cal. Apr. 03, 2009)

Pagtalunan v. Reunion Mortg. Inc., No. C-0900162EDL (N.D.Cal. Apr. 08, 2009)
A claim for rescission requires a plaintiff to allege that
the plaintiff can or will tender the borrowed funds back
to the lender
9
Lapse of the Right to Rescind?
15 USCS § 1635(f) right of rescission expires
3 years after date of consummation of the
transaction, or sale of the property, whichever
occurs first notwithstanding the fact that the
information and forms required have not been
delivered
So what is a sale?
10

Doss v. Clearwater Title, Co., 2007 WL
1141599 (N.D. Ill. Apr. 17, 2007) rev'd and
remanded sub nom. Doss v. Clearwater Title
Co., 551 F.3d 634 (7th Cir. 2008)
TILA claim dismissed because the mortgagor
had previously sold the house
11



“Sale” - not necessarily limited to transfer of the
deed
“Sale” could be termination of the redemption
Bestrom v. Bankers Trust Co., 114 F. 3d 741
(8th Cir., 1997).
Timing


Before sale/After Sale
Marschner v. RJR Fin. Services, Inc., 382 F.
Supp. 2d 918 (E.D. Mich. 2005).
12

Is the right to rescind terminated after the
mortgagor contracts to sell the home?
Hefferman v. Bitton, 882 F.2d 379 (9th Cir.
1989)
Dailey v. Leshin, 792 So.2d 527 (Fla. App.
2001)
In re Estate of Burgin, 196327, 1998 WL
1993382 (Mich. Ct. App. Jan. 23, 1998).
13

Mortgagor’s pursuit of a short sale could
terminate the right to rescind



Regardless of whether the transfer of title actually
occurs
What about a “refinance?”
King v. State of Cal., 784 F.2d 910 (9th Cir.
1986).
Although favorable – it is the minority position
14

The majority of the courts do not equate a
refinance with a sale under 15 USCS 1635 (f)

Handy v. Anchor Mortg. Corp., 464 F.3d 760
(7th Cir., 2006)

Barrett v. JP Morgan Chase Bank, N.A., 445
F.3d 874, 881 (6th Cir. 2006)

Duren v. First Gov't Mortgage and Investors
Corp., 2000 WL 816042 (D.C.Cir. June 7, 2000
15




Transfer versus Sale?
Official Staff Commentary to 12 C.F.R. §
226.23(a)(3)
Mortgagor's rescission rights extinguish after
transfer of the consumer's interest
Transfer
Mortgagor quitclaims interest
 Mortgagor takes legal title back through a purchase
money mortgage
 Mortgagor retains title through an installment sale
contract

16

Statute of Limitations (SOL)

SOL – also stands for - Stiff out of Luck
17




Beach v. Ocwen Fed. Bank, 523 U.S. 410, 419,
118 S.Ct. 1408, (1998)
Court characterized § 1635(f) as a statute of
repose
No right to assert a rescission as affirmative
defense in a collection action brought more
than three years after consummation of the
transaction
§ 1635(f) “completely extinguishes the right of
rescission at the end of the 3-year period”
18



Court stated that 1635(f) “talks not of a suit's
commencement but of a right's duration.”
“[TILA] permits no federal right to rescind,
defensively or otherwise, after the 3-year
period of § 1635(f) has run.”
State statutes which extend time to bring
otherwise time-barred claims do not apply to
time-barred rescission claims
19

True even where the counterclaim is brought in
recoupment
Wells Fargo Bank, N.A. v. Terry, 2010 WL
1223581 (Ill. App. Ct. Mar. 29, 2010)
In re Williams, 276 B.R. 394 (Bankr.
E.D.Pa.2002)
Green Tree Acceptance, Inc. v. Anderson, 1999
OK CIV APP 46, 981 P.2d 804
20





Other timing issues
Hypothetical
Notice of rescission sent before the expiration of
the 3 yrs
Claim/defense not brought within 3 yrs
Is it time-barred?
21




Miguel v. Country Funding Corp., 309 F.3d
1161 (9th Cir. 2002)
Mortgagor sent a rescission demand to the
then-current servicing agent
Mortgagor filed the lawsuit within three years
naming the servicing agent
Mortgagor failed to name the holder (Real
Party in Interest!!!)
22
Mortgagor amended complaint naming holder
(more than three after consummation)
 Right expired “[b]ecause [the
borrower/plaintiffs] did not attempt to rescind
against the proper entity within” three-years
Other examples:
 Harris v. OSI Financial Services, Inc, 2009
WML 212138 (N.D.Ill)
 Ramos v. Citimortgage, Inc., 2009 WL 86744
(E.D.Cal)

23

Relation Back Issues

Original creditor not added as a party before
three years, but was notified within the three
years?

Hubbard v. Ameriquest Mortg. Co. 2008 WL
4449888 (N.D.Ill)
24




Relation Back
Borrower preserved the claim against the
assignee by notifying the original creditor within
three years
BUT - not added to the suit within 3 yrs
Schmit v. Bank United FSB, 2009 WL 320490
(N.D.Ill.)
25

SOL arguments can take many forms

Borrower timely notified/requested rescission

Did not file suit until after three years

In re Hunter, 400 B.R. 651, Bankr.N.D.Ill. 2009
TILA does not preclude a subsequent suit to
enforce the right after the passing of the threeyear period as long as the consumer timely
exercised the right to rescind within the threeyear period
26

12 CFR 226.23 a (2). . .
Notice of rescission must be in writing
By mail, telegram or other written means
considered given when mailed or filed for
telegraphic transmission or, if sent by other
means, when delivered to

Proper Notice of the Right to Rescind specifies
the address for rescission purposes
27



Did the borrower properly give notice?
Does the mortgagor’s pleading constitute
notice?
See Jones v. Saxon Mortgage, Inc., 537 F.3d
320, 327 (4th Cir.1998)
“the filing of a lawsuit can be sufficient written
notice of rescission under TILA so long as the
complaint seeks rescission”
28


Does it matter if the notice is only served on
the assignee?
It depends – Hubbard v. Ameriquest Mortg. Co.
2008 WL 4449888 (N.D.Ill)


Borrower notified the original creditor of the
rescission within three years
The right to rescind against an assignee was
preserved (assignee added to suit after the three
years)
29



Schmit v. Bank United FSB, 2009 WL 320490
(N.D.Ill.)
Timely notice to the original lender may be
sufficient to effectuate rescission as to
assignee who was not sued within three years
15 U.S.C. §1641(c) - Any consumer who has
the right to rescind a transaction under section
1635 of this title may rescind the transaction as
against any assignee
30

What if the notice is served only the servicer?
Borrower only served notice on servicing agent
The court rejected the argument that a notice
of rescission was effective

Miguel v. Country Funding Corp., 309 F.3d
1161 (2002)
“no authority supports the position that notice
to [the servicing agent] should suffice for notice
to the Bank”
31

What if the Rescission is served on the
creditor’s or assignee’s attorney?

In Re: Holland, 1994 WL 772758 (B.Mass.)
rescission claim rejected where the notice of
rescission was sent to counsel for the holder,
but not to the holder
32



“Strict compliance does not necessarily mean
punctilious compliance.”
Will the court disallow rescission for a de
minimus violation?
1st Circuit:



Palmer v. Champion Mortgage, 465 F.3d 24 (1st Cir. 2006);
Santos-Rodriguez v. Doral Mortg. Corp., 485 F.3d 12, 17 (1st
Cir. 2007)
5th Circuit

Smith v. Chapman, 614 F.2d 968, 972 (5th Cir.1980)
33

How is that for strategy?

Real Estate Values are down!

Cost benefit analysis

Will the time/expense/amount recovered in
foreclosure exceed the amount the borrower
may be forced to tender?
34

Do the loan proceeds (minus finance charges)
exceed the value of property?

Mortgagor must be able to tender the amount

If not, claim is moot - move to strike or dismiss

Nkengfack v. Homecomings Financial, LLC,
2009 WL 1663533, (D.Md. June 15, 2009)

Nichols v. Greenpoint Mortg. Funding, Inc.,
2008 WL 3891126 (C.D. Cal.)
35

Personius v. HomeAmerican Credit, Inc., 234
F.Supp.2d 817, 819 (N.D.Ill.2002)

Court dismissed plaintiff's rescission claim


Creditor's “offer to rescind the loans rendered
plaintiffs' claims for rescission moot ...”
Relief sought was available to them and
fulfilled by servicer’s agreement to rescind
36





PRACTICE TIP
Couch letter in affirmative language
Do not condition rescission on mortgagor’s
tender
Ask the court to set tender as a condition
Compare, Velazquez v. HomeAmerican Credit,
Inc., 254 F.Supp.2d 1043, 1045 (N.D.Ill.2003)
Creditor’s promise to rescind when mortgagor
tenders does not satisfy mortgagee’s
obligations under Regulation Z
37
Statute of Limitations

Any action for damages must be brought within
one year from the date of the occurrence of the
violation. 15 U.S.C. § 1640(e).

However, a person is not barred from asserting
a violation of TILA more than one year from the
date of the occurrence of the violation as a
matter of defense by recoupment or set-off in
such action, except as otherwise provided by
State law. 15 U.S.C. § 1640(e).
38
Savings statutes
Many states savings statutes allow a defendant
to bring a counterclaim after the period
authorized in the applicable statute of
limitations has elapsed, as long as the plaintiff's
claim arose before the cause of action brought
as a counterclaim was barred.
39

In a mortgage foreclosure context where the
mortgagee’s right to recover on the debt did not
arise until the mortgagor went into default more
than one year after disclosures were given
means that the mortgagor’s cause of action for
foreclosure did not arise until after the claim
was barred. See, e.g. Bank of Oklahoma v.
Briscoe, 911 P. 2d 311 (Okl. App. 1995);
Vikowsky v. Savannah Appliance Service
Corp., 179 Ga. App. 135, 345 S.E. 2d 621
(1986).
40
Is the TILA claim “closely related” to a claim to
collect a debt?

Some courts have held that a claim on the debt is not
closely related or lacks a foundational connection to the
TILA damage claim so state law recoupment theories
do not apply. See, Hennigan v. Heights Savings Ass’n,
576 S.W.2d 126 (Tex. App. 1978); New York Guardian
Mortgage Corp., v. Deitzel, 524 A. 2d 951 (Pa. Super
Ct. 1987); Franklin State Bank & Trust Co., v Herring,
608 So. 2d 643 (La. App. Ct. 1992).
41
Does the TILA violation authorize statutory
damages?

Actual damages are recoverable for any
violation of TILA but statutory damages are
available "only" for closed list of violations
42

Brown v. Payday Check Advance, Inc., 202
F.3d 987, 992 (7th Cir.2000).

Only defects in material disclosures authorize
statutory damages
43
Thus, statutory Damages are not available for the
following violations:

Use of the wrong form or format of the disclosures

The disclosures were not clear and conspicuous

The omission of descriptive explanations in violation of
§ 1638(a)(8)

The appearance of extra matter in the federal box in
contravention of § 1638(b)(1)

Failing to clearly disclose the APR

Failing to disclose the existence of a variable interest
rate feature
44
Practice Pointer:
To defeat a claim for damages try to solicit an
admission from the mortgagor that has no actual
damages and, if the TILA violation is one where
statutory damages are unavailable, then
mortgagors damage claim fails and his attorney
cannot recover fees.
45

Detrimental reliance standard

Mortgagor must show detrimental reliance to
recover actual damages

Smith v. Gold Country Lenders, 289 F. 3d
1155(9th Cir. 2002)
46

Overstated Finance Charge arguments

An otherwise excluded fee, or portion of that
fee, is not reasonable or bona fide

12 C.F.R. § 226.4(c)(7)

Reasonableness versus bona fide

Distinct terms
47




If the creditor imposes an “unnecessary
service” the fee may not be bona fide
Some courts equate it with fraud or deceit
Claim or defense may be subject to the
heightened pleading rules required for fraud
claims
Hickey v. Great Western Mortgage Corp., 1995
WL 153372 (N.D.Ill. 1995)
48

Reasonableness is less exact

Requires expert testimony

Comparison - Creditor’s charges versus
prevailing industry practices/charges
49





Practice Tip
Borrower alleges fee should have been
included in the finance charge calculation
Fee was not reasonable
If the unreasonable portion is subtracted from
the total charge and the remainder is within the
tolerance
Seek dismissal
Scott v. IndyMac Bank, FSB, 2004 WL 422654
(N.D.Ill.)
50

Creditors are treated differently than Assignees

For both actual and statutory damages


Creditor liability attaches to “creditors who fail to
comply with any requirements imposed” under TILA,
15 U.S.C. §1640(a)
Assignee liability - limited to violations of TILA
that are apparent on the face of the disclosure
51


To determine if the violation is “Apparent on the
face”
Compare the disclosure statement to the
Note
 Any itemization of the amount financed
 Any other disclosure of disbursement
 See 15 U.S.C. §1641(e)


Violation in two circumstances
52

First - disclosure can be determined to be
incomplete/inaccurate by comparison among
The disclosure statement
 Any itemization of the amount financed
 The note, or
 Any other disclosure of disbursement


Second – disclosure does not use the terms or
format required to be used 15 U.S.C. §1641(e)
53


Assignee versus creditor continued
If mortgagor’s claim is based in whole or in part
Current holder’s failure to honor § 1635(g) rescission
 Argument that assignee not be liable
 If the underlying violation is not apparent on the face


15 U.S.C. §1635(g)
“[a]ny creditor who fails to comply with any
requirement under this part . . . with respect to
any person is liable to such person . . .”
54




Argument is by analogy
15 U.S.C. §1640(a) addresses only a creditor’s
liability
It follows that §1635(g) only applies to creditors
as well
Brodo v. Bankers Trust Company, 847 F.Supp.
353 (E.D.Pa. 1994)
55
“neither Section 1641 nor any other section
provides for a statutory penalty and award of
attorney’s fees to a plaintiff should an assignee
fail to respond to a valid rescission notice.
Congress did not wish to impose liability for
damages and attorney’s fees on an assignee
who is not responsible for or who had no notice
of TILA disclosure violations at the time of an
assignment. Rescission is, therefore, the only
remedy against [the assignee] to which plaintiff
is entitled”
56



Parker v. Potter, 8:06-cv-183 –T-26EAJ
(October 22, 2008)
Court found Plaintiff entitled to rescind due to
TILA violations occurring at the loan’s
origination
Court rejected Plaintiff’s argument for fees from
the assignee

No evidence that the assignee was responsible for
and had notice of the disclosure violations
57




Brodo rejected in some IL courts
Fairbanks Capital Corp. v. Jenkins, 231
F.Supp.2d 737 (N.D.Ill. 2002)
Court rejected the conclusion that an assignee
has no monetary liability for failure to honor a
rescission notice
In Jenkins the violation was apparent on the
face of the assigned documents
58





General Rule - Mortgagor cannot assert a TILA
claim against the servicer of a loan
Exception – If the servicer also owns or owned
the loan obligation
A servicer is not considered an Assignee for
the purposes of 15 U.S.C. §1641(f)
Jackson v. US Bank Nat’l Ass’n Trustee, 245
B.R. 23 (E.D. Pa. 2000)
Servicing agent not liable - TILA only provides
liability for original lenders and their assigns
59






Let’s use it against them for a change
What if the claimant is an assignee of the
original borrower?
TILA provides a duty to the “borrower”
No mention of borrowers assignee
Move to dismiss/strike the claim
What about borrowers that file BK?
60





Review
BK filing creates the BK Estate
Trustee owns the BK Estate
“all legal or equitable interests of the debtor in
property as of the commencement of the case.”
11 U.S.C. § 541(a)(1)
Trustee owns the claim
Mortgagor lacks standing to raise a TILA
defense if she had been discharged
61





Rowland v. Novus Financial Corp., 949 F.Supp.
1447 (D.Haw.1996)
Plaintiff-borrower sought rescission
Plaintiff subsequently filed for Chapter 7
Court held plaintiff lacked standing to bring suit
cause of action existed before the bankruptcy
and therefore [was] included in the bankruptcy
estate
“bankruptcy estate [was] the proper plaintiff
62

Also, is the party bringing the TILA claim the
consumer for TILA purposes?

Estate of the mortgagor have standing?

Co-obligors?

Mixed purposed Consumer/Business loan?
63
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