Borrower's TILA Rescission Suit Need Not Allege Ability To Repay Loan; Signing Over Collateral To Lender Doesn't Necessarily Meet Debtor's TILA Duty

For certain mortgage loans covered by the Truth-in-Lending Act (TILA), a timely written notice of rescission triggers the creditor’s duty to release its security interest and refund any finance charges. Once the creditor satisfies this duty, the borrower must return the loan proceeds. Until the creditor satisfies this duty, the borrower may keep the loan proceeds.

Because this TILA rescission duty often imposes an unfair risk on creditors: it requires the creditor to release its security interest without assurance that the consumer stands ready to honor his or her own rescission obligations, several Federal circuit courts of appeal allow lower courts to equitably condition the creditor’s duty on the borrower’s ability to repay the loan proceeds.

In a recent court ruling, the 10th Circuit Court of Appeals was asked to address whether a lower court can mandate that a borrower allege it its TILA lawsuit that he/she has an ability to repay the loan proceeds as a requisite for allowing the case to continue. The suit was brought by a homeowner/couple who failed to allege an ability to repay the proceeds. Because of such failure, the lower court dismissed the borrowers' suit.

In a nutshell, the 10th Circuit ruled that the lower court overstepped its bounds by requiring the borrower to allege its ability to repay the loan proceeds it the lawsuit for the following reasons:

1. it adds a condition to the remedy not found in the statute or the regulation: it
   requires consumers to allege that they can repay the loan proceeds, and
   
   
2. the imposition of such a mandate at a point in the litigation where the equities in the case have yet to be determined is premature. It said that the lower court’s pleading rule would give all creditors the benefit of the more burdensome pleading rule without requiring them to first show a need for equitable relief.

However, it went on to say that although the rescinding consumer need not plead an ability to repay the proceeds of the loan, the lower court may nevertheless, in an appropriate case, use its equitable powers to protect a creditor’s interests during the TILA rescission process, leaving open the possibility that, once the case is more fully developed and equities determined, the lower court can equitably condition a consumer's loan rescission on an ability to repay the loan.

Because the court found that the pleadings did not establish whether this was an appropriate case, it reversed the lower court's ruling.

In addition, because the issue may arise on remand, the appeals court also considered whether the consumers can satisfy their rescission obligations by tendering their home. For the reasons set forth in its ruling, the court concluded the tender of the home does not necessarily meet their tender obligations under TILA.

For the ruling, see Sanders v. Mountain America Federal Credit Union, No. 11-4008 (10th Cir. July 30, 2012).

Thanks to Deontos for the heads-up on the court ruling.