TILA Violations as a Defense
The Truth in Lending Act provides powerful remedies — including rescission of the loan — for certain disclosure violations.
Overview
The Truth in Lending Act (TILA), 15 U.S.C. § 1601 et seq., requires lenders to clearly disclose loan terms and costs to borrowers. TILA provides: (1) a 3-day right of rescission after closing (for refinances on primary residences, not purchase loans), and (2) an EXTENDED 3-year right of rescission if the lender failed to provide the required TILA disclosures or Notice of Right to Cancel. TILA rescission is the most powerful remedy in consumer finance law — it can void the entire loan (including the Note and Mortgage). Additionally, TILA violations (failure to disclose APR, finance charge, payment schedule, or other material disclosures) can support a defense to foreclosure and an affirmative claim for damages.
Legal Definition
TILA and Regulation Z (12 CFR Part 1026) require lenders to provide: the finance charge (total cost of credit in dollars), the annual percentage rate (APR), the amount financed, the total of payments, the payment schedule, and (for refinances on primary residences) the Notice of Right to Cancel. If the lender fails to provide these material disclosures, the borrower's right of rescission extends from 3 days to 3 years. TILA also limits certain loan terms (e.g., prepayment penalties on higher-priced mortgage loans) and prohibits certain practices.
When This Defense Applies
Asserted when: (1) the lender failed to provide the required TILA disclosures at closing, (2) the lender failed to provide the Notice of Right to Cancel (for a refinance), (3) the APR was understated (finance charge understated by more than $35 or 0.5% for most loans), (4) the loan includes prohibited terms (prepayment penalties on high-cost loans), or (5) the lender engaged in an unfair or deceptive practice under TILA's UDAAP provisions.
Common Foreclosure Scenarios
The borrower refinanced 2.5 years ago and now faces foreclosure — but the lender never provided the Notice of Right to Cancel; the 3-year rescission window is still open
The HUD-1 Settlement Statement understates the finance charge because certain fees were mischaracterized — the APR is inaccurate and TILA rescission may apply
The loan is a high-cost mortgage under HOEPA (Section 32) — it includes prohibited terms (balloon payment, prepayment penalty, negative amortization) and TILA damages plus rescission apply
The lender required the borrower to sign a waiver of TILA rights as a condition of the loan — this is unenforceable
Burden of Proof
The BORROWER must prove: (1) the loan was a consumer credit transaction secured by the borrower's primary residence, (2) the required TILA disclosures were not provided (or were materially inaccurate), and (3) the rescission notice was sent within the 3-year window. The LENDER bears the burden of proving compliance — if the lender cannot produce the signed disclosure forms, the borrower is entitled to a presumption that disclosures were not provided. The borrower must tender the rescission notice, and if the lender disputes it, file suit within the 3-year period.
Court Considerations
The Supreme Court (Jesinoski v. Countrywide, 2015) held that a borrower exercises the right of rescission by sending written notice — it is not necessary to file a lawsuit within the 3-year window, only to send the notice. Key issues: whether the TILA disclosures were materially accurate (tolerance thresholds apply: finance charge must be accurate within $35/$100 depending on the action), whether HOEPA applies (high-cost loan triggers additional disclosures and remedies), and whether the lender's failure to respond to a valid rescission notice entitles the borrower to damages plus voiding of the security interest.
Homeowner Strategies
Request a complete copy of your closing documents from the lender — review the TILA Disclosure Statement and Notice of Right to Cancel
Run the APR calculation: compare the finance charge on the TILA disclosure against the HUD-1/Settlement Statement — discrepancies may support rescission
If within 3 years of closing (and it's a refinance of your primary residence), send a Notice of Rescission via certified mail — this triggers the lender's obligation to respond within 20 days
If the lender fails to respond to the rescission notice within 20 days, file suit for TILA rescission + damages
Combine TILA rescission with other defenses — rescission voids the security interest and is a complete defense to foreclosure
Related Court Documents
Related Court Procedures
Frequently Asked Questions
Can I rescind a purchase-money mortgage under TILA?+
No. The right of rescission under TILA applies ONLY to transactions where the borrower's primary residence is used as security and the transaction is NOT the original purchase of the home. This means refinances (rate-and-term, cash-out), home equity loans, and HELOCs. Purchase loans for the home you bought are not subject to rescission (though the 3-day right applies to certain other transactions). TILA DAMAGES claims for disclosure violations can apply to purchase loans even if rescission doesn't.
What happens if I validly rescind my loan?+
The security interest (Mortgage/Deed of Trust) becomes void. The lender must return all fees, closing costs, and payments made. The borrower must return the loan principal (the money borrowed). In practice: if you borrowed $200,000 and have paid $50,000 over the years, the lender returns all payments and fees, and you still owe the principal balance (minus what you've paid). Rescission typically leads to a settlement or refinance — it's rare that the borrower simply walks away with a free house. TILA rescission is a powerful tool for forcing the lender to the negotiating table.
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