Consumer Damages and Remedies for Truth in Lending Act and Regulation Z Violations
The Truth in Lending Act TILA requires that creditors disclose credit terms and costs at the various stages of open- and closed-end credit transactions (i.e., solicitation, advertising, account opening, consummation, and monthly statements).
Section 1640 of TILA is the civil liability section. It states that creditors who violate any requirement imposed by TILA or Regulation Z are liable to the consumer for the total of all of the following damages that apply:
1) Any actual damages a consumer sustained as a result of the violation
2) Statutory damages for violations of certain provisions of TILA, with a minimum amount of $100 or $200 (depending on the type of loan) and a maximum amount of $1,000 or $2,000
3) Court costs and attorney's fees
4) The sum of all fees and finance charges paid for high cost loans.
TILA allows consumers to recover the full amount of any actual damages they sustain from a TILA or Regulation Z violation. Because TILA is primarily a disclosure statute, the question arises: what are a consumer's "actual damages" if a creditor omits a required disclosure or makes an erroneous disclosure?
Statutory Damages
Congress also established statutory damages for violations of TILA's most important disclosures to ensure that consumers receive some compensation for violations, regardless of whether they actually suffered any harm, and also to deter creditors from violating TILA and Regulation Z. The measure of statutory damages is twice the amount of the consumer's finance charge, subject to minimum and maximum recoveries
High Cost Loans
Damages for high cost loans under section 1639 of TILA and section 32 of Regulation Z. T
The definition of a high cost loan is one in which either 1) the APR at consummation will exceed the yield on Treasury securities with comparable periods of maturity by more than eight percentage points for first lien loans, 2) the APR at consummation will exceed the yield on Treasury securities with comparable periods of maturity by more than 10 percentage points for second lien loans, or 3) the total fees and points payable by the consumer at or before closing exceed the larger of $528 or eight percent of the total loan amount. Credit insurance premiums for insurance written in connection with the credit transaction are counted as fees.
Loans qualifying as high cost are subject to many restrictions, including prohibitions against:
* Balloon Payments for loans with less than five-year terms, except for bridge loans of less than one year to buy or build a home
* Negative Amortization
* The imposition of a higher interest rate if the borrower defaults
* A repayment schedule that consolidates more than two periodic payments to be paid in advance from the proceeds of the loan
* Prepayment Penalties, including refunds of unearned interest calculated by any method less favorable than the actuarial method, except if the lender verifies that total monthly debt (including the mortgage) is 50 percent or less of the borrower's monthly gross income
* Due-on-demand clause, except for consumer fraud or material misrepresentation in connection with the loan or if the consumer defaults, or the consumer adversely affects the creditor's security
* Making loans based solely on the value of the collateral without regard to the borrower's ability to repay the loan (THIS IS A BIG ONE!)
* Refinancing a high cost loan into another high cost loan within the first 12 months of origination, unless the new loan is in the borrower's best interest
* Wrongfully documenting a closed-end, high-cost loan as an open-end loan. For example, a high-cost mortgage cannot be structured as a home equity line of credit if the creditor has no reasonable expectation that repeat transactions will occur.
If a creditor violates any of its obligations under section 1639 of TILA or section 32 of Regulation Z, it is liable for the sum of all finance charges and fees paid by the consumer. The limits on statutory damages discussed above do not apply to high cost loans. In addition, if the mortgage contains a provision that section 1639 specifically prohibits, including the ones listed above, the loan can be rescinded, as discussed below.
The Right of Rescission
The right of rescission is a special remedy under TILA that applies to consumer loans secured by a non-purchase money mortgage on the consumer's principal dwelling. Rescission provides the borrower with a three-day period, after either consummation of the loan or delivery of the disclosures, whichever is later, to rescind the loan. If the borrower exercises this right, the creditor must refund all fees and charges paid and remove any security interest in the borrower's residence.
It applies to a home equity line of credit, a home improvement loan, or the refinancing of an existing mortgage. If the refinancing is with the same creditor, and no new credit is extended, rescission does not apply.
If the creditor fails to deliver the notice of the right of rescission to the consumer, fails to make material disclosures, or makes computational errors in the material disclosures in excess of the tolerance for such errors, the rescission period is extended to three years from the date of consummation of the loan.
In a foreclosure, special rescission rules apply. A consumer can rescind a loan in foreclosure if the mortgage broker fee is omitted from the finance charge and should have been included or if the creditor failed to provide a proper "notice of rescission" form. In addition, the tolerance for understating the finance charge disclosure is set at $35. Creditors should be especially careful in ensuring the accuracy of their finance charge disclosures because this low tolerance provides little room for error if a loan ends in foreclosure. The statute of limitations for use of the right of rescission in foreclosure is three years from the date of consummation of the loan.
If a loan is successfully rescinded, the consumer is entitled to a refund of all fees and charges, including finance charges, penalties, loan transaction fees, appraisal fees, closing costs, and, if a rescission lawsuit is filed, court costs and attorney's fees.
