Preventing Home Equity Lending Fraud - Special Truth in Lending Protections Enacted Gary Klein Attorney, National Consumer Law Center, Boston, MA

Loyola Consumer Law Review

Volume 7 | Issue 4 Article 3

1995 Preventing Home Equity Lending Fraud - Special Truth in Lending Protections Enacted Gary Klein Attorney, National Consumer Law Center, Boston, MA

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Recommended Citation Gary Klein Preventing Home Equity Lending Fraud - Special Truth in Lending Protections Enacted, 7 Loy. Consumer L. Rev. 126 (1995). Available at: http://lawecommons.luc.edu/lclr/vol7/iss4/3

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Preventing Home Equity Lending Fraud Special Truth in Lending protections enacted

by Gary Klein

Overview In 1994, Congress passed consumer protections with respect to certain home equity mortgage loans Background and Legislative History made at high rates of interest.' The protections are designed to prevent some predatory lending practices Abusive home equity lending is a longstanding prob- targeted at vulnerable consumers. lem that exploded in the 1980s.1 Vulnerable homeowners The new law creates a special class of regulated, such as senior citizens, minorities and the poor, who could closed-end loans made at above market interest rates or not access mainstream forms of credit, were the focus of with excessive costs and fees. Rather than cap interest these abusive practices.' Many were forced to rely on eq- rates for these loans entirely, the law contains a variety of uity loans with high rates of interest in order to finance regulatory approaches, including additional disclosures, home repairs, credit consolidation, or other crucial credit new penalties, prohibitions of certain abusive loan terms, needs. 6 A surprisingly diverse group of lending institu- and an extension of potential liability for assignees. The tions, finance companies and outright usurers developed new protections took effect October 1, 1995.2 home equity loans designed to hide the true costs and dis- These amendments to the Truth in Lending Act3 do advantages of secured credit at high rates. They targeted not curb the problem of abusive home equity lending en- vulnerable consumers through a network of contractors, tirely. The amendments continue to allow home equity loan brokers, "bird-dogs," and scam artists. Because the loans to be made at high rates, albeit with fewer terms loans were secured by home equity, lenders were protected designed to hide the true disadvantages and risks of such from risk because they could either collect high rates from loans. Additionally, the new law does nothing to regulate consumer payments or obtain repayment of the loans plus abusive terms in transactions defined outside the class of contract interest and costs, through foreclosures. covered loans including open-end credit transactions. This means that some lenders will undoubtedly continue abu- Gary Klein is an attorney at the National Consumer Law Center, 18 sive practices without triggering spe- (NationalTremont Street Con Boston, MA, 02108. He is co-author of Truth in Lending cial defenses for homeowners. sumer Law Center, 1994 Supplement). The author wishes to thank Kathleen Keest and Judy O'Donnellforassistance in preparing this article.

126 9 Loyola Consumer Law Reporter Volume 7, number 4 During the 1980s, a number of factors coalesced to and then close up shop before consumers could discover create an ongoing crisis: and raise defenses. The assignees in the secondary mar- . In 1986, the federal legislature changed the tax ket pled innocence, denying participation in the fraudu- code to establish a tax preference for interest on second lent process and asserting protection based on their claimed mortgages over interest on other consumer loans.7 This status as holders in due course.2 As a result, the assignees sent a pervasive message to homeowners that borrowing avoided liability for many of the consumer claims made against home equity was sensible economic planning. This against them. message meshed nicely Some banks with the overall "credit is and other institutional good" theme of the 1980's, Deregulation z lenders actually created and many people who llowed a wide businesses to finance never would have consid- range of marg high rate lenders and to ered borrowing against the inal players into obtain assignment of the equity in their homes be- the lending an resulting high rate loans. gan to make this their first d loan By making these trans- choice for borrowing. brokering busi actions appear to be pur- 0 Mainstream ness. chases in the secondary banks nearly abandoned market, these lenders low-income neighborhoods across the country, especially purported to obtain the defenses of holders in due course. minority low-income neighborhoods. This created a void . Deregulation allowed a wide range of marginal to be filled by finance companies charging high rates of players into the lending and loan brokering business. Many interest.8 Indeed, some mainstream banks helped fill the of the historic protections against unfair lending practices, vacuum by setting up high rate finance companies or, al- such as state ceilings on interest rates and licensing re- ternatively, by funneling cash to unscrupulous lenders. quirements, were removed or eviscerated during the . Given appreciating real estate values throughout 1980s. 3 Even where licensing requirements remain, in- much of the country, finance companies were able to make adequate funding has lead to inadequate policing of abu- loans at high rates with very little risk.' Many finance sive lenders. companies targeted homeowners who had substantial eq- 0 Finally, the Truth in Lending Act ("TILA") itself uity in their homes in order to protect their investments if became part of the problem. Many abusive lenders used the borrowers did not pay. Elders were a common target the loopholes of TILA to pad loans, to hide complex terms, because many had built significant equity in their proper- and to evade substantive regulation on the basis that the ties over time. Based on equity, a lender was in an advan- abusive loan terms were fully disclosed. Although TILA tageous situation: either the borrower paid the loan back rescission rights have often been asserted to annul abu- with high interest or foreclosure on the home permitted a sive loans, the disclosures proved inadequate both as a recovery from the property directly. In fact, when fore- means of informing consumers about complicated loan closure occurred and the borrower's property was sold to terms and in overcoming oral fraud and other chicanery. 4 the lender for less than fair market value (as it often is), In 1993, after much publicity regarding abusive the lender could resell the property after foreclosure and loans, particularly in Boston, Atlanta and Los Angeles, and keep any additional profits. 0 These anticipated windfalls at the urging of a variety of consumer groups, Congress encouraged some lenders to make loans designed to result held hearings on high rate lending. Many witnesses force- in foreclosure to homeowners with substantial equity in fully pointed out the hardship, dislocation and neighbor- their properties. hood destabilization that such loans caused. Homeowners 0 A significant secondary market developed dur- from a number of communities travelled to the hearings ing the 1980s for finance companies marketing loans with by overnight bus and surprised legislators by singing spiri- high interest rates." This created substantial liquidity for tuals and civil rights songs in the hearing room.' high rate loans. Finance companies could defraud con- In addition, some portions of the lending commu- sumers, sell mortgages on the secondary market for cash, nity lobbied against the proposed legislation, arguing that

Summer, 1995 Lead Articles * 127 regulation would shut off the flow of credit to low-income and Fleet Bank's market rate customers, who were pre- communities. The lending community claimed that home dominantly white.30 equity lending with high interest rates was justified by lend- Indeed, unfair lending cases can be very lucrative ing risks. for plaintiffs. For example, in 1991 an Alabama jury The legislative history of the bill explains the pro- awarded 45 million dollars to five families who had been cess by which legislators were convinced to regulate cov- victimized by a lender and a contractor. In a pattern of 6 ered loans. Significantly, the conference report contains fraud and financial abuse, the contractor failed to complete substantial explanations of potentially ambiguous language work required in a high interest rate mortgage transaction.3' and will be a valuable resource for litigators pursuing claims under the new act. To the extent possible, the leg- Coverage islative history is referenced below in the discussion of substantive issues in this article. The home equity protection bill defines a special class of covered closed-end loans by setting up two trig- Other Strategies for Litigating Problem gers for the special protections of the law.32 Although ini- Home Equity Loans tial versions of the bill would have called the protected class of loans "high rate loans," Congress rejected this defi- The remedies discussed in this article are not the nition as unnecessarily pejorative. Consequently, through- exclusive means by which to attack abusive home equity out the law, covered loans are referred to as "a mortgage 33 loans. The legislative history suggests that the new law referred to in section 103(aa). does not preempt more protective alternative laws 7 and The first of the two triggers is based on the annual does not preclude attacks on loans that are not covered by percentage rate ("APR") for the particular loan. The other the bill." Other provisions of the TILA, including rescis- is based on the total amount of points and fees the finan- 9 sion rights under 15 U.S.C. § 1635, will continue to be cial institution has charged. However, all covered loans of primary importance in attacking abusive loans. In ad- must be "consumer credit" transactions and must be se- dition, claimants may challenge predatory mortgages by cured by the consumer's principal dwelling.3 4 When the utilizing state controls on unfair trade practices,20 as well triggers are met, the protections of the bill are invoked. as warranty law, 21 usury,22 unconscionability,23 fraud 24 and Of course, 25 as with other coverage issues under TILA, the general contract law. lender's conclusion about whether the loan is covered will As in the past, claimants will frequently litigate their not necessarily control. An independent analysis of claims in connection with foreclosure of abusive loans. whether a particular loan is covered will have to be made. Claimants may raise defenses in judicial foreclosure cases and may seek injunctive relief against non-judicial ("power 1. Exempt Transactions of sale") foreclosures. In addition, the automatic stay pro- As in the case of the rescission provision of TILA,33 vided under the Bankruptcy Code 26 and the objections-to- the law exempts "residential mortgage transactions." This claim process 27 can be used to forestall foreclosures and term is defined by TILA to include purchase money secu- to invalidate mortgage claims.2" rity interests to finance the acquisition or initial construc- Finally, some consumer attorneys are advocating tion of the consumer's dwelling.3 6 Consequently, all refi- creative remedies for unfair lending practices around the nancing and other home equity loans are covered, but pur- 37 country. A number of suits directly attack "reverse chase and construction loans are generally not. redlining" practices at major banks. Reverse redlining is a Loan products designed to deliberately evade the practice by which banks make home equity loans at mar- terms of the Act should be covered. However, the law ket rates in certain neighborhoods (typically white neigh- contains an explicit exemption for reverse mortgages and borhoods), while buying or making high rate loans by other for open-end credit. 29 means in central cities (usually in black neighborhoods). Reverse mortgages are defined in 15 U.S.C. § A Georgia suit against Fleet Bank, for example, was based 1602(bb) of the TILA. Generally, they are transactions in on the racial disparity between Fleet Finance Company's which payments are due only upon transfer of the dwell- high interest customers, who were predominantly black, ing in which the security interest is taken or when the con-

128 9 Loyola Consumer Law Reporter Volume 7, number 4 sumer dies or moves.38 Reverse mortgage loans have be- ceding the month in which the lender receives the applica- come widely available for elders who can use these loans tion for an extension of credit.4 5 to tap home equity in their properties without a repayment By referencing "comparable maturities," the law requirement while they are living in the home. requires the creditor to evaluate the rate for treasury bonds The exemption for open-end credit is more troubling. of the same duration as the loan. For example, coverage In general, open-end credit involves a loan which antici- for a five-year loan will be evaluated by reference to the pates additional future advances. It seems likely that some treasury's five year bond rates. An ambiguity may arise in creditors will seek to evade the loan protections discussed a limited number of cases when the term is between two in this article by structuring abusive loans as open-end different bond maturities. The FRB has required that the credit. When this occurs, the transaction should be care- security with the closest maturity date be used. 6 Where a fully examined to ensure that it meets the definition in the loan is exactly between two listed maturities, the lower of statute and the regulations.39 Since the regulations require the two rates should be used.47 that in open-end credit The compa- transactions "the creditor rable yields used to de- reasonably contemplates By referencing "comparable termine whether a par- repeated transactions," ticular loan is covered claimants may challenge maturities," the law requires are published in a vari- some purportedly open- ety of places, including end credit based on the ob- the creditor to evaluate the the Federal Reserve jective reasonableness of Bulletin and the Wall the creditor's intentions. rate for treasury bonds of the Street Journal. To get This will be a question of some idea of the cover- fact that must be litigated same duration as the loan. age of the Act, at current as such on a case-by-case treasury bond rates, basis4 0 loans starting in the range above 16.5% (one year) to 18% In addition, the Federal Reserve Board ("FRB") has (ten year) APR would be covered depending on the loan discretionary authority under the Act to exempt specific term.48 mortgages, or categories of mortgages, from some of the All of the applicable requirements for calculating prohibitions under the Act, but not from the disclosures.4 ' the annual percentage rate will apply. It will be the accu- In order to create an exemption, the FRB must find that rate rate that controls, so the APR must be evaluated for the exemption is in the interest of the borrowing public errors. When an error is found, for example, because the and that it is granted for the purchase of products that main- creditor has misallocated a finance charge, the correct rate tain and strengthen home ownership and equity protec- should be calculated and coverage should be evaluated tion. When the FRB designates an exemption, it will only based on this number. Thus, errors in calculating the APR apply to the prohibitions contained in 15 U.S.C. § 1639(c) can be the basis not only for civil liability and rescission, through (i).42 The special disclosure requirements will but for failure to comply with the requirements for high remain applicable.43 rate loans as well. As discussed below, enhanced penal- 49 ties will then be triggered. 2. The Annual PercentageRate Trigger The FRB is empowered to change the margin for The first category of covered transactions under the the coverage of annual percentage rates by regulation, but Act are loans for which the annual percentage rate (at the only every two years.- The maximum permissible mar- time of consummation) exceeds, by more than 10 percent- gin is 12% and the minimum is 8%.11 In evaluating whether age points, the yield on treasury securities having compa- to change the applicable rate, the Board must be sure the rable maturities at the time the lender makes the loan.' change is consistent with consumer protections against The relevant date for evaluating the treasury bond rates abusive lending and warranted by the need for credit.52 will be the fifteenth day of the month immediately pre-

Summer, 1995 Lead Articles 9 129 3. The Points and Fees Trigger ment preparation, notarizations, appraisals, etc. (performed The second trigger for coverage applies when the by employees of the creditor or related entities) cannot be loan includes total points and fees in excess of 8 percent excluded from the trigger.6' Moreover, to qualify for the of the total amount of credit extended in the transaction. 3 exception, the charge must be paid to an entity that is un- However, for coverage to apply under this section, the to- affiliated with the lender. Fees paid to third parties that tal points and fees must be at least $4 0 0 .- This floor will have interlocking boards, the same lending principals, or change each year on January 1 to adjust for inflation (as corporate affiliations cannot be excluded from the trig- 62 determined by the consumer price index on June 1 of the ger. year prior to the adjustment.)55 This standard may lead to different results in some There is an explicit three-part definition of points cases from the analysis applicable to calculation of the and fees under the Act. 6 First, it includes all items con- TILA finance charge. For example, a title examination tained in the finance charge for the loan other than interest charge may usually be included in the amount financed in and time-price differential.57 This captures all prepaid in- calculating that amount for TILA purposes. 63 However, if terest, points, origination fees, service charges and other it does not meet the exception discussed here, it must be lender's charges for costs of doing business. Most often, included as a fee for the purpose of determining coverage these fees will be separately disclosed in the settlement of high rate loan protections. statement, the itemization of amount financed or other dis- Finally, the FRB has power to add other charges to 6 closure of disbursements. the definition of points and fees as it deems appropriate. The second element of points and fees is "all com- In the Conference Report, Congress specifically pointed pensation paid to mortgage brokers."58 This provision rec- to credit insurance fees as an example of the type of fee 65 ognizes that mortgage brokers who arrange high rate loans the FRB might choose to include. often contribute significantly to the lending abuses involved. The broker's fees are often arranged between the 4. Expanded Definition of Creditor broker and the creditor, rather than between the broker One issue which has come up increasingly as a cov- and the consumer. Even when the borrower does under- erage issue under TILA is loans made by individuals or stand that a broker is involved, the broker's fee is a sig- other entities which do not qualify under the definition of nificant ancillary cost of credit, which often significantly "creditor" because they do not make the requisite number affects the total cost of the loan. of loans.66 In many cases, these loans are arranged by The third element of points and fees concerns real loan brokers who have individuals fund the loans in order estate charges included under section 15 U.S.C. § 1605(e) to avoid the provisions of TLA. other than escrow charges for future payment of taxes.59 This issue will be addressed in the new law by the An exception to inclusion of these charges as points and creation of a special definition of "creditor" for high rate fees applies if the charge is reasonable, the creditor re- loans. Any person who makes two or more mortgages that ceives no direct or indirect compensation as a result of the qualify for coverage under the triggers or who makes one charge, and the charge is paid to a third party unaffiliated or more such mortgages through a mortgage broker is 67 with the creditor. deemed a creditor. All three elements of this last test must be met for the exception to apply. For a charge to be reasonable, it Disclosure Requirements must be actually charged and must be comparable with the standard, legitimate charge for that service in the applicable community. The term "reasonable" is to be inter- 1. Required Disclosures preted consistently with the judicial interpretations of the New disclosure requirements applicable to covered "bona fide and reasonable" standard necessary to exclude loans may be found in 15 U.S.C. § 1639. The new disclo- such items from the TILA finance charge under Regula- sures do not replace the existing disclosure requirements tion Z, 226.4(c)(7).' under 15 U.S.C. § 1638, but rather are supplementary." Because the creditor may not receive any direct or The new disclosures must be printed in type of a indirect compensation from such charges, fees for docu- conspicuous size. Although the necessary size is not speci-

130 - Loyola Consumer Law Reporter Volume 7, number 4 I IIII

fled, to be conspicuous, they should be printed in type that Although the timing requirements appear straight- is larger than normal. Additionally, the disclosures should forward, it is a common practice for predatory lenders to be printed in type that is conspicuously larger than other rush the consumer to complete a loan transaction before type on the same page. Some guidance on this require- the consumer understands the nature of the loan or can ment may be found by reference to case law on the exist- obtain advice from a lawyer, friend, or relative. It seems ing "clear and conspicuous" requirement under TLA, 15 likely that unscrupulous lenders will seek to evade the new 69 U.S.C. § 1632(a). disclosure requirements by misdating documents and/or For all loans, the creditor must make the following by abusing the telephone provision." disclosures:7" - You are not required to complete this agreement 3. Consequences of Failure to Disclose merely because you received these disclosures or have Failure to make the necessary disclosures properly signed a loan application; and will give rise to civil liability under 15 U.S.C. § 1640(a) - If you obtain this loan, the lender will have a mort- and enhanced damages pursuant to 15 U.S.C. § gage on your home. You I 1640(a)(4).77 In addi- could lose your home and For the first tir] equity tion, failure to make the any money you have put ne, home eqnew disclosures will into it if you do not meet protections for loans constitute a failure to your obligations under the high rate make "material disclo- loan. For fixed rate loans prohibit certai riI terms for sures" under the amended Act." Thus, the creditor also must discovered loans. failure to properly make close the annual percent- the new disclosures will age rate and the amount of give rise to an extended the regular monthly payment." For adjustable rate loans, right (on behalf of the consumer) to rescind the transac- additional disclosures include the annual percentage rate, tion for up to three years from the date of the consumma- the amount of the regular monthly payment, a statement tion.79 This should apply equally to creditors who fail en- that the interest rate and the monthly payment may in- tirely to make the necessary disclosures, as well as to those crease and the amount of the highest potential monthly who fail to make accurate disclosures or who fail to fol- payment based on the maximum allowable interest rate.72 low the proper disclosure procedures required under section 1639(a). This will be a powerful new weapon for 2. Timing of Disclosures consumers who wish to challenge high rate loans because The disclosures required for covered loans must be rescission requires, at a minimum, that the creditor or an given not less than three business days prior to consum- assignee cancel the mortgage plus any finance charges or mation of the transaction. 3 If the disclosures made are other loan costs.8 0 inaccurate, the terms of the loan may not be changed, unless the creditor makes new disclosures.74 When new dis- Limitations on Terms closures are required, they may, in some circumstances, be made by telephone at least three days before consum- For the first time, home equity protections for high mation. For the telephone provision to apply, three condi- rate loans prohibit certain terms for covered loans. In ad- tions must be met:75 dition to triggering civil liability and special damage rem- - The change must be initiated by the consumer; edies,"1 inclusion of a prohibited term constitutes a failure - The creditor must provide the new disclosures in writ- to deliver required disclosures for the purposes of rescis- ing at the time of consummation; and sion under TILA. 2 - The creditor and consumer must certify in writing, at Most of the prohibitions are not absolute. Care the time of consummation, that the creditor provided the should be taken to ensure that when an exception is in- new disclosures by telephone no later than 3 days prior to voked, the creditor meets the preconditions to the excep- the date of consummation of the transaction. tion.

Summer, 1995 Lead Articles 9 131 included should be the portion of the total balance owed 1. Limitations on Prepayment Penalties at the time of consummation which is required to amor- All prepayment penalties are prohibited for covered tize the bill over a reasonable period of time. Similarly, a loans with a five part exception.13 Prepayment penalties consumer's obligation to pay a joint debt may be called are defined to include any method of calculating a rebate into question. Because the relevant issue is whether the less favorable than the actuarial method.' This will elimi- consumer is "liable," it should not matter whether it is ac- nate use of the "Rule of 78s" in covered loans unless an tually the consumer who is paying the debt. exception applies. The "Rule of 78s" is a shorthand for- The second prerequisite to the exception provides mula for approximating the rebate of unearned charges that the income and expenses of the consumer be verified upon the early termination of credit. Creditors have used by a financial statement signed by the consumer, as well this rule widely because it has an inherent bias in the credi- as by a credit report. In the case of employment, income tors' favor. The rebate to the consumer will always be verification must include payment records or an employer smaller under the "Rule verification. 9 A pay stub of 78s" than under the or other payment record technically precise actu- To invoke the the supplied by the consumer arial method.85 The dis- ×ception, will suffice. The verifi- tortion is so great in long- creditor must rC( all five cation requirement will term loans (a disparity teet not be met if the lender's that can exceed thousands preconditions ontained in the verification procedures of dollars) that Congress are inadequate. For ex- previously prohibited its statute. ample, if the lender uses use in all consumer credit a financial statement that transactions with terms does not inquire about all longer than 61 months.8 6 With these new amendments, the consumer's potential "debt service," the lender will high cost mortgages, those with terms of 5 years or less, not meet the verification requirement. When the debtor now will be spared the "78 penalty" unless the loans fall has multiple sources of employment income, the verifica- within the exception. tion requirement applies separately to each source. To invoke the exception, the creditor must meet all The third condition to the exception requires that five preconditions contained in the statute. First, the loan the penalty not apply to repayments by refinancing with must not require the consumer to pay more than 50% of the creditor who made the initial mortgage or with an af- his or her monthly gross income toward "monthly indebt- filiate of the same creditor.' This will prevent creditors edness payments."87 This is measured as of the consum- from invoking the exception when they are refinancing mation date of the loan. The term "monthly indebtedness loans themselves or through a related company. Addition- payments" is not defined, except that it clearly includes, ally, the language of the statute prohibits a prepayment at a minimum, the debtor's obligation on the amount of penalty when the initial creditor refinances the loan, even credit extended in the transaction. The legislative history after assignment. provides that the "consumer's total monthly debt service The fourth prerequisite requires that the penalty not under all obligations" must be considered.88 This should apply after a five year period, beginning on the date the include not only payments on all mortgages, but also credit mortgage is consummated. 9' Because this limitation is card payments, rent-to-own charges, installment payments measured from the date of consummation, if there is an on other loans, current utility bills, agreements to pay back irregular first period that exceeds 30 days, a penalty is not charges on utility bills, current tax payments, payments available even before the 60th payment comes due. Thus, on back taxes, student loans, medical bills, agreements to a five year loan with an irregular first period, which con- pay tort judgments, and insurance bills. One question tains an unlimited prepayment penalty provision, will vio- which may arise is whether monthly credit card payments late the limits in the exception. should be treated as if the consumer will pay the mini- The final prerequisite requires that the penalty must mum allowed. The better position is that the amount to be be legal under other applicable law.' This preserves state

132 e Loyola Consumer Law Reporter Volume 7, number 4 law limits on prepayment penalties. without incurring a penalty. This will bring an end to one Since inclusion of a prohibited term is grounds for of the most flagrant abuses in high rate loans. rescission based on 15 U.S.C. § 1635(j), rescission is available even if a prohibited penalty is never invoked. This 4. Prohibitionof Negative Amortization means that if the penalty provision, as drafted, does not Negative amortization is a loan term under which strictly and accurately incorporate the limits on the ex- the payments due each period are insufficient to cover the ception contained in the statute, the consumer may rescind interest on the loan as it becomes due. Therefore, the bal- the entire loan. ance due increases as the additional interest is added to the principal. Because such interest can compound, the 2. Prohibitionof InterestRate Increases on ultimate balance can quickly and easily exceed the Default consumer's ability to repay. A covered loan may not include a term that in- Negative amortization is entirely prohibited in cov- creases the interest rate in the event of a default.93 In addi- ered loans.97 Because the law prohibits negative amorti- tion, if the loan is accelerated due to default, and the con- zation at any time during the course of the loan, even a sumer is entitled to a rebate of interest, that rebate must be loan that has a limited period of negative amortization is calculated by a method at least as favorable to the con- prohibited. Presumably, this will catch some covered loans sumer as the actuarial method.94 with large irregular first periods so that they give rise to This will prevent creditors in covered loans from remedies under the act. Similarly, covered loans that re- including provisions in loans that make it impossible, or quire incremental or variable payments will be prohibited nearly impossible, for a homeowner to cure a default. Simi- if any of the payments do not cover at least the amount of larly, creditors will not be permitted to artificially inflate periodic interest. the amount due after default to obtain excessive repayment through the foreclosure process. 5. Limitation on PrepaidPayments Prepaid payments are amounts that are withheld from 3. Limitation on Balloon Payments the proceeds of the loan to cover one or more payments Balloon payments are large monthly payments that that would otherwise be paid over the course of the loan. become due during a loan term, usually at the end of the They have been used by some unscrupulous creditors to loan. They pose a problem for consumers who do not disguise the true amount of credit granted and to increase have the means to make such payments from their income the consumer's obligation to pay interest. In addition, or assets. When coupled with a prepayment penalty term, because the lender retains use of this money, the lender even if the consumer is able to refinance, there may be a frequently earns interest on the prepayments without cred- significant financial disadvantage. Balloon loans have iting the interest to the borrower's account. caused special hardship for many consumers because they The amendments preclude taking more than two are often coupled with a fraudulent oral promise to refi- prepayments in covered loans.98 This provision, as drafted, nance. These refinancing promises are seldom met and should apply equally to lenders who place more than two foreclosure is a frequent consequence. payments in escrow at the consummation of the loan, and Balloon payments are prohibited in covered loans to those who disburse such payments to the consumer only that have a term of less than five years.95 Thus, for loans to immediately recollect them as a prepayment. of less than five years, the payments must fully amortize the outstanding principal balance. Because negative am- 6. Extending Credit Without Regard to ortization is completely prohibited,' even in loans of more Ability to Pay than five years, the largest potential balloon will be the Another problem that has plagued the home equity initial principal balance. lending industry involves lenders who make loans which Additionally, since prepayment penalties are gener- they know or should know the consumer is not able to ally prohibited after the first five-year period of the loan, a repay. As discussed above, lenders make these loans based consumer will be able to refinance a balloon payment loan on the value of the property involved and the advantages they expect to reap upon foreclosure.

Summer, 1995 Lead Articles 9 133 The amendments contain a compromise provision 7. Special Requirements for Payments to on this issue that prohibits a lender from engaging in "a Home Improvement Contractors pattern or practice of extending credit to consumers in When a lender finances a home improvement con- covered loans based on the consumers' collateral without tract, disbursements for a covered loan may not be pay- regard to the consumers' repayment ability, including the able directly to the contractor alone. 0° Disbursements must consumers' current and expected income, current obliga- be payable to either the consumer or jointly to the con- tions, and employment." 99 sumer and the contractor. At the election of the consumer, This is a curious provision because it requires an the lender may disburse the funds through a third party individual consumer to establish a "pattern or practice." escrow agent provided the consumer, lender, and contrac- Presumably, such cases will be difficult and expensive tor sign an agreement to do so prior to the disbursement because the lender's entire date. '1 This provision U3 loan portfolio may need to will end a common prac- be examined. [A111 violation whether tice of collaboration be- There are a number t, tween lenders and con- of factors that might con- material or noi will give rise tractors who arrange for tribute to establishing funds to be disbursed such a case, including a to claims for a tual damages, directly to contractors pattern of making loans in a without the knowledge low-income neighbor- statutory dam ges, attorney's of consumers. Often, hoods with relatively high lenders have disbursed property values. A signifi- fees and costs. funds to contractors cant portion of a lender's even though the contrac- portfolio may be examined to review loan-to-value ratios. tors have not completed the work the contracts require. A lender may violate the provision if it has a pattern of Unfortunately, the protections can do little to stop con- making small loans to consumers with substantial home tractors from pressuring vulnerable consumers to endorse equity. checks prematurely. Similarly, the lender's practice in evaluating a consumer's income and ability to pay should be exam- 8. Remedies for Including a ProhibitedTerm ined. Through discovery efforts, litigants suing in differ- Inclusion of a prohibited term will give rise to civil ent areas of the country have established that certain lend- liability under 15 U.S.C. § 1640(a) and enhanced dam- ers do not evaluate or verify consumer incomes, expenses ages pursuant to 15 U.S.C. § 1640(a)(4). °2 In addition, or credit histories to determine if the loans can be repaid. inclusion of a prohibited term gives rise to the extended Their only concern appears to be that the consumer has right to rescind the loan under 15 U.S.C. § 1635.1°3 Be- sufficient equity in his or her property. These lenders' cause the language of the statute makes the remedy avail- underwriting procedures begin and end with an appraisal able whenever a prohibited term is "contained" in a mort- that reveals a level of sufficient equity to assure repay- gage, the rescission remedy is available even if the term is ment through the foreclosure process. never invoked. When a consumer alleges fraud under this provision When a creditor includes a term that is available in due to an abusive loan or series of loans to particular con- a covered loan only by virtue of an exception to a prohibi- sumers, discovery should be allowed to determine the tion, the term should accurately track the language of the lender's general underwriting policies and its specific port- applicable exception. Otherwise, the mortgage will con- folio of existing loans. Because many lenders are reluc- tain the prohibited term and the rescission right will ap- tant to reveal such information publicly, aggressive dis- ply. covery should create some incentive to settle.

134 - Loyola Consumer Law Reporter Volume 7, number 4 Remedies Presumably, the tolerances contained in the statute apply to disclosures of the annual percentage rate.17 The 1. Civil Liability and Enhanced Damages conference report suggests that the primary concern was The violation of any provision of the new law gives to exclude the penalty for some inadvertent violations. For rise to civil liability for actual damages, statutory dam- instance, when the lender's error is due to a simple mis- ages, attorney's fees and costs.' In addition, there are calculation or other mistake, and it maintains procedures special enhanced damages for violations of 15 U.S.C. § to catch such errors, the penalty will be unavailable. 8 1639 available under 15 U.S.C. § 1640(a)(4) unless the Certainly, the principle that a violation must be material lender demonstrates that its failure to comply is not mate- does not mean the law incorporates a reliance standard. rial. These include all finance charges and fees paid by Nothing is contained in the amendments or the legislative the consumer. By using the conjunction "and" in 1640(a), history of § 1639 that suggests these provisions provide it is clear Congress intended for the enhanced damages to any less than a strict liability standard than do the balance supplement existing civil liability provisions. of the provisions of TILA.' ° Without question, all the All violations of 1639 will give rise to civil liability. prohibited terms and the disclosures required for high rate Unlike other TILA requirements, there is no provision lim- loans would be material in making an informed decision iting civil liability under 1640 to certain types of viola- about the use of credit. If, as a prerequisite to suit, the tions for these special protections concerning high rate consumer was required to read, understand and rely on loans. 05 More specifically, all violations, whether mate- the prohibited provision or inaccurate disclosures, then the rial or not, will give rise to claims for actual damages, remedial purpose of the Act would be entirely frustrated. statutory damages, attorney's fees and costs. The "material" violation requirement is contained in 1640(a)(4) only. 3. Requirement That Finance Charges and Also, the amendments supplement existing TILA Fees Be Paid requirements. Therefore, if there is a basis for civil liabil- The enhanced damages provision requires finance ity under other provisions of TILA, liability will apply to charges and fees be paid by the consumer."0 Given the a covered loan as well. applicable one year limitation period, this may be a small amount in affirmative cases. When damages are available 2. MaterialViolation Standardfor by way of recoupment, however, as they are in many ju- Enhanced Damages risdictions,1" a much greater offset will be possible. Ad- Undoubtedly, the meaning of the term "material," ditionally, it is possible to argue that prepaid finance as used in § 1640(a)(4), will be a substantial issue when a charges are paid by the consumer at the time of consum- consumer seeks the enhanced damages available under the mation so that they can be recovered as damages."2 new law. Based on the statutory language, the creditor One additional question is whether the enhanced has the burden of establishing that the violation is not ma- damages, in the form of finance charges and fees paid, terial. will be available in conjunction with rescission remedies According to the conference report: and/or an award of actual damages. In either case, it appears the legislature contemplated the use of compound The conferees employ the word "material" to damages for the same financial harm. This is true for re- reference prior judicial interpretation of ma- scission, because rescission cancels the finance charges teriality, not to reference "material disclosures" and fees. It appears Congress intended to allow multiple under TILA. Case law under 130(c) may be damages when it made multiple remedies available under used to evaluate materiality and the reason- the same statute. ableness of the prevention procedures for errors under this section. Miscalculations, com- 4. Rescission puter malfunctions and printing mistakes shall As discussed above, a covered loan that includes pro- not be deemed material if the creditor main- hibited terms will be subject to the extended right to re- tained reasonable procedures to prevent such scind under 15 U.S.C. § 1635." 3 Also, it is important to mistakes."" note that the amendments supplement, rather than replace,

Summer, 1995 Lead Articles 9 135 existing TILA requirements. If there are grounds for re- not a holder in due course." 7 Also, assignees have some scission of a covered loan under other provisions of TILA, potential liability for TILA violations under existing law, the right to rescind will continue to apply. Thus, failure of including liability for rescission when such a remedy is a lender to make material disclosures at consummation, or available." 8 All of these remedies will continue to be avail- to provide a proper notice of right to rescind, will provide able for assignees of loans covered by the new home eq- grounds for a consumer to rescind a covered loan at any uity protections. In addition, there is a special provision time during the lending process. creating extended liability for assignees of covered loans.'9 This new provision is likely to cause investors in Attorney General Enforcement the secondary market for home equity loans to be more careful about where they buy loans. They no longer will In addition to the existing administrative provision,' 14 be able to purchase mortgages from companies commit- states' attorneys general may bring actions to enforce the ting fraud, or other consumer credit violations against new amendments." 5 There is a limitations period of three homeowners, without any risk of liability for the years for such actions, and action may be brought in fed- originator's fraudulent actions. eral or state court. The state attorney general is required to provide prior written notice and a copy of the complaint 2. Availability of Extended Liability to the federal agency responsible for administrative en- The protections for high rate loans provide that as- forcement unless prior notice is not feasible. That federal signees of covered mortgages are liable for all claims and agency may then intervene if it so chooses. defenses with respect to the assigned mortgage that the consumer could assert against the originator, except to the Extension of Assignee Liability extent of certain limitations on damages discussed below.2 ° However, an assignee will 1. Overview still be entitled to protec- As discussed This new prov U3ion is likely to tion from liability if it le- above, one of the con- gitimately could not have tributing causes to abu- cause investor, in the known the assigned mort- sive loan schemes is gage was a covered loan. transfer of fraudulently secondary mar cet for home Protection from as- obtained mortgages to signee liability arises assignees who assert the equity loans to be more when the assignee demon- protections of a holder in strates, by a preponder-. due course. The assign- careful about vVhere they buy ance of the evidence, that ees claim this defense to a reasonable person exer- defeat claims which loans. cising ordinary due dili- would be available gence could not have de- against the originator of termined the loan was the loan. The homeowner is left to pay the mortgage with- covered. 2' "Due diligence" requires that the assignee ex- out a defensive strategy against the assignee. Particular amine all documentation required by TLA, the itemiza- problems arise because many of the most unscrupulous, tion of the amount financed and other disclosures of dis- "fly-by-night" mortgage originators are insolvent or they bursements. 22 In addition, the assignee is responsible for disappear at the first hint of litigation. any other information it has knowledge of at the time of 23 In the case of some home improvement loans, this assignment. problem is addressed by the Federal Trade Commission's In most cases, whether the loan is covered or not Holder Rule that abrogates the traditional protections of a will be apparent on the face of the documents. In fact, the holder in due course for certain loans." 6 In other instances, maker of a covered transaction is required to place notice it may be possible for a consumer to avoid application of of the fact that assignees are potentially liable in the loan assignee protections by establishing that the assignee is documents.'24 This notice must be prominent. Alterna-

136 * Loyola Consumer Law Reporter Volume 7, number 4 tively, review of the APR and the points and fees charged credit abuses, RICO violations and any other claims within should reveal whether or not the loan is covered. the imagination of litigators and the limits of Rule 11. Problems will arise when a loan does not contain However, there are two substantive limits on dam- the notice of assignee liability or when coverage is based ages against assignees.' 6 For actions brought under TILA, on misdisclosure, misallocation of points and fees or other liability is available to the extent of the "amount specified error. In such instances, an assignee may assert freedom in 1640." 271 The use of the term "amount" in the legisla- from liability based on its inability to discover that the tive history suggests that Congress intended to reference loan was covered. The assignee will have the burden of the entire relief available under § 1640, including actual, establishing that it met the statutory standard. statutory, and enhanced damages for covered loans as well Under the statute, due diligence extends to the TILA as attorney's fees and costs. 2 This limitation will rarely documentation, the itemization of amount financed and come into play because most TLA cases brought against other disclosure of disbursements.'25 This means that if assignees will continue to be brought under § 1631(a) or upon a careful reading these documents establish that the (c). loan was covered, then the assignee is liable. For example, For actions based on any other claim, damages are the assignee must review the APR disclosures and the dis- limited to the amount of all remaining indebtedness and closed points and fees. If the assignee made errors in cal- the total amount already paid by the consumer.2 9 When culation, and the errors were discoverable based on due damages are awarded based on TILA and on other claims, diligence, the assignee should be liable. The due diligence the TILA damages must be offset against the damages standard also requires that an assignee reconcile documents awarded on the other claims. 30 By using the term "amount that are internally inconsistent to determine if the loan is of any damages" in the provision governing this offset, covered. A reasonable person would not ignore errors on Congress suggested that attorney's fees and costs should the face of the documents. Similarly, obvious not be offset. misdisclosures should be discovered upon exercise of due Read together, it is clear that the maximum dam- diligence. ages available against an assignee under § 1631(d) is the amount of the loan due at the time of suit, plus the amount 3. Damages Available Against Assignees already paid on the loan. Under the statute, it does not When assignees are liable, they will be subject to matter whether the payments were made to the original the full range of claims that could have been asserted creditor or to the assignee. In many instances, especially against the maker of the loan. This includes liability for when the loan can be rescinded, a substantial damage award the originator's unfair trade practices, fraud, consumer will result.

E N D N O T E S

'Home Ownership and Equity Protection 4 See generally Forrester, Mortgaging the 17, 1993) (statement of Terry Drent, Act of 1994, Subtitle B of Title I of the American Dream: A Critical Evalua- Ann Arbor Community Development Riegle Community Development and tion of the Federal Government'sPro- Dept., Ann Arbor, MI); Hearing on Regulatory Improvement Act, Pub. L. motion of Home Equity Financing, 69 S.924 Home Ownership and Equity No. 103-325 (Sept. 23, 1994) herein- TutLANE L. REv. 373, 379-381 (1994). Protection Act, Before the Senate after "HOEP." Final regulations imple- Banking Committee, 103d Cong., 1st menting the new law are at 60 Fed. 5 Dozens of examples were raised in the Sess. (May 19, 1993); The Home Eq- Reg. 15,463 (March 24, 1995). variety of Congressional hearing held uity Protection Act of 1993, Hearings on these issues. Problems in Commu- 2 on H.R. 3153 Before the Subcommit- HOEP, 156 (1994); 60 Fed. Reg. 15,463 nity Development Banking, Mortgage tee on Consumer Credit and Insurance (March 24, 1995). See 15 U.S.C. § Lending Discrimination, Reverse of the House Committee on Banking, 1604(d). Redlining, and Home Equity Lending: Finance and Urban Affairs, 103d Hearings Before the Senate Comm. on 15 U.S.C. § 1601 et seq. Much of the Cong., 2d Sess. (March 22, 1994); new law has been codified in 15 U.S.C. Banking, Housing, and UrbanAffairs, Hearing on Community Development 103d Cong., 1st Sess. 258, 260 (Feb. § 1639. Institutions, 103-2, Before the House

Summer, 1995 Lead Articles 9 137 Subcommittee on FinancialInstitutions 20 See NATIONAL CONSUMER LAW CENTER, units, condominiums, cooperatives and Supervision, Regulation and Deposit UNFAIR AND DECEPTIVE ACTS AND PRAC- mobile homes. Insurance, 103d Cong., 1 st Sess. (Feb. TICES (3d ed. 1991 & Supp.). 35 15 U.S.C. 2-4, 1993) [hereinafter § 1635 (1994). collectively 2! NATIONAL CONSUMER LAW CENTER, SALES "Senate Hearings."] 36 15 U.S.C. § 1602(w) (1994). OF GOODS AND SERVICES (2d ed. 1989 61d. and Supp.). 37For a further discussion explaining the 7The Tax Reform Act of 1986, Pub. L. No. 22 NATIONAL CONSUMER LAW CENTER, THE meaning of the term "residential mort- transactions," see NATIONAL 99-524, 100 Stat Ann. 2085 511(b) COST OF CREDIT: REGULATION AND LE- gage CON- (codified at 26 U.S.C. § § 163(h)(3)). GAL CHALLENGES (1994). SUMER LAW CENTER, TRUTH INLENDING 6.2.1 and 6.2.2 (2d ed. 1989 & Supp.). 'See 9 NCLC REPORTS, CONSUMER CREDIT 23 See Carboni v. Arrospide, 2 Cal. Rptr. Case law on the coverage of this term AND USURY ED. 21, Nature Abhors a 2d 845, 2 Cal. App. 4th 76 (1991). See for the purposes of rescission should Vacuum: High-rate Lending in also 10 NCLC Reports, Consumer be equally applicable to coverage for Redlined, Minority Neighborhoods in Credit and Usury Ed. 39 (Jan/Feb home equity loan protections. Boston (May/June 1991). 1992) ("200% Loan Found Unconscio- 3' HOEP § 154(a). Though reverse mort- nable"). 9 See Forrester, supra, note 5, at 382. gages are excluded from the special 24 See NATIONAL CONSUMER LAW CENTER, 0 See Wechsler, Through the Looking consumer protections for high cost Glass: Foreclosure By Sale as De THE COST OF CREDIT: REGULATION AND mortgages, the bill did amend TIL, add- LEGAL Facto Strict Foreclosure - An Empiri- CHALLENGES 11.9 (1995). ing 138 15 U.S.C. § 1648, to provide cal Study of MortgageForeclosure and 23For a general discussion of potential le- more meaningful disclosures for this type of credit. HOEP § 154(b). These SubsequentResale, 70 CORNELL L. REV. gal challenges of overreaching credit 850 (1985). disclosure requirements are not dis- see NATIONAL CONSUMER LAW CENTER, cussed in this article. THE COST OF CREDIT: REGULATION AND "See Senate Hearings, supra, note 6. 39 LEGAL CHALLENGES, ch. 11 (1995). The definition of open end credit is con- 12U.C.C. § 3-302. 2611 U.S.C. § § 362. tained in 15 U.S.C. § 1602(i) and is am- See NATIONAL CONSUMER LAW CENTER, plified by Regulation Z, 12 C.F.R. 27 NATIONAL CONSUMER LAW CENTER, CON- 226.2(a)(20). COST OF CREDIT: REGULATION AND LE- SUMER BANKRUPTCY LAW AND PRACTICE, 40 See NATIONAL CONSUMER GAL CHALLENGES, ch.3 (1994). ch. 13, (4th ed. 1992). LAW CENTER, TRUTH IN LENDING, ch. 5 (2d ed. 1989 '4 In one notable 2 incident, the reporter Sam 1 See, e.g., In re Celona, 98 B.R. 705 (E.D. & Supp.). Donaldson caught a purported home Pa. 1989). See also In re Porter, 961 improvement contractor on 41 15 U.S.C. § 1639(1)(1) (1994). camera F.2d 1066 (3rd Cir. 1992). To date, telling an 80 year old homeowner: the FRB has used its authority to cre- "20% APR, that's about 10% interest." 29 For a further discussion of reverse ate only one very limited exception and Prime Time (Sept. 10, 1992). The prac- redlining see NATIONAL CONSUMER LAW that only to the prohibition on balloon tice of "unbundling" and padding over- CENTER, CREDIT DISCRIMINATION 4.2. 10 payments for loans with a term of less head and expenses led to a number of (1993 & Supp.). than five years. The FRB has ex- media articles on "garbage fees" or 31 See NATIONAL CONSUMER LAW CENTER, empted only some "bridge" loans con- "junk charges." See, e.g., THE SAN nected with the construction or acqui- CREDIT DISCRIMINATION 4.2.10.3 (1993 FRAN. CHRON., July 5, 1994 at D1; THE sition of a dwelling from the prohibi- WASH. POST, April 9, 1994, at F8; CHI. and Supp.). tion on balloon payment terms. 12 TRIB., August 22, 1992, HOME GUIDE, 3" See 10 NCLC REPORTS, CONSUMER C.F.R. 226.32(d)(1)(ii). Since most at 12. of those loans would be CREDIT AND USURY ED. 25 (July/Aug. "residential subject to the 1991) ("$45 Million Jury Award in mortgage transaction" ex- See Senate Hearings supra. note 6. Second Mortgage Fraud Case"). ception, the FRB's additional protec- 16 See Senate Hearings at supra. note 6. tion for these loans would seem to have 32 Truth in Lending, See also H.R. No. 652, 103d Cong. 2d U.S.C. § § 1602(aa). little impact. Sess. 147, 165 (1994) (accompanying 3' Section 103(aa) of the bill is codified at 42 See infra, pp. 131-34 "Limitations on H.R. 3474) [hereinafter Conference 15 U.S.C. § § 1602(aa). Terms." Report]. 3 By defining covered loans to include 1 1 See Conference Report, supra note 17, "consumer credit," 43 See infra, pp. 30-31 "Disclosure Re- Congress presum- quirements." at 162. ably intended to reference the Federal Reserve Board's definition of that term ' 15 U.S.C. § 1602(aa)(l)(A). 's Conference Report, supra note 17, at 159. in Regulation Z, 12 C.F.R. 45 15 U.S.C. § 1602(aa)(l)(A). 226.2(a)(12). The term "dwelling" is 9 ' See generally NATIONAL CONSUMER LAW defined in 15 U.S.C. § § 1602(v) and 46 60 Fed. Reg. 15465 (March 24, 1995) CENTER, TRUTH IN LENDING, ch. 6, (2d Regulation Z, 12 C.ER. 226.2(a)(19). (explanation of 226.32(a)). ed. 1989 & Supp.) It includes one to four family housing 47 Id.

138 e Loyola Consumer Law Reporter Volume 7, number 4 In explanatory material accompanying sure requirements, see NATIONAL CON- 87 15 U.S.C. § 1639(c)(2)(A)(i). amendments to Regulation Z, the SUMER LAW CENTER, TRUTH IN LENDING, 80Conference Report, supra, note 17, at Board expressed the view that an ap- ch. 4, (2d ed. 1989 & Supp. 1989). 161. plication is received when it reaches 69 See NATIONAL CONSUMER LAW CENTER, the creditor in any one of the ways ap- 09 15 U.S.C. § 1639(c)(2)(A)(ii). plications are normally transmitted, TRUTH IN LENDING 4.2.1.4 (2d ed. 1989 even & Supp. 1989). 9 15 U.S.C. § 1639(c)(2)(B). The term if the application is incomplete. "affiliate" is defined 60 Fed. Reg. 15465 (March 24, 1995) 70 15 U.S.C. § 1639(a)(1). for these purposes 2 2 as it is in section 2(k) of the Bank Hold- (explanation of 26.3 (a)). The appli- 7115 U.S.C. § 1639(a)(2)(A). cation date will then be determinative ing Company Act of 1956, 12 U.S.C. of which treasury rates to evaluate for 72 15 U.S.C. § 1639(a)(2)(B). All adjust- § 1841(k). 15 U.S.C. § 1639(k). The definition is "any company that con- determining coverage. In some situa- able-rate mortgage loans made since tions involving rapidly rising or fall- trols, is controlled by, or is under com- Dec. 9, 1987 must specify a maximum mon control with another company. ing rates, or where there are small interest rate. Absent any applicable changes which affect coverage, some usury ceiling, the rate can be as high 9115 U.S.C. § 1639(c)(2)(C). creditors may seek to manipulate the as the creditor wishes, but a cap must 2 15 U.S.C. § 1639(c)(2)(D). application date. Factual disputes may be included in the contract. 12 U.S.C. arise and discovery may be necessary § 3806(a); Reg. Z 226.30. 9315 U.S.C. § 1639(d). on this issue. 73 15 U.S.C. § 1639(b)(1). 9415 U.S.C. § 1639(d). 49See infra, at pp. 134-35 "Civil Liability and Enhanced Damages." 74 15 U.S.C. § 1639(b)(2)(A). 9515 U.S.C. § 1639(e). 50 15 U.S.C. § 1602(aa)(2)(A). 7515 U.S.C. § 1639(b)(2)(B). 96 See infra, p. 133 "Prohibition of Nega- 76 51 15 U.S.C. § 1602(aa)(2)(A). See generally Rodash v. AIB Mortgage tive Amortization." 52 15 U.S.C. § 1602(aa)(2)(A). Co., 16 F.3rd 1142 (11th Cir. 1994) 9715 U.S.C. § 1639(f). (scheme to predate notice that loan is 9015 U.S.C. § 1639(g). 5315 U.S.C. § 1602(aa)(1)(B). not rescinded violates the rescission requirements of TILA). 9 15 U.S.C. § 1639(h). 54 15 U.S.C. § 1602(aa)(1)(B). 7 15 U.S.C. § 1640(a) (as amended). 'o 15 U.S.C. § 1639(i). 55 15 U.S.C. § 1602(aa)(3). 7815 U.S.C. § 1602(u) (as amended). 101 15 U.S.C. § 1639(i). 56 15 U.S.C. § 1602(aa)(4). 57 15 U.S.C. § 1602(aa)(4)(A). See Regu- 79 15 U.S.C. § 1635; Regulation Z, 12 102 See infra, pp. 134-35 "Civil Liability C.F.R. 226.23(a)(3). See NATIONAL and Enhanced Damages." lation Z, 226.4(a). CONSUMER LAW CENTER, TRUTH IN LEND- 103 15 U.S.C. § 16390). 5815 U.S.C. § 1602(aa)(4)(B). ING, ch. 6 (2d ed. 1989 & Supp. 1989). 80 15 U.S.C. § 1635, Regulation Z, 12 10415 U.S.C. § 1640(a). 5915 U.S.C. § 1602(aa)(4)(C). C.F.R. 226.23 (d). For a broader dis- 105Compare 15 U.S.C. § 1640(a)(3) (lim- 60 Conference Report, supra, note 17, at cussion of rescission remedies under iting damage remedies to certain dis- 159. the Truth in Lending Act, readers are closure requirements that Congress 61 15 U.S.C. § 1602(aa)(4)(C)(ii). encouraged to see NATIONAL CONSUMER considered especially crucial at the LAW CENTER, TRUTH IN LENDING, ch. 6 time of TILA simplification). 6215 U.S.C. § 1602(aa)(4)(C)(iii). (2d ed. 1989 and Supp.). 106Conference Report, 63Official Staff Commentary 226.4(c)(7). 81 15 U.S.C. § 1640(a)(4). supra, note 17, at 162. 64 8215 U.S.C. § 16390)(1994). The FRB has chosen not to do so at this 107See NATIONAL CONSUMER LAW CENTER, time but rather has expressly stated that 8315 U.S.C. § 1639(c)(1994). TRUTH IN LENDING 4.3.6.4 (2d ed. 1989 it will hold hearings on this issue & Supp. 1989) among others. 60 Fed. Reg. 15466 84 See NATIONAL CONSUMER LAW CENTER, 01 For case law on the bona fide error de- (March 24, 1995) (explanation of THE COST OF CREDIT: REGULATION AND 226.32(b)(1)). LEGAL CHALLENGES ch. 5 (1994) for an fense, see NATIONAL CONSUMER LAW 65Conference Report, supra, note 17, at explanation of the actuarial rebate CENTER, TRUTH IN LENDING 7.1.2 (2d ed. method. 1989 & Supp. 1989). 159. 85Id. 'o See NATIONAL CONSUMER LAW CENTER, 6 See NATIONAL CONSUMER LAW CENTER, TRUTH IN LENDING 1.4.1.1 (2d ed. 1989 TRUTH IN LENDING, 2.3 (2d ed. 1989 & - 15 U.S.C. § 1615(b), applicable to loans & Supp. 1989) Supp. 1989). consummated after September 30, 11o15 U.S.C. § 1640(a)(4). 6715 U.S.C. § 1602(0. 1993. For further discussion see NA- TIONAL CONSUMER LAW CENTER, THE 6815 U.S.C. § 1639(a)(1). For a discus- See NATIONAL CONSUMER LAW CENTER, COST OF CREDIT: REGULATION AND LE- TRUTH IN LENDING 7.1.5.4 (2d ed. 1989 sion of the general closed end disclo- GAL CHALLENGES, ch. 5 (1994). & Supp. 1989).

Summer, 1995 Lead Articles * 139 12 See NATIONAL CONSUMER LAW CENTER, 11915 U.S.C. § 1641(d)(1). See also Con- '26 Note that these limitations apply only THE COST OF CREDIT: REGULATION AND ference Report, supra, note 17, at 163. to the extent that the action is made LEGAL CHALLENGES 4.7, 5.5.2.2 (1994). (assignee liability provisions for cov- permissible by 15 U.S.C. § 1641(d)(1). ered loans are "not intended to limit They are inapplicable if the action 11See infra, p. 134 "Remedies for Includ- assignee liability under other portions against an assignee is made available ing a Prohibited Term." of the Truth in Lending Act ...or other under another provision of 1641 or by 14 15 U.S.C. § 1607 (1994). causes of action.) any other means of establishing assignee liability. 15 15 U.S.C. § 1640(e) (1994). 120 15 U.S.C. § 1641(d)(1). 127 15 U.S.C. § 1641(d)(2)(A). 11616 C.FR. § 433. See NATIONAL CON- 121 15 U.S.C. § 1641(d)(1). 22 121 Conference Report, supra, note 17, at SUMER LAW CENTER, UNFAIR AND DECEP- 1 Id. TIVE ACTS AND PRACnCES 6.6 (3d ed. 163. ("Truth in Lending violations, 1991 & Supp. 1991). 123Conference Report, supra, note 17, at damages are limited to relief available 163. under Section 130"). "1 See NATIONAL CONSUMER LAW CENTER, 124 15 U.S.C. § 1641(d)(4). 129 15 U.S.C. § 1641(d)(2)(B). UNFAIR AND DECEPTIVE ACTS AND PRAC- TICES 6.6.5 (3d ed. 1991 & Supp. 1991). 125 11 U.S.C. § 1641(d)(1). 130 15 U.S.C. § 1641(d)(3). ]8 15 U.S.C. § 1641(a),(c).

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