Law Review: Shepard- It’s All about the Principal: Preserving Consumers’ Right of Rescission under the Truth in Lending Act

Abstract: This Article explores a significant market-based threat to the Truth in Lending Act’s (“TILA”) right of rescission, a remedy that attempts to deter lender overreaching and fraud during one of the most complex financial transactions of a consumer’s lifetime. The depressed housing market has substantially impaired many borrowers’ ability to fulfill their responsibilities in rescission’s unwinding process: restoring the lender to the status quo ante by repaying the net loan proceeds of the mortgage transaction. When a consumer is unable to finance her tender obligation, nonbankruptcy judges’ overwhelming response has been to protect the lender and deny rescission to the borrower. This Article argues that these courts, to fulfill TILA’s consumer-protective function, must take a different approach. Courts should use their equitable authority under TILA to modify borrowers’ repayment obligations by allowing borrowers to tender in installments, over a period of years, and at reasonable interest rates. This approach both averts foreclosures that harm borrowers, lenders, and neighborhoods and ensures that TILA’s consumer-protective mandate will remain viable even in a depressed housing market. This Article also considers an important aspect of TILA’s rescission remedy that, while tacitly acknowledged by courts and commentators, has been insufficiently explored in the academic literature. There exists an uneasy tension between the goal of TILA—informing consumers of the financial consequences of their mortgage loan transactions—and borrowers’ frequent use of TILA rescission: defending their homes from foreclosure actions that the lender’s disclosure violation may or may not have precipitated. The Article concludes that TILA’s rescission provisions, albeit a blunt instrument in the consumer protection setting, must be vigorously enforced, particularly during periods of economic calamity, since the statute remains a singular source of borrower leverage in a legal and economic climate that remains generally inhospitable to homeowners. Commentary: This article also contains a very good summary of how bankruptcy courts have dealt with rescission in the context of Chapter 13 cases. It does seem a bit over optimistic about the willingness of bankruptcy judges to fashion “creative” solutions to issues relating to tender by the Debtor. For a copy of the article, please see: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1626564