Nonbank Public Registry Proposal

QUESTION 

I would like to know more about the public registry that the CFPB is now trying to set up. I don't think it's fair any more than I thought it was fair years ago when the CFPB wanted to list complaints against us lenders and brokers. 

It seemed then, as it does now, as a kangaroo court where we don't get to defend ourselves! At this time, when we're already suffering from low volume, the last thing we need is the CFPB starting up another public registry. 

Here's what I want to know: What is this new public registry all about? 

ANSWER 

The Consumer Financial Protection Bureau (CFPB) has had a public-facing facility called the Consumer Complaint Database (CCD) for years. Consumers who allege financial harm contact the CFPB and lodge complaints relating to a laundry list of possible products and services. 

Here is a list of some products and services covered in the CCD:

 

·       Checking and savings accounts

·       Credit cards

·       Credit repair services

·       Credit reports and other personal consumer reports

·       Debt collection

·       Debt settlement

·       Money transfers, virtual currency, and money services

·       Mortgages

·       Payday loans

·       Personal loans (i.e., installment and title loans)

·       Prepaid cards

·       Student loans

·       Vehicle loans or leases

However, let me disabuse you of one notion: the CCD does not publish information that directly identifies your company. But, the CFPB will contact you directly about the complaint, and, if you're not responsive or can't be reached, it will send the complaint to another federal agency to contact you. That said, the Bureau will also provide the complaint information to state and federal agencies that are involved in supervision (i.e., state banking departments), enforcement (i.e., FBI), and monitoring the market for consumer financial products and services (i.e., FTC). 

The CFPB is now proposing a public registry for terms and conditions in form contracts that waive or limit consumer rights and protections.[i] The registry specifically would apply to nonbanks.[ii] A form contract is a "take-it-or-leave-it" contract between two parties where the terms and conditions of the contract are determined by one of the parties, and the other party has little or no ability to negotiate more favorable terms, thereby putting them in a "take it or leave it" position. You may have heard the term "boilerplate" contract; it's pretty much the same thing. 

There are specified exceptions;[iii] however, all nonbanks subject to CFPB supervisory jurisdiction, including those operating in payday lending, private student loan origination, and mortgage lending and servicing, would be subject to this proposed rule. Larger participants operating in student loan servicing, automobile financing, consumer reporting, consumer debt collection, and international remittances would also be subject to the rule. 

Many of these boilerplate contracts are lengthy and filled with verbose legalese. This does not mean all such contracts are inherently adverse to the consumer. Imagine how ridiculous it would be if each sale of every product or service required new drafts resulting from negotiated, long-settled standards. But imagine if a company drafts unfair terms and conditions, by which I mean, among other things, they allow the seller to avoid all liability or unilaterally modify terms or terminate the contract. 

Here's the reality: some companies stick in the fine print and even not-so-fine-print certain terms and conditions that attempt to take away consumer protections, limit how consumers exercise their rights, or silence consumer complaints or criticism; indeed, the terms and conditions potentially undermine consumer financial protection law. These boilerplate contracts often deprive consumers of choice, leaving only one choice: sign the contract. 

Here are a few examples of some "take-it-or-leave-it" terms and conditions that can be legally "controversial," to say the least: bankruptcy rights, liability amounts, or complaint rights. These boilerplate contract clauses claim to waive or limit consumer rights and protections. Have you ever been warned to "read the fine print?" The CFPB, in effect, wants to be sure the consumer is warned about the "fine print." 

It may shock you, but in some cases, the terms and conditions in boilerplate contracts mislead consumers into believing the terms or conditions are legally enforceable. In any event, the CFPB is seeking a way, through the proposed public registry, to require nonbanks to submit information on terms and conditions in boilerplate contracts, where there are provisions to waive or limit consumers' rights and other legal protections. 

And, yes, that information would be posted in a public registry available to the public and, of course, to enforcement entities involved in consumer financial protection. The CFPB’s rule would require nonbanks that are subject to CFPB supervision and that use form contracts to impose terms and conditions that limit or purport to limit consumer rights and legal protections to register with the CFPB. 

The CFPB has provided some examples of terms and conditions in boilerplate contracts that are onerous, which is the term I use when I don’t want to say litigious. Here are four types of terms and conditions that would be included in the public registry.[iv]

Waive Servicemembers’ Legal Protections

The Military Lending Act (MLA) and the Servicemembers Civil Relief Act (SCRA) set limits on the cost of loans for military families and include numerous other important consumer protections. The MLA broadly prohibits waivers of legal protections and arbitration agreements, and the SCRA limits waivers of its protections. However, some companies include banned arbitration agreements to try to avoid accountability for loans to military families. Other companies have faced regulatory action related to how they obtain waivers of SCRA protections.

 

Undermine Credit Reporting Rights

In contracts for credit monitoring products, some consumer reporting companies use terms and conditions that seek to block the ability of consumers to pursue legal action, including through class action lawsuits, to remedy alleged violations of the Fair Credit Reporting Act. For example, a term or condition may seek to limit liability to a class of consumers when a consumer reporting company fails to investigate inaccurate information on numerous consumer reports reasonably.

 

Limit Lender Liability for Bank Fees from Lender’s Repeated Debit Attempts

In contracts for short-term small-dollar loans, some companies seek to waive liability for bank fees that borrowers incur when the lender engages in repeated attempts to debit payments from an account that lacks sufficient funds to cover the debit.

 

Mislead Consumers by Using Unenforceable Waivers in Mortgage Contracts

CFPB examiners have regularly identified deceptive acts and practices committed through mortgage lenders’ use of waivers and limitations inconsistent with the Truth in Lending Act’s restrictions on the use of waivers and limitations in such transactions.

 

So, what would happen if the proposed rule becomes final? The CFPB would provide the following information to the public regarding nonbank terms and conditions, presumably giving consumers a better understanding of their consumer and legal rights.[v] 

There are two explicit goals[vi] that the CFPB wants to effectuate, as follows: 

Identify and Collect Information on Form Contract Terms and Conditions that Seek to Waive or Limit Consumer Rights and Other Legal Protections 

Under the proposal, the CFPB would seek information on contract terms and conditions seeking to waive any constitutional, statutory, or common law legal protection, right, or defense; restrict the ability of consumers to complain; limit the time or place for consumers to bring legal actions; limit liability amounts; waive class action rights; and impose arbitration provisions. Both company information and information about the use of the terms and conditions would be published. 

Increase Market Transparency and Improve Risk-based Oversight 

When standard terms and conditions limit consumers' ability to protect themselves, increased public oversight is necessary, and the registry would provide important support for the CFPB’s monitoring of supervised markets. Specifically, collecting and publishing information about the identities of nonbanks and their contract terms and conditions would allow for enhanced risk-based government oversight. The CFPB and agencies from all levels of government would be able to consider the information when prioritizing their supervision and enforcement resources.

 

A final few words about the selection criteria to be applied. The proposed rule would require covered persons to register with the CFPB if they have one or more “covered orders.” A covered order refers to public court judgments or agency orders obtained or issued by a federal, state, or local agency. The covered order must have an effective date on or later than January 1, 2017, and must resolve alleged violations of a “covered law” in connection with the offering or provision of a consumer financial product or service. A covered law, in turn, generally includes:

- a Federal consumer financial law (which is the term of art for the approximately 20 laws, such as the Truth in Lending Act and the Electronic Funds Transfer Act, that the CFPB administers);

- any other law that the CFPB may enforce (such as the Military Lending Act);

- the prohibition on unfair or deceptive acts or practices (UDAPs) under section 5 of the FTC Act; and,

- a state law prohibiting unfair, deceptive, or abusive acts or practices (viz., identified in an appendix to the proposed rule).

 

A covered order must also contain provisions requiring the company to “take certain actions or refrain from taking certain actions,” that is, containing injunctive or remedial provisions. Various authorities beyond the CFPB, such as the Federal Trade Commission, state attorneys general, and state regulatory agencies, could issue such covered orders. 

 

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

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[i] Registry of Nonbank Covered Persons Subject to Certain Agency and Court Orders, Proposed Rule with request for public comment, Bureau of Consumer Financial Protection, 12 CFR Part 1092, Docket Number CFPB-2022-0080, RIN 3170-AB13, December 12, 2022

[ii] Nonbanks that are subject to the CFPB’s supervision and examination authority are: all nonbanks in the mortgage, private student lending, and payday industries; larger participants, as defined by CFPB regulations, in the following industries: consumer reporting, consumer debt collection, student loan servicing, international money transfer, and automobile financing; and companies designated for supervision pursuant to 12 U.S.C. 5514(a)(1)(C), which authorizes the CFPB to designate particular companies for supervision based on their risks to consumers (viz., I am not aware of any such designated companies).

[iii] For instance, the proposal excludes companies that are subject to CFPB supervision only because they are service providers to supervised nonbanks.

[iv] CFPB Proposes Rule to Establish Public Registry of Terms and Conditions in Form Contracts That Claim to Waive or Limit Consumer Rights and Protections, Announcement, January 11, 2023 Consumer Financial Protection Bureau

[v] The proposal states that the registry would not be implemented until at least January 2024.

[vi] Op. cit. iv

Credit Card Relief Scams

QUESTION 

We allow our loan applicants to pay for certain services by credit card. One service that we do not offer is credit relief. But our loan officers send applicants with poor credit to a credit relief company. The credit relief company repairs their credit, which makes it possible for us to get them a mortgage on improved terms. Most of the time, their credit problems involve credit card debt. 

Recently, an attorney for one of our loan applicants contacted us about the applicant being scammed by the credit relief company. He's threatening to contact law enforcement, the state banking department, the FTC, and the CFPB. For what it's worth, I had told the CEO not to use credit relief companies, but he ignored me. 

I know you have written about all kinds of scams over the years. I want to show the CEO your feedback. Maybe he will change his mind about using a credit relief company. 

What are some dangers of using a credit relief company? 

ANSWER 

Yes, indeed, I have written extensively about credit relief companies. They pose a threat to the banks and nonbanks in many ways. Your scenario, unfortunately, happens all the time. The Federal Trade Commission (FTC) is very aggressive in going after these companies. 

If your CEO calls me, I will tell him to knock it off! He's playing with fire. Whatever his reasons (which I assume are based on profit incentives), the risk is much too high to justify such a tactic to originate mortgage loans. 

There is a constant stream of administrative and litigious actions against credit card relief scams. I'll pick just one bad actor out of the barrel of thousands of bad actors that have been caught in the FTC's net. But other federal and state agencies are continually monitoring and prosecuting these scammers. If your company is referring clients to them, you could come in for rather unpleasant special treatment by these agencies. 

Let's take a brief look at the FTC's action against a credit card debt relief scheme operated by Sean Austin, John Steven Huffman, and John Preston Thompson and their affiliated companies that allegedly took millions from people by falsely promising to eliminate or substantially reduce their credit card debt. 

In the Complaint, Federal Trade Commission v Acro Services LLC, et al,[i] the FTC alleged that, since 2019, Austin, Huffman, and Thompson operated a network of companies incorporated in Tennessee, Nevada, New Mexico, and Wyoming that worked together as a common enterprise to support their deceptive credit card debt relief scheme.[ii] Their companies allegedly operated under multiple names, such as ACRO Services, American Consumer Rights Organization, Consumer Protection Resources, Reliance Solutions, Thacker & Associates, and Tri Star Consumer Group. 

The deceptive and unlawful tactics allegedly included:[iii] 

Deceptive Telemarketing

The operators violated the Telemarketing Sales Rule[iv] by using telemarketers to call consumers and pitch their deceptive scheme. The telemarketers often falsely claimed to be affiliated with a particular credit card association, bank, or credit reporting agency and promised they could greatly reduce or eliminate consumers' credit card debt in approximately 12-18 months. 

Making Phony Debt Relief Promises

In marketing their services, the scheme's operators claimed to use several bogus methods to reduce or eliminate consumers' credit card debt. For example, they falsely claimed that consumers may qualify for a federal debt relief program or that a consumer doesn't owe the debt because it hasn't been "validated." 

Charging Deceptive Upfront Fees

Consumers who agreed to sign up for the debt relief program were charged an upfront enrollment fee of thousands of dollars depending on a consumer's available credit. They were falsely told it is part of the debt that will be eliminated as part of the program. Consumers were also charged monthly fees ranging from $20-$35 for "credit monitoring" services. 

To compound the misery, consumers who signed up for the defendants' services were allegedly told to stop making payments to their credit card companies and communicating with those companies. Consumers, however, were never informed that as a result of such actions, they could be sued for failing to pay their credit card debt, may accrue even more debt, and could damage their credit scores, which could also harm their ability to get credit in the future, the FTC alleged. Nice guys! 

They wound up being temporarily shut down, and their assets were frozen.[v] QED 

Consumers often do not know how to spot a debt relief scam. Two signs of this fraud are (1) the consumer gets an unsolicited call from a scammer helping to eliminate their debt, and (2) the scammer asks for upfront fees. Another trick of this nasty scam is where the scammer tells the consumer to cut off communication with creditors. When a debt settlement company says the consumer must cut off all contact with the creditors and doesn’t disclose potential consequences such as collection actions or damage to the consumer’s credit, that’s a red flag of a debt settlement scam. 

Other ornery stratagems include where the scammer refuses to send the consumer information about the debt relief company unless the consumer first provides financial information (such as credit card account numbers and balances, and offering guarantees about lowering or erasing the debit. 

I do not want to paint all debt relief companies with too broad a brush. Legitimate debt relief companies can help consumers to avoid bankruptcy and get their credit back on track. Most debt relief companies are debt settlement companies whose ultimate goal is supposedly to help the consumer settle their debt, sometimes for less than what they owe. But their services are never free, and often costly, with some companies charging significant fees for their help. 

Debt settlement companies may tell the consumer to stop paying debts during the negotiation process with creditors to enable them to expedite the settlement process; however, they do not tell the consumer to cease contact with the creditors. The idea of negotiating is to convince the creditors that the consumer cannot repay the borrowed amount. Through the negotiation, leading to a debt management plan, the goal is for the creditor to settle for less rather than getting nothing by pushing the debtor into bankruptcy. 

If your CEO wants to continue to use a credit relief company, he should insist that the company comply with applicable FTC guidelines. According to the FTC, upfront, a debt settlement company must disclose the fees, conditions, and terms of service; how long it will take to achieve results; the amount the consumer must save in a dedicated savings account before the company makes an offer to each creditor on the consumer’s behalf; money in a dedicated account is the consumer’s to withdraw at any time without penalty; and the account administrator is not affiliated with the debt settlement provider and doesn’t get referral fees 

Based on your question, your company is currently at legal and regulatory risk. I have only grazed the surface. Careful planning and appropriate due diligence must be done. Until that undertaking is conducted, resulting in legally sound guidelines, your loan officers should stop referring applicants to any credit relief company. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] Federal Trade Commission v Acro Services LLC, et al, US District Court, Middle District of Tennessee, 3:22-cv-00895, November 7, 2022

[ii] See FTC Halts Debt Relief Scheme that Bilked Millions from Consumers While Leaving Many Deeper in Debt, Release, November 30, 2022, Federal Trade Commission,

[iii] Idem

[iv] The Federal Trade Commission (FTC) enforces the Telemarketing Sales Rule.

[v] Temporary Restraining Order, Federal Trade Commission v Acro Services, et al, US District Court, Middle District of Tennessee, 3:22-cv-00895, November 21, 2022

Getting Prepared for the CFPB Examination

QUESTION

Well, it has finally happened, and we have been told that the CFPB is going to be doing an examination of our company. I am in the compliance department, and, needless to say, everyone is getting ready. But there is also anxiety about what to expect. Nobody, including some top management, has ever been through a CFPB audit. Even our legal counsel has never been involved in a CFPB exam. 

Our company has never had a CFPB exam before! So, we need help understanding what is going to happen. As part of our preparation, we are retaining your firm to do a CMS Tune-up, which will give us an overview of our Compliance Management System. I asked permission from our Chief Compliance Officer and our CEO to write you for some guidance. We want to know what to expect. Please let us know the usual way that the CFPB conducts its audits. 

What is the customary way that we can expect the CFPB to audit us? 

Are there resources we can research for CFPB examination guidelines?

ANSWER

First, everybody take a deep breath! The Consumer Financial Protection Bureau (CFPB) is not your enemy. Consider it like state banking departments, which, like them, is a sort of consumer advocacy agency. The CMS Tune-up is a good overview of your Compliance Management System. However, you should have a solid understanding of the CFPB's examination process itself.

I began writing extensively about the CFPB even before it was enfranchised. For instance, in 2009, I published an article entitled The CFPA Controversy: Asking the Tough Questions. Indeed, in 2011, just days before the CFPB received its enumerated authorities, I published a dialogue with Elizabeth Warren, who had advocated for it in the halls of Congress, and in speeches, lectures, and interviews throughout the United States. The article was entitled Opening a Dialogue: Elizabeth Warren and the Mortgage Industry. I invited many mortgage industry organizations and officials to participate in the interview questions. Nearly all major mortgage industry associations responded to my invitation. Senator Warren (then Professor Warren) and her staff worked with me on this project. Send me a request if you want a copy of the foregoing articles. 

Over the years, my firm has worked with numerous companies in preparation for the CFPB examination. We've worked with companies on resolving issues that the CFPB found as a result of the examination. We've worked with companies on CFPB administrative and legal matters, such as Civil Investigative Demands. We've worked with companies on their compliance needs, both large and small institutions, that want to be proactive in anticipation of a CFPB examination. 

And here's my takeaway: the CFPB's remit is to ensure consumer financial protection. If your company complies with applicable Federal consumer laws, the CFPB will help to ensure your company's regulatory stability. 

Getting ready – and staying ready – for a CFPB exam requires you to be aware of the CFPB's focus. There are essentially three supervisory activities in the CFPB's mandate, which are: 

1.   assessing compliance with Federal consumer financial law;

2.   obtaining information about a supervised institution's activities and compliance systems and procedures; and

3.   detecting and assessing risks to consumers and markets for consumer financial products and services.

Before the Consumer Financial Protection Act, other Federal supervisory agencies conducted consumer protection examinations of banks and credit unions. Many features of its supervision program are based on the longstanding supervisory traditions of such other agencies. 

As with other supervisory agencies, CFPB supervisory activities are confidential. The confidential nature of supervision promotes candid communication between supervised entities and their regulators. These considerations also apply to both bank and non-bank supervision. That said, I suggest you have counsel involved in confidential communications. 

The CFPB's supervision operates as a continuous cycle. This graphic shows the examination cycle.[i]

Supervision Examination Cycle

 

If you follow the Supervisory Highlights, you will learn quite a lot from the CFPB's summaries of the examiners' findings. These periodic issuances also provide a high-level understanding of examiners' activities. It is important to review this issuance for trends, which could cause the CFPB to update its audit procedures. 

You should review the Supervision and Examination Manual issued by the CFPB. This manual is the guide used by examiners to oversee companies that provide consumer financial products or services. The manual describes how the CFPB supervises and examines these companies and gives examiners explicit directions on assessing compliance with Federal consumer financial laws. 

However, legal discussions in the manual are not binding on examiners or other CFPB staff. A supervisory finding that an institution has violated the law is based on the governing statute and regulations applicable to that institution. The manual is not a legal reference. Or, to put it succinctly, supervised institutions are bound by statutes and regulations, not by the CFPB's manual. 

The selection of firms subject to audit is accomplished through a risk-based methodology that prioritizes the allocation of supervisory resources. The prioritization approach focuses on individual product lines at an institution rather than on a comprehensive focus of all products and services offered by an institution. This approach allows the CFPB to assess the likely risk to consumers across the consumer financial marketplace in all product lines at all stages of a product's life cycle, including product development and implementation.[ii] Affiliated organizations that fall under the CFPB's jurisdiction are considered, too. Because of this prioritization method, not every firm subject to the CFPB's supervision authority will get examined. 

There are seven aspects involved in the role of examiners. Examiners typically do the following: 

1.   Collect and review available information from within the CFPB, other Federal and state agencies, and public sources, consistent with statutory requirements; 

2.   Review documents and information obtained through information requests sent to supervised entities; 

3.   Conduct onsite (or virtual) portions of exams to observe, conduct interviews, review additional documents and information, transaction test, and assess compliance management; 

4.   Consult within the CFPB on legal issues arising from an examination, including legal violations; 

5.   Draw preliminary conclusions about the regulated entity's compliance management and its statutory and regulatory compliance after internal consultation; 

6.   Consult within the CFPB about examination work product and any corrective actions that the institution should take; 

7.   Send the supervisory communication to the supervised entity. 

Examiners usually discuss their preliminary conclusions during the examination.

Right of Rescission after Three-Year Expiration

QUESTION 

We sued a borrower for defaulting on a residential mortgage loan after the 3-year extended rescission period had expired. The borrower countersued us by claiming they had the right of rescission by way of recoupment even after the lapse of the 3-year period. They say there was a material violation of TILA, so their right to rescind is allowed. 

This lawsuit is with our lawyer. I'm not a lawyer, but I know when I'm being conned. This makes no sense. I don't see how the borrower can open up rescission on us - and we're not even the original owner of the mortgage. The original owner had the loan for years. Maybe you can get me through all the legalese. I've never encountered this situation before. I asked our attorney to phrase the question I should be asking you. Here it is. 

May a borrower assert the right of rescission by way of recoupment even after the lapse of the three-year period, assuming a material TILA violation by the creditor, if the borrower did not previously assert that right? 

ANSWER 

This is a good question, as it frames the context of the TILA issue. We will need a little legalese, but I will clarify the terms and implications for you. 

Let's go to a working definition of the so-called "Right to Cancel." Briefly put, for any credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, TILA, and Regulation Z, give each consumer residing in the dwelling whose ownership interest is or will be subject to the security interest the right to rescind the transaction. That's a mouthful! 

It is important to understand, too, that the rescission right does not apply to transactions expressly exempted by Regulation Z, such as residential mortgage transactions (purchase money transactions) and in those rare instances when the consumer has appropriately waived the right to rescind. 

Regulation Z[i] allows the consumer to exercise the rescission right until the third "business day" following the last in time of the following events: 

(1) consummation of the (consumer) credit transaction;

(2) delivery of the notice of right to rescind required by Regulation Z;[ii] or

(3) delivery of all "material disclosures." 

If the required notice of right to rescind or the "material disclosures" are not delivered, the right to rescind expires three years after consummation, upon transfer of all of the consumer's interest in the property, or upon sale of the property, whichever event first occurs. 

Before going on to your specific scenario, there is a recent case that comes to mind that highlights both the meaning of a residential mortgage transaction and also the requirement to file a rescission claim in the required timeframe. 

Many consumer law claims involving rescission, where consumers who miss filing their rescission claims within the 1-year or 3-year period, attempt to fall back on an argument that equitable tolling excused their delay. 

The term "equitable tolling" means a pause or "toll" in a statutory limitation period after that period has commenced. The period is suspended, but not that the limitation period starts all over again. To trigger this legal principle, the plaintiff must show that they took reasonable care and due diligence and also did not discover the injury until after the period expired. 

The case I have in mind is Plong v. Fisher, decided by a federal district court in California.[iii] After discussing it briefly, I will move on to your question. 

·       In August 2007, the Plongs obtained a home mortgage loan from Countrywide Home Loans, Inc. to purchase their residence. In May 2022, they filed a Truth-in-Lending Act (TILA) rescission claim. 

·       The court dismissed the claim as time-barred, which means that a plaintiff can't bring a claim because the statute of limitations has expired. The Plongs had until August 2010 to demand rescission. Instead, they waited 12 more years. 

Equitable tolling, even if it were based on fraudulent concealment, could not apply because equitable tolling does not apply to rescission under TILA. In fact, TILA completely extinguishes the right to rescind after the 3-year period ends, even if the lender never made required TILA disclosures.[iv] The applicable TILA section is a statute of repose, depriving courts of subject matter jurisdiction after the 3-year period. 

There is a difference between a statute of limitations and a statute of repose. 

A statute of repose differs from a statute of limitations because a statute of limitations generally does not begin to run until the injury or damage giving rise to the cause of action occurs. Certain equitable principles, such as equitable tolling and the fraudulent concealment doctrines, also generally do not toll or pause a statute of repose because repose provisions set an outer limit independent of the plaintiff's knowledge. Both types of statutes may apply to the same claim. 

But, TILA's right to rescind did not apply to the Plongs' loan anyway because the loan, as a "residential mortgage transaction" (defined by TILA), was exempt from TILA's right to rescind. 

Now, having provided some background, let's move on to answering your question. 

You asked: May a borrower assert the right of rescission by way of recoupment even after the lapse of the three-year period, assuming a material TILA violation by the creditor, if the borrower did not previously assert that right? 

As a matter of fact, the U.S. Supreme Court resolved this question in 1998! 

The dispute was Beach v. Ocwen Fed. Bank.[v] 

·       In 1986, the Beaches refinanced their Florida home with a loan from Great Western Bank. In 1991, they stopped making mortgage payments, and in 1992, Great Western began foreclosure proceedings. 

·       The Beaches acknowledged their default but raised affirmative defenses, alleging that the bank's failure to make TILA disclosures gave them the right to rescind the mortgage loan. 

·       The Florida state courts rejected that defense, holding that any right to rescind had expired in 1989, three years after the loan closed. 

·       The U.S. Supreme Court affirmed, holding that a borrower may not assert the right to rescind as an affirmative defense in a collection action brought by the lender after the 3-year limitations period has run. 

According to the Court, in the context of an affirmative defense, the 3-year period is not a statute of limitations that governs only the institution of a lawsuit. Instead, it operates, with the lapse of time, to extinguish the right of rescission. TILA's relevant statute is uncompromising, as it states that the borrower's right shall expire with the running of time and manifests a congressional intent to completely extinguish the right of rescission at the end of the 3-year period. 

The absence of a provision authorizing rescission as a defense stands in stark contrast to the TILA section that says TILA's 1-year limitation on actions for recovery of damages 

"does not bar … assert[ion of] a violation … in any action … brought more than one year from the date of the … violation as a matter of defense by recoupment." 

Recoupment of damages and rescission in the context of recoupment receive manifestly different treatments that, under the normal rule of construction, are understood to reflect a deliberate intent on the part of Congress. Recoupment, or equitable recoupment, is an equitable remedy that is sought when there is an effort to recover or collect money previously unduly paid out. It's considered an affirmative defense used by a defendant to reduce a plaintiff's claim by an amount the defendant argues the plaintiff owes the defendant arising from the same transaction. 

Because a statutory rescission right could cloud a bank's title on foreclosure, Congress may have chosen to circumscribe that risk while permitting recoupment of damages regardless of the date a collection action may be brought. 

The Court in Beach v. Ocwen Fed. Bank concluded its decision with this statement: 

"We respect Congress's manifest intent by concluding that the Act permits no federal right to rescind, defensively or otherwise, after the 3-year period of § [125(f)] has run." [My emphasis.] 

A closing observation. The Dodd-Frank Wall Street Reform and Consumer Protection Act amended TILA to allow certain defenses to foreclosure but did not change the rules regarding rescission or allow TILA rescission to be used as a defense or other bar to foreclosure.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] 12 CFR § 1026.23(a)(3)

[ii] See Regulation Z § 1026.23(b)

[iii] Plong v. Fisher, 2022 U.S. Dist., C.D. Cal. June 27, 2022

[iv] TILA § 125(f)

[v] Beach v. Ocwen Fed. Bank, 523 U.S. 410 (1998)