Chapter 8-2 The Truth in Lending Act (TILA)

• Jurisdiction: United States

8-2 The Truth in Lending Act (TILA)

The Truth in Lending Act (TILA)⁴ is a disclosure statute, the main purpose of which is to ensure borrowers are fully aware of the cost of credit.⁵ TILA is an arduous statute with its own body of federal case law and lengthy federal regulations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)⁶ generally granted rulemaking authority under the TILA to the Consumer Financial Protection Bureau (CFPB).⁷ Presently, borrowers rarely assert a TILA violation as an affirmative defense or a counterclaim to a foreclosure claim. Their attempts to do so in the past have, for the most part, proved unsuccessful.⁸

8-2:1 The Home Ownership and Equity Protection Act (HOEPA)

The Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994 as an amendment to TILA to address abusive practices in refinances and closed-end home equity loans with high interest rates or high fees.⁹ The purpose of both HOEPA and TILA is to provide up-front information to potential buyers so that they can assess the true cost of the loan they are about to take.¹⁰ The law imposed new disclosure requirements and substantive limitations on certain closed-end mortgage loans bearing rates or fees above a certain percentage or amount, termed "high-cost mortgages."¹¹ Among other things, the statute provides that mortgage loans subject to HOEPA may not provide for an interest rate after default that is higher than the interest rate that applies before default¹² or contain terms imposing a prepayment penalty on a consumer for paying all or part of the principal before it is due.¹³ The law also included new disclosure requirements to assist consumers in comparing the costs and other material considerations involved in a reverse mortgage transaction and authorized the Federal Reserve Board to prohibit specific acts and practices in connection with mortgage transactions.

Since HOEPA's enactment, refinances or home equity mortgage loans meeting any of HOEPA's three high-cost mortgage tests have been subject to special disclosure requirements and restrictions on loan terms. Consumers with high-cost mortgages have had enhanced remedies for violations of the law.¹⁴

In January 2013, after the passage of the Dodd-Frank Act,¹⁵ the Consumer Financial Protection Bureau issued the 2013 HOEPA Rule,¹⁶ which amends TILA's Regulation Z to implement the Dodd-Frank Act's changes to HOEPA, which, among other things, expanded the scope of HOEPA coverage to include purchase money mortgages and home equity lines of credit. The new requirements in Regulation Z only apply to transactions that occurred on or after January 10, 2014.¹⁷ In November 2018, the Bureau updated the Small Entity Compliance Guide regarding the HOEPA Rule to reflect changes made by the Economic Growth, Regulatory Relief, and Consumer Protection Act.¹⁸

A borrower alleging a HOEPA violation is entitled to actual and statutory damages as a defense of recoupment or setoff against an action for collection of the debt, even when a claim for rescission would be barred by TILA's statute of limitations.¹⁹ Borrowers who assert TILA or HOEPA counterclaims for actual damages must establish they were harmed because of the statutory violation.²⁰

Any mortgage containing a provision prohibited by HOEPA must be treated as a failure to deliver material disclosures under TILA, thereby subjecting the loan transaction to TILA remedies.²¹ Those remedies include recovery of twice the amount of any finance charge made in connection with the transaction not to exceed $2,000 in the case of an individual action on a non-open-ended credit plan.²²

8-2:2 TILA Rescission

Lenders originating refinance transactions and home equity transactions secured by a consumer's principal dwelling must include a notice to the borrower of the borrower's right to rescind the transaction within three business days.²³ If the lender fails to disclose that rescission right or fails to disclose a material...