Forensic Loan Audit Uncovered TILA Disclosure Violations

Posted on January 18, 2009. Filed under: bankruptcy, Case Law, Foreclosure Defense, Mortgage Audit, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , , , , |

By Lane Houk

The borrower in this case had foreclosure filed against them. After retaining an attorney for the foreclosure, the attorney advised them to have an audit of their loan closing file which revealed a material disclosure violation. It is important to note that a loan can ONLY be rescinded when:

  1. The loan is a refinance transaction;
  2. Funded in the last three years
  3. On the borrower’s primary residence;
  4. When a “material disclosure violation” is found

The term “material disclosure violation” is a very important component. Many people (including self-proclaimed experts in loan auditing) think that “any” violation of the Truth in Lending Act gives someone the right to rescind.  That is patently wrong. The four conditions above must be true in order for the borrower to have the possible “extended right to rescind” the loan transaction. There are only 4 potential “material disclosure violations.”

The borrower in this case was given an insufficient amount of the Notice of Right to Cancel. A borrower should receive two (2) copies of the Notice.

If a married couple is identifiable on a Universal Residential Application, then each consumer is entitled to rescind and must be given a copy of the TILA Disclosure Statement with all material information accurately and correctly disclosed, 15 U.S.C. § 1602(u); Reg. Z § 226.23(a)(3) n.48, and two (2) copies each of the rescission notice, 15 U.S.C. § 1635(a); Reg. Z § 226.23(b), irrespective of whether both are obligated on the note (or either, for that matter).

In this case, the borrowers were married and received only 2 copies total. Material disclosure violation. Thus they rescinded. The lender Option One obviously contested the matter.

Once the Consumer rescinds, the security interest arising by operation of law becomes void automatically. The promissory note is also voided since it is part of the same “transaction,” see i.e., 15 U.S.C. § 1635(b) and Reg. Z § 226.23(d)(1).]

This is powerful folks. This is a complete remedy to foreclosure. The mortgage is the security interest and it is the mortgage (and the mortgage only) that gives the lender the right to foreclose. In a rescission, the lender must void the mortgage within 20 days. If it does not, it is another violation of TILA.

After rescinding the loan the borrowers also filed a Chapter 13 bankruptcy. The lender refused to rescind the loan. The borrowers filed an Adversary Proceeding in the Bankruptcy Court. Bottom line: The judge heard all arguments from both Plaintiff (borrower) and the Defendant (Option One). The judge found in favor of the borrower/plaintiff and determined that they had the right to rescind. Victory number one.

But a BIG ruling in this case was that since they had rescinded the loan, the loan became an “unsecured” debt since the mortgage was automatically voided as per TILA. Since the debt became “unsecured” it was able to be discharged through bankruptcy like any other type of unsecured debt such as a credit card debt.

The moral of the story: TILA Rescission is the most powerful remedy to foreclosure if/when the borrower has this remedy afforded to them. The key is to obtain a loan audit by a real expert.


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6 Responses to “Forensic Loan Audit Uncovered TILA Disclosure Violations”

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what are the 4 potential “material disclosure violations”? Where can I find them in plain english? Thank you for your help.


Loan Modifications do not work. The principal is not sufficiently reduced to an affordable payment. The borrower is made to sign away all their rights to act on the lender. Seventy percent of the MODs are in foreclosure again and the monthly payments went down only an average of $195.00 per month.

I agree, can you provide TILA rescission in plain english

Is it best to wait after Rescission case before you file any kind of bankruptcy?

In this case they should have waited until after the TILA case was resolved. Then they could have filed a chapter seven. This would have allowed the trustee to work with the lender to keep their home?

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