Tender of Full Repayment of Principal is Condition of Rescission

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The 7th U.S. Circuit Court of Appeals has held that borrowers are not assured of conditions that would allow them to rescind a home mortgage loan pursuant to the federal Truth in Lending Act (“TILA”), 15 U.S.C. 1601 et seq., and that a court can condition rescission of the loan on the borrowers’ tender of the full principal balance of the loan. The Court in Iroanyah v. Bank of America, et al., 2014 WL 2198562 (7th Cir. May 28, 2014) affirmed the determination of the district court that conditioned the borrowers’ rescission, and the attendant release of the banks’ security interests in the home, on the borrowers’ tender of the remaining principal balances within 90-days.

The borrowers took out two loans secured by their home. When they defaulted, the banks commenced foreclosure proceedings in state court. In response the borrowers sent notices of rescission to the banks, basing the rescission on allegedly deficient disclosure statements in the loan documents in violation of TILA. When the bank holding the first mortgage agreed to rescind the loan if the borrowers first tendered $169,015, the borrowers refused and sued the banks and their loan servicers for rescission of the loans based on violations of TILA. While the borrowers prevailed on their claims that the loan documents provided by the banks at closing violated TILA, the district court determined that the borrowers were required to tender the loan proceeds advanced to them before the banks would be required to release their security interests in the property.

The borrowers proposed that they be allowed to repay the principal installments over the remaining 26-years of the original mortgage. The district court rejected that proposal, finding that such a tender method would essentially turn the mortgages into zero interest loans, and instead gave the borrowers 90-days to tender the principal balances.

On appeal, the 7th Circuit agreed with the district court, noting that rescission is an equitable remedy with obligations on both parties. “Tender is inherently part of rescission, not an occasional effect of it…”. The panel further noted its agreement with other federal circuit courts, including the 1st, 4th, 8th and 9th Circuits, that borrowers’ inability to tender principal in the context of rescission based on a TILA violation may make any such rescission impossible. See, e.g. Large v. Conseco Fin. Serv. Co., 292 F.3d 49 (1st Cir. 2002). “Ultimately, rescission is fundamentally meant to unwind the entire transaction, not merely change the amount of the loan…if repayment is impossible, then rescission, by any definition, has not taken place and there is no benefit to claim.”

Finally, the Court noted that the 90-day tender period was equitable under the district court’s broad discretion to fashion rescission procedures, and there was no abuse of discretion in the district court’s finding that the borrowers’ proposed 26-year repayment period was inequitable.

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