I want to address one of the complexities of the Truth-in-Lending Act (TILA). You may recall that I started this series with a discussion of credit cost disclosure. The very first blog that I wrote for this series addressed disclosure obligations. See here. I want to now discuss TILA liability for violations with respect to taking assignment of consumer credit contracts—whether promissory notes originated by another lender or an installment sales contract originated by a retailer.

I briefly touched on this subject a year and a half ago when I wrote about the difference between direct lending and indirect lending. See here. So, what about the liability of indirect lenders for the failure of direct lenders to dot the “i’s” and cross the “t’s”?  There are defenses under TILA available to “assignees” who take assignment of contracts without knowledge of disclosure violations and when such violations are not apparent on the face of the instrument.   

Original creditors are held to a higher standard of disclosure responsibility than are assignees. Original creditors have absolute or “strict” liability for disclosure violations. TILA spells out that damages for disclosure violations can range from $200 to $4000 in certain individual claims, and to the lesser of $1.0 million or 1% of the net worth of the creditor in certain class actions.  And, adding insult to injury, creditors can be liable for actual damages as well as the debtor’s attorneys’ fees.  

But these damages are not necessarily obtainable in connection with an assigned contract. The concept of strict liability for disclosure violations is not visited on assignees.  Rather, if the violation for which the action is brought is not apparent on the face of the disclosure statement, then the assignee has a defense to such a claim.   A violation is apparent on the face of the disclosure statement if

• The disclosure can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents assigned; or
• A disclosure is not made in terms required to be used by TILA and Regulation Z.

Once you are concerned about damages for TILA violations, trouble has already found you. However, it is important to keep in mind that there are real defenses that are available to assignee creditors that are not available to original creditors.

Practice Pointer: While an assignee is given some protection against a TILA disclosure violation claim, note that the FTC Holder-in-Due Course Rule still applies for the benefit of the consumer, making the assignee subject to all claims and defenses that the consumer may have against the original creditor—albeit limited to amounts received by the assignee.

Please note: This is the one hundred thirty-seventh blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.