TILA Claims Can be Raised in Recoupment – Defensively

As Russ Baldwin and other lawyers have pointed out, borrowers can raise and use TILA violations and maybe FDCPA violations defensively even if they are otherwise barred as affirmative claims. The way it works is simple — the affirmative defense of recoupment for violations of statute, if proven, result in an offset to the amount demanded by the opposing party up to the amount of the Plaintiff’s claim (i.e., the amount claimed as owed).


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In nonjudicial states, there is a serious constitutional question because it is only in states requiring judicial foreclosure that you can file an affirmative defense. It is in the application of the nonjudicial statutes that you get an unconstitutional result. A borrower should be able to say that he or she has affirmative defenses to the claim for foreclosure and that therefore the case must be transferred to a judicial foreclosure. But so far, that isn’t the case. And one day some smart constitutional lawyer is going to make new law.

But in the meantime the high number of TILA and FDCPA violations could go a long way toward decreasing and even negating the final award to the claimant even if the court presumes ownership and control over the debt, note and mortgage. My own experience is that the foreclosure mills start throwing out various settlement offers as soon as FDCPA is raised and probably would so if TILA violations were raised defensively.

see 2006 opinion In Re Sadie Faust https://www.leagle.com/decision/2006447353br941440

However, while the applicable statute of limitations may preclude Debtor from asserting TILA violations affirmatively, it does not affect her right to assert them defensively, i.e., by recoupment. See In re Ross, 338 B.R. 266, 269 n. 9 (Bankr. E.D.Pa.2006). And it is recoupment which the Amended Complaint specifically seeks. Amended Complaint, p. 4, WHEREFORE clause. “Recoupment is a common law contract doctrine that allows `countervailing claims, which otherwise could not have been asserted together to be raised in a case based upon any one of them.'” Integra Bank/Pittsburgh v. Freeman, 839 F.Supp. 326, 330 (E.D.Pa.1993), (citing Lee v. Schweiker, 739 F.2d 870 (3d Cir.1984)). Unlike setoff, recoupment “lessens or defeats any recovery by the plaintiff.” Algrant v. Evergreen Valley Nurseries L.P., 126 F.3d 178, 184 (3d Cir.1997) (quoting Household Consumer Discount Co. v. Vespaziani, 490 Pa. 209, 219, 415 A.2d 689, 694 (1980)). A party may assert recoupment as a defense after a statute of limitations period has lapsed. Beach v. Ocwen Fed. Bank 523 U.S. 410, 417-418, 118 S.Ct. 1408, 1412, 140 L.Ed.2d 566 (1998). The defense must be related to the nature of the demand made by the other party, that is, it must arise from the same contractual transaction. Algrant, 126 F.3d at 184.

In this case, the TILA claims arise out of the mortgage loan. It is alleged that the lender failed to disclose certain finance charges and the “high cost” of the mortgage loan. Amended Complaint, ¶¶ 22-24. Although otherwise tardy, such claims may nevertheless be raised via recoupment.

Also see Stake Center v Logix https://www.govinfo.gov/content/pkg/USCOURTS-utd-2_13-cv-01090/pdf/USCOURTS-utd-2_13-cv-01090-0.pdf

I frankly don’t know whether or not setoff claims might be barred by the statute of limitations. I can see court doctrine going either way. But on recoupment, the defense is based on the exact same transaction as the one in the complaint. So on that basis TILA claims would not be barred but FDCPA claims could be barred if the statutory period has expired. TILA and foreclosure arise from origination of the loan. FDCPA arises in collection often by a third party. So it could be that FDCPA would be setoff whereas TILA would be recoupment.

Although “[s]ome jurisdictions have dissolved the distinction between setoff [and] recoupment . . . for pleading purposes,”9 the concepts are nonetheless substantively distinct. “[A] setoff, as distinguished from a recoupment . . . ar[i]se[s] from different transactions, or occurrences, between the same parties.”10 Recoupment “describe[s] a claim that defendant could assert against plaintiff only if it arose from the same transaction as plaintiff’s claim.”11 The breach-of-contract counterclaim Defendant seeks to assert against Plaintiff arises from the same transaction or occurrence that gave rise to the claims Plaintiff asserted in its Complaint. As such, Defendant’s affirmative defense of setoff is not duplicative of its proposed breach-of-contract counterclaim. Moreover, even if the Court were to construe Defendant’s affirmative defense of setoff as an affirmative defense for recoupment, Defendant’s proposed counterclaim seeks relief in excess of the damages that would be available under a recoupment defense, including attorney fees, costs, and equitable rescission. Based on the foregoing, the Court finds that amending the Answer to include Defendant’s breach-of-contract counterclaim will serve to maximize the parties’ opportunity to have their dispute decided on the merits and will not prejudice Plaintiff’s ability to prepare a defense.

Not So Fast! Statute of Limitations Bars Claims for Enforcement of Statutory Duties But Does Not Bar Other Action For Damages Based on That Duty.

Claims under state statutes or Federal statutes have different periods of limitation under which you can file suit.

BUT — if the statutory duty that was breached is part of another claim that is not barred by the statute of limitations then you can survive a motion to dismiss or even an affirmative defense of statute of limitations.

Sound crazy? Actually it isn’t.

I have already discussed claims for damages that are barred by the statute of limitations but he same statute does not bar the same pleading as an affirmative defense because that is NOT, for procedural purposes, a “claim.” Those are generally called Defenses for Recoupment which allow awards of damages for money and even court costs and attorney fees that might ordinarily be barred. Several lawyers have recognized this and some who have been successful have brought it to my attention and even appeared as a guest on the Neil Garfield Show.

Now for the past year, more decisions are coming out predicated on public policy. You cannot raise a claim for violation of HAMP, FDCPA or TILA after the period of limitations has expired but you can use the statutory violation as the basis of a claim under another right of action. So if the state, for example, has a law that allows a private right of action for damages for breach of a duty, that duty might come from a statute that has expired but is still in operation as evidence of the duty of fair dealing and against wrongful enrichment.

see https://www.lexology.com/library/detail.aspx?g=1f747ad6-1d9c-43f8-8c61-431f099cc58b

The bank informed the plaintiffs of the error, provided a check for $15,000, and after mediation, paid the plaintiffs another $25,000. The plaintiffs filed a class action against the bank, asserting claims for violation of the WCPA and unjust enrichment. The bank moved to dismiss the action, arguing, among other things, that the WCPA claim was an “impermissible attempt to enforce the federal Home Affordable Modification Program (HAMP), which creates no private right of action.” The court disagreed with the bank, determining that while the mortgage modification application was filed pursuant to HAMP, the plaintiffs “do not seek to enforce HAMP.” Instead, the plaintiffs argue that the wrongful denial of their application and failure to disclose the calculation error for three years “constitutes unfair or deceptive conduct in violation of the [WCPA].”

Tolling the Statute of Limitations by Initiating Administrative Processes

A recent case brought to mind a possible argument for tolling the applicable statute of limitations (SOL) on certain claims. By submission of complaints to the CFPB (TILA, RESPA, FDCPA etc) you are starting an administrative process. It might even be true that by submitting a QWR (under RESPA) or DVL (under FDCPA) you are starting an administrative process. One could argue that while you were in that process the statute of limitations on certain claims should be tolled.

Let us help you plan for trial and draft your foreclosure defense strategy, discovery requests and defense narrative: 202-838-6345. Ask for a Consult or check us out on www.lendinglies.com. Order a PDR BASIC to have us review and comment on your notice of TILA Rescission or similar document. LendingLies provides forms and services regarding initiating administrative processes including Qualified Written request, Debt validation Letter, Complaint to State Attorney General and Complaint to Consumer Financial Protection Board.
I provide advice and consultation to many people and lawyers so they can spot the key required elements of a scam — in and out of court. If you have a deal you want skimmed for red flags order the Consult and fill out the REGISTRATION FORM.
A few hundred dollars well spent is worth avoiding a lifetime of financial ruin.
Get a Consult and TERA (Title & Encumbrances Analysis and & Report) 202-838-6345 or 954-451-1230. The TERA replaces and greatly enhances the former COTA (Chain of Title Analysis, including a one page summary of Title History and Gaps).

The argument would be that you were exhausting your administrative remedies and that therefore the statute of limitations barring your claim should be tolled (extended). The argument against that position is usually that you didn’t need to exhaust your administrative remedies and therefore there should be no tolling of the statute. General doctrine and decisions weigh the balance of the goal of finality of claims and the desire to see all meritorious claims be litigated in pursuit of justice. The courts vary so do your legal research.

Your position is obviously strongest where you MUST exhaust administrative remedies BEFORE filing a claim, as provided by a statute. Your position is weakest where you didn’t need to exhaust administrative remedies. But equitable arguments often prevail.

Remember that if you are successful the statute of limitations will only be tolled during the period that you were pursuing administrative remedies so the filing of complaint with the CFPB and the AG office in your state is probably a good idea if it’s done sooner rather than later. The fact that administrative remedies were available for a time does not seem to advance your position unless you started some procedure invoking administrative action.

And remember that while you can’t bring a claim for remedies under a tort of statutory violation that is barred by the statute of limitations you CAN raise the same issues as an defense under the doctrine of recoupment. Procedurally recoupment only applies if you are sued. State laws and common law vary so again be careful to do your legal research.

If the foreclosure is contested I believe that under the US Constitution, this requires the foreclosure to become judicial — something that every judicial state has in fact made provision for.

As I have insisted for 12 years, the fact that nonjudicial foreclosure is available for uncontested foreclosures should not be an excuse for changing the burden of proof in contested foreclosures.

Hence the proper (constitutional) procedure would be realignment of the parties to where the claimant for foreclosure must judicially claim foreclosure and prove it while the homeowner merely defends with an answer and affirmative defenses and/or counterclaim.

As it stands, courts resist this approach and that gives the claimants in unlawful and wrongful foreclosures the ability to skip proof and go straight to foreclosure. In my opinion that reveals  an unconstitutional application of an otherwise valid statutory scheme for disposing of uncontested foreclosures.

Unlawful detainer or eviction is an attempt to eat fruit from a poisoned tree if in a nonjudicial foreclosure state a contested foreclosure did not require the claimant to assert and prove its claim for foreclosure.


Securitization for Lawyers

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The CONCEPT of securitization does not contemplate an increase in violations of lending laws passed by States or the Federal government. Far from it. The CONCEPT anticipated a decrease in risk, loss and liability for violations of TILA, RESPA or state deceptive lending laws. The assumption was that the strictly regulated stable managed funds (like pensions), insurers, and guarantors would ADD to the protections to investors as lenders and homeowners as borrowers. That it didn’t work that way is the elephant in the living room. It shows that the concept was not followed, the written instruments reveal a sneaky intent to undermine the concept. The practices of the industry violated everything — the lending laws, investment restrictions, and the securitization documents themselves. — Neil F Garfield, Livinglies.me


“Securitization” is a word that provokes many emotional reactions ranging from hatred to frustration. Beliefs run the range from the idea that securitization is evil to the idea that it is irrelevant. Taking the “irrelevant” reaction first, I would say that comes from ignorance and frustration. To look at a stack of Documents, each executed with varying formalities, and each being facially valid and then call them all irrelevant is simply burying your head in the sand. On the other hand, calling securitization evil is equivalent to rejecting capitalism. So let’s look at securitization dispassionately.

First of all “securitization” merely refers to a concept that has been in operation for hundreds of years, perhaps thousands of years if you look into the details of commerce and investment. In our recent history it started with “joint stock companies” that financed sailing expeditions for goods and services. Instead of one person or one company taking all the risk that one ship might not come back, or come back with nothing, investors could spread their investment dollars by buying shares in a “joint stock company” that invested their money in multiple sailing ventures. So if some ship came in loaded with goods it would more than offset the ships that sunk, were pirated, or that lost their cargo. Diversifying risk produced more reliable profits and virtually eliminated the possibility of financial ruin because of the tragedies the befell a single cargo ship.

Every stock certificate or corporate or even government bond is the product of securitization. In our capitalist society, securitization is essential to attract investment capital and therefore growth. For investors it is a way of participating in the risk and rewards of companies run by officers and directors who present a believable vision of success. Investors can invest in one company alone, but most, thanks to capitalism and securitization, are able to invest in many companies and many government issued bonds. In all cases, each stock certificate or bond certificate is a “derivative” — i.e., it DERIVES ITS VALUE from the economic value of the company or government that issued that stock certificate or bond certificate.

In other words, securitization is a vehicle for diversification of investment. Instead of one “all or nothing” investment, the investors gets to spread the risk over multiple companies and governments. The investor can do this in one of two ways — either manage his own investments buying and selling stocks and bonds, or investing in one or more managed funds run by professional managers buying and selling stocks and bonds. Securitization of debt has all the elements of diversification and is essential to the free flow of commerce in a capitalistic economy.

Preview Questions:

  • What happens if the money from investors is NOT put in the company or given to the government?
  • What happens if the certificates are NOT delivered back to investors?
  • What happens if the company that issued the stock never existed or were not used as an investment vehicle as promised to investors?
  • What happens to “profits” that are reported by brokers who used investor money in ways never contemplated, expected or accepted by investors?
  • Who is accountable under laws governing the business of the IPO entity (i.e., the REMIC Trust in our context).
  • Who are the victims of misbehavior of intermediaries?
  • Who bears the risk of loss caused by misbehavior of intermediaries?
  • What are the legal questions and issues that arise when the joint stock company is essentially an instrument of fraud? (See Madoff, Drier etc. where the “business” was actually collecting money from lenders and investors which was used to pay prior investors the expected return).

In order to purchase a security deriving its value from mortgage loans, you could diversify by buying fractional shares of specific loans you like (a new and interesting business that is internet driven) or you could go the traditional route — buying fractional shares in multiple companies who are buying loans in bulk. The share certificates you get derive their value from the value of the IPO issuer of the shares (a REMIC Trust, usually). Like any company, the REMIC Trust derives its value from the value of its business. And the REMIC business derives its value from the quality of the loan originations and loan acquisitions. Fulfillment of the perceived value is derived from effective servicing and enforcement of the loans.

All investments in all companies and all government issued bonds or other securities are derivatives simply because they derive their value from something described on the certificate. With a stock certificate, the value is derived from a company whose name appears on the certificate. That tells you which company you invested your money. The number of shares tells you how many shares you get. The indenture to the stock certificate or bond certificate describes the voting rights, rights to  distributions of income, and rights to distribution of the company is sold or liquidated. But this assumes that the company or government entity actually exists and is actually doing business as described in the IPO prospectus and subscription agreement.

The basic element of value and legal rights in such instruments is that there must be a company doing business in the name of the company who is shown on the share certificates — i.e., there must be actual financial transactions by the named parties that produce value for shareholders in the IPO entity, and the holders of certificates must have a right to receive those benefits. The securitization of a company through an IPO that offers securities to investors offer one additional legal fiction that is universally enforced — limited liability. Limited liability refers to the fact that the investment is at risk (if the company or REMIC fails) but the investor can’t lose more than he or she invested.

Translated to securitization of debt, there must be a transaction that is an actual loan of money that is not merely presumed, but which is real. That loan, like a stock certificate, must describe the actual debtor and the actual creditor. An investor does not intentionally buy a share of loans that were purchased from people who did not make any loans or conduct any lending business in which they were the source of lending.

While there are provisions in the law that can make a promissory note payable to anyone who is holding it, there is no allowance for enforcing a non-existent loan except in the event that the purchaser is a “Holder in Due Course.” The HDC can enforce both the note and mortgage because he has satisfied both Article 3 and Article 9 of the Uniform Commercial Code. The Pooling and Servicing Agreements of REMIC Trusts require compliance with the UCC, and other state and federal laws regarding originating or acquiring residential mortgage loans.

In short, the PSA requires that the Trust become a Holder in Due Course in order for the Trustee of the Trust to accept the loan as part of the pool owned by the Trust on behalf of the Trust Beneficiaries who have received a “certificate” of fractional ownership in the Trust. Anything less than HDC status is unacceptable. And if you were the investor you would want nothing less. You would want loans that cannot be defended on the basis of violation of lending laws and practices.

The loan, as described in the origination documents, must actually exist. A stock certificate names the company that is doing business. The loan describes the debtor and creditor. Any failure to describe the the debtor or creditor with precision, results in a failure of the loan contract, and the documents emerging from such a “closing” are worthless. If you want to buy a share of IBM you don’t buy a share of Itty Bitty Machines, Inc., which was just recently incorporated with its assets consisting of a desk and a chair. The name on the certificate or other legal document is extremely important.

In loan documents, the only exception to the “value” proposition in the event of the absence of an actual loan is another legal fiction designed to promote the free flow of commerce. It is called “Holder in Due Course.” The loan IS enforceable in the absence of an actual loan between the parties on the loan documents, if a third party innocent purchases the loan documents for value in good faith and without knowledge of the borrower’s defense of failure of consideration (he didn’t get the loan from the creditor named on the note and mortgage).  This is a legislative decision made by virtually all states — if you sign papers, you are taking the risk that your promises will be enforced against you even if your counterpart breached the loan contract from the start. The risk falls on the maker of the note who can sue the loan originator for misusing his signature but cannot bring all potential defenses to enforcement by the Holder in Due Course.

Florida Example:

673.3021 Holder in due course.

(1) Subject to subsection (3) and s. 673.1061(4), the term “holder in due course” means the holder of an instrument if:

(a) The instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and
(b) The holder took the instrument:

1. For value;
2. In good faith;
3. Without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series;
4. Without notice that the instrument contains an unauthorized signature or has been altered;
5. Without notice of any claim to the instrument described in s. 673.3061; and
6. Without notice that any party has a defense or claim in recoupment described in s. 673.3051(1).
673.3061 Claims to an instrument.A person taking an instrument, other than a person having rights of a holder in due course, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. A person having rights of a holder in due course takes free of the claim to the instrument.
This means that Except for HDC status, the maker of the note has a right to reclaim possession of the note or to rescind the transaction against any party who has no rights to claim it is a creditor or has rights to represent a creditor. The absence of a claim of HDC status tells a long story of fraud and intrigue.
673.3051 Defenses and claims in recoupment.

(1) Except as stated in subsection (2), the right to enforce the obligation of a party to pay an instrument is subject to:

(a) A defense of the obligor based on:

1. Infancy of the obligor to the extent it is a defense to a simple contract;
2. Duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor;
3. Fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms;
This means that if the “originator” did not loan the money and/or failed to perform underwriting tests for the viability of the loan, and gave the borrower false impressions about the viability of the loan, there is a Florida statutory right of rescission as well as a claim to reclaim the closing documents before they get into the hands of an innocent purchaser for value in good faith with no knowledge of the borrower’s defenses.


In the securitization of loans, the object has been to create entities with preferred tax status that are remote from the origination or purchase of the loan transactions. In other words, the REMIC Trusts are intended to be Holders in Due Course. The business of the REMIC Trust is to originate or acquire loans by payment of value, in good faith and without knowledge of the borrower’s defenses. Done correctly, appropriate market forces will apply, risks are reduced for both borrower and lenders, and benefits emerge for both sides of the single transaction between the investors who put up the money and the homeowners who received the benefit of the loan.

It is referred to as a single transaction using doctrines developed in tax law and other commercial cases. Every transaction, when you think about it, is composed of numerous actions, reactions and documents. If we treated each part as a separate transaction with no relationship to the other transactions there would be no connection between even the original lender and the borrower, much less where multiple assignments were involved. In simple terms, the single transaction doctrine basically asks one essential question — if it wasn’t for the investors putting up the money (directly or through an entity that issued an IPO) would the transaction have occurred? And the corollary is but for the borrower, would the investors have been putting up that money?  The answer is obvious in connection with mortgage loans. No business would have been conducted but for the investors advancing money and the homeowners taking it.

So neither “derivative” nor “securitization” is a dirty word. Nor is it some nefarious scheme from people from the dark side — in theory. Every REMIC Trust is the issuer in an initial public offering known as an “IPO” in investment circles. A company can do an IPO on its own where it takes the money and issues the shares or it can go through a broker who solicits investors, takes the money, delivers the money to the REMIC Trust and then delivers the Trust certificates to the investors.

Done properly, there are great benefits to everyone involved — lenders, borrowers, brokers, mortgage brokers, etc. And if “securitization” of mortgage debt had been done as described above, there would not have been a flood of money that increased prices of real property to more than twice the value of the land and buildings. Securitization of debt is meant to provide greater liquidity and lower risk to lenders based upon appropriate underwriting of each loan. Much of the investment came from stable managed funds which are strictly regulated on the risks they are allowed in managing the funds of pensioners, retirement accounts, etc.

By reducing the risk, the cost of the loans could be reduced to borrowers and the profits in creating loans would be higher. If that was what had been written in the securitization plan written by the major brokers on Wall Street, the mortgage crisis could not have happened. And if the actual practices on Wall Street had conformed at least to what they had written, the impact would have been vastly reduced. Instead, in most cases, securitization was used as the sizzle on a steak that did not exist. Investors advanced money, rating companies offered Triple AAA ratings, insurers offered insurance, guarantors guarantees loans and shares in REMIC trusts that had no possibility of achieving any value.

Today’s article was about the way the IPO securitization of residential loans was conceived and should have worked. Tomorrow we will look at the way the REMIC IPO was actually written and how the concept of securitization necessarily included layers of different companies.

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