This defense is based on the federal Truth In Lending Act (TILA). Under the Act, lenders are required to provide specific disclosures to borrowers either before the loan closes or at closing, or both, depending on the notice. For example, when you are refinancing the loan on your primary residence, you are entitled to receive two copies of a document called the "Notice of Right to Cancel."
If you don't receive two copies, or if the notices do not comply with the suggested format, there has been a violation of TILA. Normally, you only have three days to rescind your loan. If your lender violates TILA, however, you have three years to rescind your loan. So what is rescission? Quite simply, rescission is the process of unwinding the loan and returning the borrower and the lender to where they were before the loan was issued. In practice, the remedy is a bit different. The statute establishes an order of performance in a TILA rescission.
Once the loan has been properly rescinded, the bank must release the mortgage and return any payments to the borrower. The borrower is then supposed to return the funds that the bank lent. A courts is free to modify this tender strategy if fairness dictates that it should. The effect of the broad equitable power to modify tender has been the subject of much of the case law related to TILA rescissions. As the law continues to evolve and develop, this remedy may be strengthened or weakened. In the meantime, it is always important to have your attorney evaluate your loan documents and determine whether you have a potential claim under TILA.