Hi again, this post provides general legal information that every real estate broker and agent in the United States should be aware of. I will be discussing the recent UNANIMOUS United States Supreme Court decision in the case of Jesinoski v. Countrywide Home Loans If you are the kind of person that likes your information in VIDEO format, click on one of the two pictures posted in this blog to go-to parts 1 and 2 of the video.
All real estate agents should have at least a general working knowledge of TILA (Truth in Lending Act). After all, your clients buy and sell real estate and being the guru that you are, you want to be able to impress someone anytime they are "talking real estate." This blog will help you become converasational on the topic of Truth in Lending ("TILA") loan resscission rights.
Now, everyone in the real estate (well just about everyone) understands that when your clients do a mortgage refinance transaction, that they have a 3 day "cooling off" period, meaning a three day right to RESCIND their mortgage loan for ANY REASON AT ALL. If the borrower says "you know what, I decided I don't want the loan" they can send in their Notice of Right to Cancel form and simply rescind the loan transaction (rescind is just a fancy way to say "cancel")
Now, most of you also realize, being real estate professionals, that when a person gets a loan, they normally sign a whole stack of papers. One of the papers that is required under the Truth in Lending law to be given to all borrowers in residential loan transactions is the "TRUTH IN LENDING DISCLOSURE STATEMENT." This is the statement that has the four boxes on it and shows you what the APR is, the Amount Financed, the Finance Charges, and Total of Payments. This is a "MATERIAL" disclosure and is REQUIRED to be given to all consumers and this disclosure must be CLEAR and CONSPICOUS and of course, accurate (subject to some slight "tolerances" that are normally permitted." If for some reason, the borrower did not get these disclosures, that would be a MATERIAL TILA law violation that would justify recission EVEN THREE YEARS AFTER THE LOAN WAS CONSUMMATED. Yes, you heard that right, if there is a "Material" TILA disclosure violations as to these items, that will allow any borrower to have an "extended three year right to rescind their mortgage" once again, by sending in written notice of the lender or creditor that the borrower wants to cancel the loan transaction.
This is an amazing remedy, because think about it, what happens if you are three years into a loan and then you seek to cancel it? Interesting right? We talk about what happens below.
Another "material TILA violation" that justifies a borrower rescinding their loan three years after the loan is closed is the failure of EACH BORROWER to receive TWO COPIES EACH of a Notice of Right to Cancel the Loan, with the 3 day rescission rights accurately filled in. If each borrower does not recieve such a disclosure in the proper quantity (which you are probably telling yourself "that's pretty ticky tack") then the extended three year right to rescind the mortgage arises once again and the borrowers can cancel the loan three years after signing the closing documents. Weird right?
What are "material loan violations" that justify a property owner to rescind their mortgage loan?
1. Understating the APR
2. Finance charges
3. Total of Payments
4. Inaccurate payment schedules
5. Failure to provide two copies each of the NRTC (Notice of Right to Cancel)
The purpose of TILA law is to provide borrowers with clear and accurate credit terms, and allow them to shop around and compare prices and rates with other lenders. If you have made it this far, you are golden. But it gets better.
What happens when a borrower rescinds their mortgage loan under Federal Truth in Lending Law ("TILA")?
Here is the part I love, what happens if you are 2 and a half years into a loan and now the borrower wants to rescind and cancel their loan? Hint: this oftern comes up when clients are in foreclosure. Well, you know when you sign the NOTE (which is evidence of your debt to the lender) and the DEED OF TRUST (whcih is, say it with me, the "Security" securing repayment of the note, and which contains a "Power of Sale" clause which allows the lender to foreclose on a property if the note isn't paid). This is what you have in just about every mortgage loan.
When someone rescinds or cancels their mortgage loan under TILA (by sending in the rescission notice) here is what happens:
1. The loan is rescinded upon sending in the letter
2. The borrower is no longer obligated to pay finance charges
3. The lender or creditor must tender back to the borrower all payments the borrower made and all money the lender received in connection with the mortgage loan (WHAT YOU SAY, yes that is what Reg Z says)
4. The creditor must take action to reflect the cancellation of the Security (because the Security interest becomes VOID as a matter of law)
Now you tell me, did you know this? It's okay if you didn't because most lawyers don't even know this. It is just an interesting law with an interesting remedy. Now, you are probably asking yourself is "does the borrower get the money back and just get to keep the house for free?" Probably not. At some point the terms of the rescission need to be worked out (the borrower should be forced to tender back to the lender the money they received), and this is where litigation can ensue between a borrower facing foreclosure and creditor seeking to foreclose. The case gets more interesting if it goes into bankruptcy after the recission occurs, because without the "security" this mortgage loan could be viewed as an "unsecured debt."
Anyway, this is where the Jesinoski United States Supreme Court case comes in (2015 fresh caselaw for you here). This case involved a borrower who tried to rescind their loan by sending in the notice of cancellation (due to alleged "material" TILA loan violations) and the notice to rescind was sent on the third year, preceisely on the cutoff date. The borrower did not file a lawsuit to do this, they just sent the letter in. Bank of America (successor to Countrywide) sent the borrower a letter denying them the right to rescind. Bank of America argued that if the borrower wanted to rescind the mortgage, this had to be done by FILING A LAWSUIT within the three year period. The borrower disagreed and the case went to court.
After losing in the lower Courts, the United States Supreme Court picked this one up on certiori (review) and decided to weigh in and resolve the dispute over HOW a borrower is supposed to cancel. In a nutshell, the Court said if a borrower has material TILA violations, then get an extended three year right to rescind the loan, and alll they have to do is NOTIFY THE LENDER IN WRITING (within the three year cutoff period) and NOT FILE A LAWSUIT within three years. So a very simple decision.
The Court also discussed that there was no need for the borrower to initially tender back the loan money he/she got, as the lender was first obligated to perform their obligations as set forth above BEFORE the borrower had to look at their tender obligation. So merely sending in a TILA cancellation later, as hopefully you can see, has a pretty powerful effect on the rights and obligations between a borrower and a bank.
The Court also noted that if the creditor disputed the borrower's assertions, they could always file a "Declaratory Judgment" action (which is bascailly asking a court to determine the rights of the parties and whether or not they have a valid loan in place, or whether it should be cancelled, and if cancelled, how to work out the final details). This Declaratory Relief action must, under the statute, be filed within 20 days of the borrower sending in the rescission notice. So that is not really much time, but that is what the law says.
So here are a few questions my law firm is getting on this topic, and I thought I would provide my answers which may provoke further thought and conversation on this very interesting legal topic.
Will the borrower get the house for free if they rescind under TILA?
This is doubtful. Again, the Courts will not likely allow this to happen, and what might happen is the borrower and the creditors work out a deal in federal court during a Declaratory Judgment Lawsuit (assuming the lender, loan servicer, creditor, or securitized loan trust files such an action within 20 days.
Now, if the borrower rescinds the mortgage, and the lender fails to respond within 20 days, you might see borrowers going to file their own Declaratory Judgement action, and also seeking to Quiet Title and filing for "cancellation of instruments" (this will vary as each state has its own laws and we are only licensed to practice in California and Arizona). This is also possible because if you rescind, and the lender forecloses, there is some case law that suggests you lose your right to rescind the loan if the house is sold. So this is one thing to keep an eye on. Of course, if the lender or creditor forecloses when the security interest was VOISD AS A MATTER OF LAW (as we discussed above) then you can see how this might be argued to be a "wrongful foreclosure" or a willful, or opressive exercise of the power of sale under the (cancelled) deed of trust, and that opens another can of worms, again depending upon the law in your jurisdiction. But these are things to just keep in mind.
What does a mortgage lender do if they disagree with the borrowers assertion that there is a material loan violation justifying an extended three year right to rescind the loan?
Again, they have 20 days to go into court. They could also try to contact the borrower and work our an arrangement informally. Nothing prohits a borrower and a lender from resolving their TILA dispute privately and informally on terms acceptable to both parties.
Can I rescind my loan that was originated in 2007 or 2008?
This does not appear to be promising, although never say never as borrowers will keep trying to expand the law of "equitable tolling" of the statute (meaning that perhaps the 3 year right to rescind should be extended to the "date of discovery" of the fraud or concealment which would allow borrowers to bring these claims beyond three years after the "consumation" of their loan (which is also defined by state law but generally understood to mean the date of closing, the date the borrower became obligated on the loan, the date the papers were signed etc.). There is some discussion on this point as well. But suffice to say, the three year deadline for the time being appears to be pretty firm.
If you haven't had enough, watch my videos that discuss the brief from my Business and Real Estate Youtube channel. Make sure to SUBSCRIBE by click on the RED "V" in the top right hand corner. If you have any thoughts or comments please feel free to share them
The Jesinoski v. Countrywide Video Case Briefs (Part 1 and Part 2) by Attorney Steve Vondran. Real Estate Litigation Whiteboard!
Where can I get more information about TILA?
Attorney Steve Vondran is a licensed real estate broker and attorney in both California and Arizona. We represent both Plaintiff's and Defendants in federal TILA litigation including rescission and recoupment claims. We also handle a real estate arbitration and litigation for real estate professionals. We can be reached at (877) 276-5084 or on our website VondranLegal.com. We hope you enjoyed this article, fee free to share this on your social media networks.