The Right of Rescission and its Limits

June 5, 2014 at 8:45 am Leave a comment

Just about everyone knows that when they take out a home equity loan to remodel the kitchen, they have three business days to rescind the transaction.  This right comes to us courtesy of 15 USC 1635(a) and its corresponding regulations at 12 CFR 1026.23(a)(2).  It applies to any individual who receives consumer credit in exchange for a security interest in his or her principle dwelling.  This provision occasionally scares the bejebies out of credit unions because if its notice requirements aren’t followed, the homeowner has three years to rescind the loan.

This sounds like a big deal but a recent decision by the federal Court of Appeals Seventh Circuit underscores that the right of rescission has its limits.  The ruling is consistent with what New York’s federal courts have said about the issue and the decision is worth filing away if and when a member defaults on a home loan.

Iroanyah v. Bank of America involved homeowners who took out two mortgages against their home.  As required by the Truth in Lending Act, they were given a disclosure statement explaining the repayment schedule, including the number of payments, the amount due for each loan, and the due dates for the first and last payments.  However, the disclosures did not include the date on which each payment was due, nor the frequency with which payments were to be made.  As my wife just pointed out, this seems like a fairy significant oversight, and indeed it was.

When the homeowners stopped making payments and the evil bank moved to foreclose on the property, the homeowners argued, and the court agreed, that their right of rescission had been violated.  At this point of the decision, the homeowners probably thought it was time to uncork the champagne.

But then the Seventh Circuit explained that even though the Truth in Lending Act requires a creditor to release its security interest and return all money paid in connection with a transaction (12 CFR 226.23(d)(4)), the courts have the authority to condition the release of a lien on the borrowers repayment of any unpaid loan proceeds already advanced to the borrower.  In other words, the right of rescission doesn’t provide a windfall to the borrower who takes out a consumer loan.  Instead, it puts the borrower back where he would have been had the loan never been made.  As the Court noted, “TILA does not give borrowers the right to rescind their own obligations without also making the lenders whole.”  The exact repayment terms are within the discretion of a court to fashion.

One other interesting aspect of this case is worth noting.  When the right of rescission notices are not properly provided, homeowners have three years as opposed to three days to rescind the transaction.  However, the homeowner still has only one year from the date of the violation to sue for damages resulting from this violation.

Strip away the legal niceties and if you ever find yourself facing a potential violation of the right to rescind, don’t panic.  Once you start reading the way the statute has been interpreted, its bark is much worse than its bite.




Entry filed under: Compliance, Legal Watch, Mortgage Lending. Tags: , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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