Loan Rescission - When Three Days Really Means Three Years

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Nathan F.

Guest
#1
By Nathan Fransen
Attorney

Fransen & Molinaro Law Firm
Toll Free (951) 520-9684
www.modifyloan.net

In recent months our country has seen a staggering increase in the number of defaults of residential mortgages, specifically those involving “sub-prime†borrowers and what I would like to call "predatory lending" practices. Thee defaults will continue to lead to foreclosures, short sales, subsequent property devaluation, and other related adverse circumstances. Many borrowers will end up in bankruptcy or credit counseling, often reaching out to attorneys for direction. Regardless of the attorney’s area of practice or background, a solid understanding of the remedies available to desperate homeowners is perhaps now more timely than ever. Arguably the most valuable remedy available exists in The Truth In Lending Act, promulgated by Regulation Z, specifically a borrowers right to rescind.

Most people are familiar with the “three-day right to cancel†period after signing a refinance loan secured by a principle dwelling. Lenders even provide documentation that clearly identifies the procedure for canceling the loan and the time in which it can be done. What the documentation fails to explain is that if any one of three key aspects of the loan package is not properly completed, the three day period is extended to three years.


Before explaining what these three defects are, it is helpful to first understand what canceling, or “rescinding†a loan really means. In a very general sense, to rescind is to “undoâ€Â. Basically put the injured party back to their original position. When a person rescinds a loan during the three day period the loan is simply not funded. There are no closing costs because there is no closing (exceptions such as appraisal fees may apply). The borrower simply keeps their existing loan; but what about when the loan has already closed? What about when the borrower has made payments on the loan for say, two and half years? In that case, what happens is that all closing costs and all interest paid to date on the loan are returned to the borrower. I highlight these two items because most people find the need to read them several times. The truth is there are other favorable events that take place, but this should at least peak your interest.


What makes a loan rescindable for more than three days.

First, a loan must qualify, that is it must be a refinance, or non-purchase loan, secured by a principle dwelling (Second mortgages and home equity lines of credit qualify since they meet the requirements above.) 15 U.S.C. § 1635(a); 12 C.F.R. §§ 226.15(a) 226.23(a)


Second, there must be a failure by the creditor to provide accurate material disclosures or the notice of right to cancel in the prescribed manner. 12 C.F.R. §§ 226.15(a)(3), 226.23(a)(3). Regulation Z defines, in no uncertain terms, what the term material disclosures is intended to include. “The term “material disclosures†means the required disclosures of the annual percentage rate, the finance charge, the amount financed, the total payments, the payment schedule, and the disclosures and limitations referred to in sections 226.32(c) and (d).†12 C.F.R. § 226.23(a)(3)(fn48). In a typical loan transaction these terms can be found on a document called “Truth In Lending Disclosure Statementâ€Â. The numbers on this disclosure statement must be accurate to within very narrow tolerances. Depending on the type of loan, the Annual Percentage Rage (APR) must be within 1/8 of 1 percentage point of the actual APR. 12 C.F.R. § 226.22(a)(2). The total finance charge can not be understated by more than $100 in most cases, and not more than $35 if the creditor has initiated foreclosure proceedings. 12 C.F.R. §§ 226.23(g), 226.23(h). It is necessary to carefully examine the final closing statement and compare it to the Truth In Lending Disclosure Statement to identify possible discrepancies.


The notice of right to cancel is perhaps the most straight forward requirement of the creditor set forth by TILA, yet the most commonly violated in predatory lending. It seems apparent from reading TILA, Regulation Z and the associated commentary, that Congress was concerned with two aspects of the creditor/borrower relationship. First, they wanted to make sure borrowers received as much disclosure as practical so that they can make an informed decision. Second, they wanted to make sure that borrowers had ample time to consider this decision after being presented with all the details. The three-day right to cancel is intended to accomplish this second concern.


The law is very clear on what is required when it comes to the notice of right to cancel. Each borrower, must receive two notices of right to cancel which clearly and conspicuously disclose: (1) the retention or acquisition of a security interest in the consumer’s principal dwelling; (2) the consumer’s right to rescind the transaction; (3) how to exercise the right to rescind with a form for that purpose, designating the address of the creditor’s place of business; (4) the effects of rescission; and (5) the date the rescission period expires (Regulation Z § 226.23(b)(1)(i-v)). In an effort to assist creditors, Regulation Z even includes a model form showing exactly what must be disclosed. 12 C.F.R. § 226 App. H. Unfortunately, creditors often leave the completion of these forms to the closing agent or notary public. Given the recent rise of “mobile notaries†or “loan document signersâ€Â, the environment is fraught with negligence when it comes to this duty.


To understand how this negligent disclosure occurs, it is important to understand how the loan signing is conducted in practice. After loan documents are generated and issued by the lender, they are sent to an escrow company designated often times by the mortgage broker. Typically the loan documents are transmitted via email but regardless of the form, the escrow company prepares the loan document package, including the lender documents with documents prepared by escrow. The notice of right cancel is one of the documents provided by the lender, however since the lender does not know when the borrower will ultimately sign the documents, they typically leave certain fields on the notice blank, specifically the date the rescission period expires (see item #5 above). The documents are then presented to the borrower, often in the comfort of their home with a “mobile notary†present to notarize the requisite documents and direct the signing. The notary public will usually present the borrowers with a “copy package†of the loan documents that is an exact duplicate of the ones to be executed and returned to escrow. This is often where the problem arises. A prudent lender will put sufficient copies of the right to cancel in the loan documents when they deliver them to escrow. In a transaction with a husband and wife this usually means a total of five (5) copies, two per borrower as required by statute, and one to be acknowledged by the borrower and returned to the lender. However the notary will often presume that the copy package contains all necessary paperwork for the borrower(s) and proceed to have them execute all notices and retain them in the package. When the lender receives five notices they logically presume that the borrower is in possession of a copy package and thus the remaining four are redundant. The problem is that the notary never opened up the copy package and properly completed these notices and thus, the borrower never received adequate notices of right to cancel. This scenario has numerous variations but the result is that many borrowers were never properly given their notice of right to cancel, and as such, are entitled to rescission pursuant to TILA.

In defense, a lender will undoubtedly raise is that they are in possession of an acknowledged copy of the notice of right to cancel which clearly states the borrower acknowledges that they received two copies of such notice. TILA addresses this defense in section 1635(c) stating “Notwithstanding any rule of evidence, written acknowledgment of receipt of any disclosures required under this subchapter by a person to whom information, forms and a statement is required to be given pursuant to this section does no more than create a rebuttable presumption of delivery thereof. (emphasis added)â€Â. 15 U.S.C. 1635(c). Further case law has indicated that this is a low burden (See Cooper v. First Gov’t Mortg. & Investors Corp., 238 F. Supp. 2d 50 (D.D.C. 2002)). Presumably the defective notices the borrower(s) is likely in possession of from their copy package is at least a strong argument in overcoming the presumption.


Raising the Issue of Rescission

Although a rescission claim can be brought initially in a complaint, it is often prudent, and more cost effective to do so by sending a letter. The letter should be sent to the current lender who although may not have been the original party to the loan transaction, is still liable under TILA. 15 U.S.C. § 1641(a). A borrower should be prepared to “tender†which is a requirement of TILA and basically means the borrower must return the money that is still owed to the creditor. 15 U.S.C. 1635(b). Essentially, the calculation requires taking the money that was actually received by the borrower or paid to others on their behalf (such as the payoff of the previous loan), and deducting all interest payments and attorney’s fees. Since it is likely the borrower will not have this money on hand, it is best to have the borrower arrange for a new loan conditioned on the rescission, and notify the creditor of this fact in the rescission letter. Technically, the lender has 20 days after receipt of a notice of rescission to terminate the security interest and return all monies owed. 15 U.S.C. 1635(b). Returning the monies owed is usually done in the form of a new “payoff statement†reflecting the adjusted amount. Given the severity of this remedy, a lender will often respond with reasons as to why they do not feel rescission is proper. A discourse can ensue that can last for any length of time. At some point it may be necessary or appropriate to file a suit in order to conduct proper discover and ultimately have the question resolved in court. Regardless of the method of obtaining a rescission it is important to note that the lender is responsible for reasonable attorney’s fees and costs. 15 U.S.C. 1640(a)(3). This is of particular importance because without such a provision the remedy is often meaningless to a borrower despite obvious justification.


Some may argue a violation such as the failure to properly date the right to cancel notice is overly technical and abusive. This position is myopic in that it minimizes the value a remedy such as rescission plays in defending borrowers against predatory lending. A borrower who is satisfied with their loan and the transaction that proceeded rarely seek legal counsel; rather it is those who have stories of misrepresentations and deceptive practices that do so. Violations of TILA may not be the sole cause of action in a case, but it certainly is one that can potentially provide the greatest relief, that is, returning the borrower to their original position. Failure to identify a potential rescission effectively denies a key remedy available to a borrower in need. In addition to a thorough understanding of TILA and Regulation Z, a solid understanding of the loan process is critical. Discussing a borrower’s transaction with a mortgage broker, escrow officer or notary public can be extremely enlightening in bridging this gap.


The law in this area will continue to evolve as we are already seeing numerous court decisions hand down significant rulings with respect to predatory lending. Unscrupulous lenders will always be a part of home financing, but at least with remedies available such as the ones provided under TILA, a borrower will have some recourse, and hopefully, lenders will weight the risks of such activity and err on the side of caution
 

Antonio

LoanSafe Member
#2
How can I be in touch with you if I need your services? I am having these problems with my 2nd mortage, I am in M.D...please help.
 

Antonio

LoanSafe Member
#5
Who can provide me is e-mail or phone, please? thanks in advance!!!

p.s: the only paperwork I got from my 2nd mortgage refinancing was a HUD1 fax copy that I had to sign and fax back to them, after that they sent me the checks and a settlement statement by fedex... any experts, please?
 
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Brian K.

Guest
#6
sounds like a good TILA case to me. Without the other disclosures the lender is not in good shape.
 
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Brian K.

Guest
#10
You don't happen to have a Novastar loan do you? I am looking into a possible class action against them out of the Maryland area.

In any event send me private email to discuss the referral.
 
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Jose L. Semidey

Guest
#12
Dear Brian,

I have a friend that has a fist and a second with First Magnus, and about six months he talked to what I now know to be a shark loan person, They got a mortgage through him, and this guy had them get into some kind of trust with a lien against the home, now loan shark , is evicting them and tells them the house is his to keep , because they sent the payment to him 5 days late. This does not seem right. do you know some one in VA, we can talk to. There were not TILA disclosures, but the loan is secured by a lien against the home, might this deal be illegal, and thus rescindable?, CAn some one set a private trust and take over the house without the first and second trust approval of the change?

This looks predatory in nature.
This guy charged them $10,000 for every $30,000 they got, they borrowed $100,000. and this guy gauged them with almost $40,000 in fees.

Is this type of activity criminal, usurious, RICO, etc???:eek:
 
#14
Do you think I have a case if my loan funded October 24, 2005 the recission notice in my copy package is completely blank, and then I received a letter from the lender dated Nov 3, 2005 (after the loan funded) requesting I resigned the recission notice because the one I signed that they had had a date filled in of 9/22/2005 instead of 10/22/2005? I have the original letter requesting me to resign, the copy of the original recission notice that they sent to me as well as the return Fed-Ex bill. Also, if I do have a case, what happens if the original lender is now out of business? Just a side note, I lost my job and this loan is now in default/foreclosure with a sale date pending.
 
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Mary Salzer

Guest
#15
Well, without a doubt there are some serious irregularities reflected in your post as regards the rescissionary period. Having said that, you need to immediately do not pass go contact an Attorney for assistance, some of the Lenders felt that with the Fed-X delivery routine, they had constructive notice and were safe as they reopened rescission, but did not inform you how that specifically worked. I watched it in action and was curious to see if I could get my hands on one after the fact as it was not real solid ground for them....

Please you need a forensic document review, an attorney and some real fast footwork to get some things resolved fast. There is an attorney reflected on this site, there are others that you can get referral to through your local Bar Association. Please, please make sure that they are very, very experienced in this field of practice, reputable, honest and comfortable for you to work with. Do something fast, from what you have represented in your post you do have some teeth on this subject, real teeth.
 

Moe Bedard

Call 1-800-779-4547
Staff member
Loan Safe Mortgage
#16
You definitely have something here. But there are issues that you will have to address if you choose to go the rescission route. For one, you will have to tender with a new loan if your current lender rescinds this loan and agrees that TILA has been violated and that is something that you will have to consult with an attorney about.

(5) the date the rescission period expires (Regulation Z § 226.23(b)(1)(i-v)). In an effort to assist creditors, Regulation Z even includes a model form showing exactly what must be disclosed. 12 C.F.R. § 226 App. H. Unfortunately, creditors often leave the completion of these forms to the closing agent or notary public. Given the recent rise of “mobile notaries” or “loan document signers”, the environment is fraught with negligence when it comes to this duty.
You should speak with an attorney or 2 about this ASAP.
 

Moe Bedard

Call 1-800-779-4547
Staff member
Loan Safe Mortgage
#18
No problem. That is the tough thing with this new area of law. Not many lawyers do this but you can try www.NACA.net and find an attorney http://members.naca.net/findanattorney.php.

The National Association of Consumer Advocates (NACA) is a nationwide organization of more than 1000 attorneys who represent and have represented hundreds of thousands of consumers victimized by fraudulent, abusive and predatory business practices.
The biggest issue I see is that you need to be able to qualify for a new loan. So, getting back to work is imperative for anything you wish to do in working with your lender. Maybe you can negotiate a loan modification based on the TILA violations out of court?

Best of luck to you!
 
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Buddy Wizer

Guest
#19
quick question.... if a borrower used 100% financing from the same lender when purchasing their home, is the 20% of the equation ( the 2nd mortgage) rescind-able? Regulation Z rules would apply with the 2nd mortgage?

This would have been a 80/20 loan.

thanks!!


Buddy

BUDDY YOU ARE A LOSS MIT GUY AREN'T YOU?????
 
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Mary Salzer

Guest
#20
Ah buddy you disappoint me trolling for info on the forum.....seriously disappointed me......to bad.:mad: