OVER THE PAST COUPLE OF YEARS, INTEREST RATES HAVE BEEN AT their lowest level in roughly 30 years, and many residential mortgage lenders have enjoyed explosive growth. Homeowners have jumped at the chance to cash out the equity in their homes and/or consolidate debt. Yet, as is always the case, there are some borrowers who will encounter financial difficulties and start to fall behind on payments. [??] For these borrowers some options have become less appealing in recent times. Interest rates have started to rise, so the option of refinancing is much less attractive. Unfortunately, some borrowers unable to meet their obligations will look for ways to hold on to their homes by any means possible. [??] With increasing frequency, one claim borrowers are making is that the lender allegedly failed to provide borrowers the required notice of right to cancel (NOR) at closing. Under the federal Truth in Lending Act (TILA), failure to provide proper notices allows the borrower to rescind the loan up to three years after the time of the mortgage loan closing. (If given proper notices, the borrower has three business days in which to rescind under TILA.)
Rescission within three days of a mortgage loan closing is a straightforward process. Rescission up to three years after the closing is far more complicated and costly.
We're seeing more of these "stale rescission claims" in recent years. This article sets out an action plan for lenders to deal with such claims. With some proactive strategies, lenders can avoid what can otherwise be a costly legal trap.
Before getting into the prescriptions, here's a brief refresher on the Truth in Lending Act and rescission under TILA. TILA was passed in 1968. Courts regularly characterize it as a consumer-rights statute. One provision of TILA is a "cooling-off period" for borrowers after consummation of certain loan transactions.
In mortgage refinancing transactions, borrowers must normally be given a minimum of three days from the date of the closing to rescind their loans. TILA also requires that lenders give each borrower two copies of the NOR (one to retain and one to send in if the borrower wishes to rescind, or a single electronic copy each) outlining the appropriate time period to rescind, the meaning of rescission and the proper procedure for rescission. If the lender fails to provide the NOR at the closing or provides a defective NOR, the rescission period can be extended for up to three years.
Courts have generally been quite strict when determining if an NOR is defective. For example, courts have found an NOR to be defective where the lender provided a single copy, rather than two copies for each borrower. Similarly, NORs have been found to be defective when the NORs explain how to calculate the number of days a borrower has to rescind, but do not expressly identify the specific date by which he or she must rescind.
Further, evidence that the borrowers actually knew of their rescission rights all along may not be a defense to a claim based on a defective NOR. A court, for example, has awarded rescission where the lender provided a defective NOR even when the borrowers were real estate agents and admitted that they knew of their rights under TILA regardless of defective NORs.
The lender's first line of defense against stale rescission claims
TILA's rules as to delivery of the NOR are counterintuitive. Every borrower must get two copies of the completed NOR. The copies must be completely and correctly filled out. A husband and wife who are co-signing must receive two copies each.
It must be emphasized to whomever performs closings that these formal requirements exist and that the cost for not conforming to them can be substantial.
When business is booming, in particular, it might be wise not just to train those who perform closings, but also to train loan officers and assistants and remind them periodically of these TILA requirements. Because turnover can be high, ongoing training programs are a critical line of defense. A comprehensive training program merely cuts down on meritorious NOR claims, of course, rather than preventing or deterring false claims. A strong training program nevertheless can be powerful evidence in the event the issue is litigated, and can make the difference at the summary judgment stage of a lawsuit (see the fifth line of defense in this article).
The second line of defense
No one is perfect. Notwithstanding a lender's best training efforts, there may be times when a loan officer or closing agent slips up. It can be as simple as leaving the office in a hurry for a closing at a borrower's home before making the appropriate number of photocopies. In other words, there may be cases when quick internal fact-finding will establish that a particular borrower's NOR claim is, in fact, valid.
If information can be collected quickly and a finding made, there is...