Rescission: Shifting the Burden of Proof

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I ran across an excellent article on rescission in mortgage cases that I think is a MUST READ for those who might be affected or entitled to use it. Check the link above. Make sure you check with a knowledgeable attorney licensed in the jurisdiction in which your property is located before you act, but I think there are very good reasons to send out the notice of rescission in virtually all cases.

From my reading of the Supreme Court’s decision and other cases the notice need only be a statement that the “borrower” hereby rescinds the transaction with appropriate reference to the loan number. It would be wise to attach the note and mortgage, in my opinion. It does not appear that you need to state your reasons and I would suggest you not do so. Basically the statute says you can rescind within three days of “consummation” of the transaction without a reason or within three years if the disclosures were wrong, inadequate or withheld. But the statute does not appear to require you set forth what disclosures were wrong or how they were wrong so I would suggest that no such statement be included.

In cases where the disclosures were intentionally withheld (table funded or third party sourced loans) the statute of limitations might not start to run until the date that you knew or should have known of the defective disclosure package. It also might not start to run unless you received two copies of your right to rescind with all the information filled in by the LENDER. Of course right there is a problem since the likely “lender” (the one who actually loaned you the money) was probably unknown to everyone at closing including the borrower. But that doesn’t stop the rescission. In fact, in my opinion, it supports the rescission.

So it is possible for virtually all the loans to be subject to the right of rescission which is meant to give the borrower a very strong remedy with teeth, since all the money, the mortgage and the note must be returned and the mortgage is void by operation of law as soon as a homeowner declares his rescission of the “transaction’ (which is probably nonexistent — something that TILA was intended to prevent).

The most interesting thing to me is the tactical advantage of sending a notice of rescission even if it turns out to be unsupported (disclosures were all there and adequate). It changes the burden of proof. Once the rescission is declared by the borrower, it is then up to the creditor to file a lawsuit (within 20 days of the notice of rescission) against the borrower seeking a declaratory judgment that the notice of rescission is not supported by the facts or should otherwise be declared invalid because of statute of limitations or other grounds.

Thus the statute of limitations also applies to the pretender lender. Since none of them ever filed a declaratory action that I know of (within the 20 days required by statute), every notice of rescission has, by operation of law, and as confirmed by the Supreme Court, rendered the mortgage void. This means that at best the obligation is unsecured and can be discharged in bankruptcy. Any subsequent foreclosure after such a notice of rescission is equally void in my opinion and it appears from the statute and the case law now that the notice can be sent anytime up until the mortgage no loner exists because of satisfaction or forced sale.

In order to file such a lawsuit the pretender lender would have to allege and prove the validity of the origination, including the fact that it was not a table funded loan. This is going to be mostly impossible for any of them to achieve. Strategically it is an opportunity to shift the burden of proof on matters that should already be within their burden of proof (but ignored by many trial judges) to the party seeking foreclosure or the party whom they purport to represent as the creditor. I am even wondering if the rescission should be stated in responsive pleading or notice of filing in pending foreclosure cases.

This might be the powerful tool I thought it was back in 2007 where the parties involved in “securitization fail” (see Adam Levitin) must stop everything and (if they do it within the time period prescribed by statute) actually prove (a) that there really is a transaction under that pile of documents they show the court and (b) that there was adequate disclosure of the real parties in their closing and real terms. Remember that the statute has a “tolerance” of only $35 for the the disclosed terms.

Comments are invited.

14 Responses

  1. Ok, I did the Rescission. They received the letter on February 14, and of course they responded with the normal letter that I was beyond the 3 years and they will not honor the rescission. I received the response on March 14. So what is my next course of action?

  2. Can someone assist me with an issue. I submitted a Rescission with all the required documents, but having trouble getting it recorded in Baltimore County public records. Any ideas on how I can get it recorded? James Smith, 443 677 2799. Thanks

  3. Here is some good case law that was cited in the CFPB’s brief in Jesinoski related to what happens to the mortgage once the borrower rescinds. The case is FAMILY FINANCIAL SERVICES, INC. v. SPENCER, 41 Conn. App. 754 (1996)(,%20INC.%20v.%20SPENCER)

    The Spencer Court states: “The plaintiff did not accept the defendant’s rescission. The plaintiffs failure to acknowledge the rescission or to take proper actions after receipt of the notice of rescission within the twenty day period allowed by statute, terminated its security interest and prevented the mortgage from being foreclosed.”

    The Spencer Court further states: “We conclude that the trial court properly interpreted and applied 15 U.S.C. § 1635 (a) and (b). The tender of property is not required by § 1635 (b) as a condition preceding rescission. The notice given by the defendant properly rescinded the transaction. The failure of the plaintiff to accept the valid rescission by the defendant nullified the plaintiffs security interest. Because the [41 Conn. App. 771] plaintiffs security interest became void, it was barred from foreclosing on the mortgage. The trial court correctly concluded that TILA does not require tender back in order effectively to rescind the mortgage.”

  4. Information only: my “alleged” loan paperwork was dated: December 26, 2006, closed February 27, 2007, with cease and desist orders in place, Federal Investigation, etc….no lending to New Century was going on, Hmm! Come to find, they were borrowing lines of credit prior to January 2007 AND taking people’s payments and escrows and not applying them as well. Funding anyone? How did this work? Defaults of many loans were “before” homeowners didn’t/couldn’t pay and FYI: having files from servicers in hand many modifications are not in ledgers…even after “supposed” mods, the payments are the exact same amount as prior to a mod…so for me: there was no trust or PETE in place to authorize the mod…keep a keen eye on that play!

    Just my non-legal input.

  5. My situation is complex. I sent rescission letter to th ecreditor three months before the mortgage and note were transferred to the trustee. I sued the creditor to enforce the TILA rescission in federal court and won a judgment against the creditor. The federal court stated that I had timely exercised a valid right of rescission. The servicer/trustee, however, obtained a foreclosure over a year and a half later. I appealed but lost in appeal. The attorney for the bank told the appeals court that no court had ever decided my rescission claim.

  6. DUMB question my loan mod was in 2008 is it to late been over 3 yrs or dose it have to be over 3 yrs to rescission of my loan

  7. were does the fraud trust , we all know doesn’t exists, as a spv, for bankrupty remote purposes, as a sepertate enity wouldn’t the trust have to be a member of mers???

  8. HERE’S A QUESTION; like all mortgages in 2005 as to mine, before signing the mortgage, there is a mers min number on mortgage doc’s.

    so was the mortgage in the mers computer system prior to signing the mortgage???

    and who owns/or is the real entity that controls that mins number? if mortgage electronic registration systems, inc does not own or have anything to do with that mins number . then they dont have anything to do with mortgage. right?

  9. Neil- how about recision of a loan mod. Please address that next. No one has addressed that and there are millions of them out there, at least half of them less than 3 years old.

  10. David I have been told by law one can not transferred a mortgage until it is perfected (recorded in the public record) I am told there is much case law U.S on this subject maybe someone knows for sure.

  11. Sorry, unilateral Mtg. Modification by servicer.

  12. Do you think the this ruling will apply to a valid Quit Claim holder? Where the original alleged borrower is deceased but ex-wife is still alive?

    Do you think a unilateral (by servicer) constitutes a requirement for new TILA?
    W.J.S. Pro Se

  13. i have a copy of the bank wire for my loan, its from a bank other than the one on mortgage and note. and i have a copy of a mortgage note from lender show that they sign over without recourse on same day of signing the mortgage and mortgage note, to the same bank that sent money?? so should i resind

  14. SO., if a homeowner has been fighting with servicer, for past 4 yrs, but just got a full copy of closing docs from old servicer in past few yrs showing that the lender in mortgage and note. did not lend money, than we should, send letter of resinding. right

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