Pondering TILA Rescission

For additional information or assistance please call 954-495-9867 or 520-405-1688

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see Jonathen Foxx article on TILA Rescission BEFORE the Supreme Court decision http://nationalmortgageprofessional.com/news/42119/tila-versus-tila-rescission-notice-or-lawsuit

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In my continuing research into the mechanics of rescission I keep bumping into articles like the Foxx article in the link shown above. While he concedes that no lawsuit is required to “effect” rescission, he seems concerned that the mechanics (procedure) are such that the impact on banks would be onerous and impossible to fulfill.

My answer to that is simple and seems to be borne out by the unanimous Supreme Court decision penned by Justice Scalia. The answer is that it isn’t supposed to be nice to the banks. It was decided by the highest legislative authority in the country (Congress, and now the highest court in the land) that rescission is effective as of the date of mailing and that all the duties and obligations of the creditor commence as of the date of rescission, and that they have 20 days to do it all. If they fail to comply then they are responsible for their own “injury’ (if that have one) in potentially waiving or suspending any right they have to recover the net debt due from the borrower whose obligation they purport to own, manage or service.

Foxx is right when he says that getting an actual final decision from any court during the 20 day period puts an impossible burden on the creditor who believes that the the rescission was improper or otherwise barred by some set of facts, rules or laws. But that is exactly what  Congress did after very careful consideration of the competing ideas and claims from both the consumer side and the banking side.

The simple truth is that if the bank was the actual lender and they had all their proof of their disclosures etc., they would easily get a court order to set aside the rescission. Presumably their failure to comply with TILA would then be excused. And speaking of presumptions TILA says that if the borrower signs an acknowledgement that the disclosures were made, there is a presumption that the disclosures were in compliance with statute.

So IF the creditor proves they are a creditor on the basis of proper pleading the burden shifts back to the borrower to justify the rescission notice. BUT that is only true if the creditor files a lawsuit within 20 days of the notice contesting the the rescission. And yet, there is no evidence that any 20 day lawsuit has been filed by any creditor or servicer who received a rescission notice. Instead they have cooked themselves in their own stew.

Instead of complying with statute by giving back the note, mortgage satisfaction and the money AND/OR filing the action to contest the rescission, the banks instead either ignored the notice or sent back a notice of rejection of the rescission which completely cures the borrower’s problem about delivery of the notice.

Actually in most cases the Banks had no choice. If they had filed suit the way the TILA statute demands, then they would be admitting that the loan was not necessarily secured (and that the note was not necessarily a negotiable instrument) and in fact that the alleged debt was at that moment unsecured by operation of law. Sales and resales, of mortgage backed securities, guarantees, insurance, credit default swaps and other hedge products would have come to a screeching halt. So the banking industry took the position that there was at least an arguable basis for rejecting the rescission. By kicking the can down the road they enlarged the time that they could sell more bogus mortgage backed securities and enlarged the negative impact on the country.

PRACTICE SUGGESTION: Consider the fact that the current interpretation of TILA allows for rescission and might allow for equitable tolling (this is still in doubt), the defined elements of negotiable paper might not be present until all possibilities of rescission were obliterated. Hence being a holder or even a holder in due course of the paper would not give rise to any presumptions in favor of the bank, “lender,” or servicer as holder or anything else. It would be a simple lawsuit based upon alleging and proving up the debt and alleging and proving the mortgage as collateral for the debt — something the banks don’t seem to be able to do because they misused the investor money in the first place and if they proved or even alleged what they really did with the investor money they would be admitting to potentially criminal and certainly civil fraud.

Here are some quotes form the Foxx article that I found interesting:

TILA Versus TILA: Rescission by Notice or Lawsuit

Thursday, September 4, 2014 – 12:54
Given the immense legal implications, especially with respect to the loan flow process from point of sale through portfolio and securitization, I would urge a familiarity with the positions taken by both parties to the litigation. ….
The Big Question
Jesinoski v. Countrywide cites Section 1635 of TILA to present the foundation upon which the deliberations are to proceed. In that section, it states that a borrower “shall have the right to rescind the transaction until midnight of the third business day following … the delivery of the information and rescission forms required under this section … by notifying the creditor … of his intention to do so.” …
“Does a borrower exercise his right to rescind a transaction in satisfaction of the requirements of Section 1635 by “notifying the creditor” in writing within three years of the consummation of the transaction, as the Third, Fourth, and Eleventh Circuits have held, or must a borrower file a lawsuit within three years of the consummation of the transaction, as the First, Sixth, Eighth, Ninth, and Tenth Circuits have held?” [Editor’s note: this article was written before the Supreme Court decision stating that no lawsuit was required for rescission to be effective under TILA. Thus a matter considered settled by the legal communities in a majority of states were wrong.] …
The Three-Year Gauntlet
Stepping through the rescission timeframe toward the three year mark, this is a brief outline of how TILA  sets forth the obligations of borrower and creditor:
1. A borrower who secures the loan with a principal dwelling “shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section … whichever is later” by notifying the creditor of the intention to do so.
This means that the borrower has an unconditional right to rescind for business three days after the consummation of the transaction and, as a remedy for a creditor’s violation of the Act’s disclosure requirements, extends that right to rescind until three days following the ultimate delivery of the required disclosures.
2. A borrower’s exercise of the right to rescind “sets in motion a series of automatic steps to unwind the transaction,”  imposing obligations on both the creditor and the borrower. When a borrower “exercises his right to rescind, he is not liable for any finance or other charge, and any security interest given by the borrower becomes void upon such a rescission.”
3.  Following the borrower giving notice to rescind, and within 20 days after receipt of a notice of rescission, the creditor must return to the borrower any money or property given as … down payment … and “shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction.”
4. The borrower’s time limit for exercising the right of rescission is three years from the transaction’s consummation,  even if a creditor never delivers the disclosures required by the Act. …
the respondents (banks) concluded that, outside of the three-day unconditional rescission period, TILA does not impose any obligation on lenders to rescind a mortgage upon a borrower’s unilateral demand. [Editor’s note: As said above, they were wrong — but wrong like a fox. They steadfastly refused to file an 20 day actions required by TILA because the negotiability of the notes and mortgages would have been obliterated. It doesn’t matter, they will now argue, that we were wrong — everyone thought we were right. AND now it is too late to file an enforcement action under the provisions of TILA because it is time-barred. The problem for the banks is that the borrower does not need to file an action to enforce the rescission. They can if they want to. But all they really need to do is to clear title based upon the FACT that the mortgage is void.] …
Even if it could somehow be interpreted that a lawsuit is required to rescind the loan transaction, within the specified timeframe, Section 1635’s procedures clearly do not contemplate how a court proceeding could be held in a timely manner.
Recall that the statute expressly states that within 20 days after receipt of a notice of rescission, the creditor must return any “money or property given as earnest money, down payment, or otherwise” and “shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction.”  The provision specifies that those procedures of Section 1635(b) are triggered by “receipt of notice of rescission,” not by a lawsuit. Moreover, the time limits established here and elsewhere in Section 1635(b) are tied to the actions of the borrower and creditor.  Therefore, operationally, to comply with the pleadings timeframe, the statute would be inconsistent with the established rules to commence legal action set forth in the Federal Rules of Civil Procedure for establishing times for responsive pleadings.
A reasonable interpretation of Section 1635,  therefore, is that the notice to a creditor triggers rescission, and the default procedures of Section 1635(b) follow automatically in due course from that notice, without requiring the initiation of a court proceeding.”

Rescission: Equitable Tolling Extends Statute of Limitations

For further information please call 954-495-9867 or 520-405-1688

Important Message: This blog should NEVER be used as a substitute for competent legal advice from an attorney licensed in the jurisdiction in which your property is located.

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see http://openjurist.org/784/f2d/910/king-v-state-of-california-d-m

The most popular question I get here on the blog and on my radio show is what happens when the three year statute has run? The answers are many. First is the question of whether it ever started running. If the transaction was not actually consummated with anyone in the chain of parties claiming rights to collect or enforce the loan it would be my opinion that the three day right of rescission has not begun to run. That would be a remedy to an event in which the note and mortgage (or deed of trust) has been signed and delivered but the loan was never funded by the originator any creditor in the chain of “ownership.” The benefit of the three day rescission is that you don’t need a reason to do it. But in order to do that you need to be careful that you are not stating that there was a closing because that would be consummation and therefore the right to rescind unconditionally ran three days after that “Closing.”

Second is the three year statute of limitations. The same reasoning applies.  But it also raises the question of non-disclosure and withholding information. The rather obvious delays in prosecuting foreclosures on alleged “defaults” are clearly a Bank strategy for letting the 3 year statute run out and then claim the homeowner cannot rescind because the closing was more than 3 years ago. That is where the doctrine of equitable tolling comes into play. A party who violates TILA and fails to disclose material facts and continues to hide them from the borrower should not be permitted to benefit from continuing the violation beyond the apparent statute of limitations. People keep asking why the banks wait so long to prosecute foreclosures. The answer is that it is because they have no right to do so and they are running out the apparent statute of limitations on rescission and TILA disclosure actions.

Third is a procedural issue. According to TILA the “lender” who receives such a notice of rescission is (1) obligated to send it to the “real” lender and (2) must file a declaratory action against the borrower within 20 days in order to avoid the rescission. If they don’t file the 20 day action, they waive the objections they could have raised. So far I have not heard of one case in which such an action has been filed. I think the reason for that is that nobody can file an action in which they establish standing. Such a party would be obliged to allege that they are the “lender” or “creditor” as defined by TILA. That means they either loaned the money or bought the loan for “valuable consideration” just like it says in Article 9 of the UCC. Then they would have to prove that allegation before any burden shifted to the borrower to answer or file affirmative defenses against the action filed by this putative “lender.”

CAVEAT: The doctrine of equitable tolling is remedial as is the statute, but it is fairly strictly construed. I’m am quite confident that the best we will get from the courts is that the 3 day and 3 year rules and other limitations in TILA starts running the moment you knew or should have known the facts that had been withheld from you at “closing.” The fact that you are not a lawyer and did not realize the significance of this will not allow you to delay the start of the statute running after the date of discovery of the facts, whether you understood them or not.  But this is a two-edged sword. The current practice of objecting to any QWR, DVL or discovery question without answering the truth about the claimed chain of ownership or servicers on the loan corroborates the borrowers allegation that the parties are continuing to withhold this information. So a well-framed TILA defense might serve as the basis for enforcing your rights of discovery and rights to answers on your Qualified Written Request or Debt Validation Letter.

Additional Caveat: The doctrine of equitable tolling has been applied with respect to the one year statute of limitations on TILA disclosures but it remains open as to whether it would be otherwise applied. From the 9th Circuit —

“Section 1640(e) provides that “[a]ny action under this section may be brought within one year from the date of the occurrance of the violation.” We have not yet determined when a violation occurs so as to commence the one-year statutory period. See Katz v. Bank of California, 640 F.2d 1024, 1025 (9th Cir.), cert. denied, 454 U.S. 860, 102 S.Ct. 314, 70 L.Ed.2d 157 (1981). Three theories have been used by other circuits to determine when the statutory period commences: (1) when the credit contract is executed; (2) when the disclosures are actually made (a “continuing violation” theory); (3) when the contract is executed, subject to the doctrines of equitable tolling and fraudulent concealment (limitations period runs from the date on which the borrower discovers or should reasonably have discovered the violation). See Postow v. OBA Federal S & L Ass’n, 627 F.2d 1370, 1379 (D.C.Cir.1980) (adopting “continuing violation” theory in some situations); Wachtel v. West, 476 F.2d 1062, 1066-67 (6th Cir.), cert. denied, 414 U.S. 874, 94 S.Ct. 161, 38 L.Ed.2d 114 (1973) (rejecting “continuing violation” theory, statutory period commences upon execution of loan contract); Stevens v. Rock Springs National Bank, 497 F.2d 307, 310 (10th Cir.1974) (rejecting “continuing violation” theory); Jones v. TransOhio Savings Ass’n., 747 F.2d 1037, 1043 (6th Cir.1984) (applying equitable tolling and fraudulent concealment).”

Hats off to James Macklin who sent me this email:

Hang on to your hats fella’s…in Sargis’ ruling … back in 2012…he confirms the equitable tolling principles of TILA as I had argued…just saw this again while reviewing…to wit:
“The Ninth Circuit applies equitable tolling to TILA’s … statute of limitations (King v. California, 784 F.2d 910, 914 (9th Cir. 1986).
“Equitable Tolling is applied to effectuate the congressional intent of TILA.”, Id.
Courts have construed TILA as a remedial statute, interpreting it liberally for the consumer.” (Id. Citing Riggs v. Gov’t Emps. Fin. Corp., 623 F.2d 68, 70-71 (9th Cir. 1980).
 Specifically the 9th Circuit held: “[T]he limitations period in section 1640(e) runs from the date of consummation of the transaction but that the doctrine of equitable tolling may, in appropriate circumstances, suspend the limitations period until the borrower discovers or had the reasonable to discover the fraud or non-disclosures that form the basis of the TILA action.” 
Gentlemen…I give you proof positive that the statute tolls and the fact that the term “consummation” is also subject to broad interpretation as we know…the loan could not have consummated if what we allege is found to be true… However, the non-disclosures language used by the 9th Circuit gives rise to possible myriad rescissions upon discovery of those non-disclosures…
James L. Macklin, Managing Director
Secure Document Research(Paralegal Services/Legal Project Management)

Rescission: Shifting the Burden of Proof

For more information please call 954-495-9867 or 520-405-1688

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see http://www.foreclosuredefenseresourcecenter.com/top-f-foreclosure-defense-strategies-in-california/truth-in-lending-rescission/

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.

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