Beach v Ocwen: 1997 Decision that will be used by banks and servicers against rescission

For Further information and assistance please call 954-495-9867 and 520-405-1688.

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See Beach v Ocwen Fla. Supreme Court

I have no doubt that the Banks will attempt to use this decision — but it still is trumped by Jesinowski and other Federal decisions on equitable tolling. Having the right to cancel/rescind is described as extinguished by TILA regardless of the circumstances — including the absence of any enforceable loan contract.
This decision (1998) was rendered far before the idea of securitization was introduced into mortgage litigation. The interpretation of the extinguishment of the underlying right made sense in the context of loans from Bank A to Borrower B. In the era of securitization you have all kinds of questions — like when the transaction was “commenced”. The courts say it is when the “liability” arose. I agree — if we are saying that the consummation of the transaction begins when the lender loans money to the borrower. But in most cases we see that the lender did not loan money to the borrower and that is corroborated by the absence of anypurchase transaction, for value, when the alleged loan is “transferred.” There is no reasonable business explanation of why anyone would release an asset worth hundreds of thousands of dollars without receiving payment — unless it wasn’t an asset of the “seller” in the first place.The presumption is that TILA rescission rights run from the date the liability arose from the Borrower to the Lender. If the Lender was not properly disclosed, then one of two things are true: (1) there is no loan contract which means a nullification and quiet title action is appropriate or (2) until the real lender was disclosed, the transaction was not consummated. That might mean that both the three day rescission and the three year rescission are in play. If the position of the foreclosing party is that a REMIC Trust was finally disclosed to the borrower — and that the Trust was the lender, then disclosure is complete. But that isn’t what happened.

The ultimate decision here is going to be on the question of whether there is in fact a loan contract, and, if so, who were the parties to it? If there was no contract, it is the same as rescission by operation of law. No new rights arise on assignment or even sale of the loan from a pretender lender — unless the purchase was in good faith FOR VALUE and occurred without notice of borrower’s defenses and NOT when the loan was already in “default.” This narrow exception arises under the UCC for a Holder in Due Course to be Protected if they meet the narrow criteria stated in the UCC, article 3, and the narrow enforcement criteria for the mortgage expressed in Article 9.

The so called default is another hidden issue. If someone “acquires” the note and mortgage where the Borrower has already not paid or stopped paying on the alleged loan, then (1) it isn’t negotiable paper and (2) it provides notice that the borrower might not be paying because they don’t owe the party or successor on the note and mortgage (and never did).
When the mortgage crisis began, the banks and servicers were claiming that there were no Trusts and that they could file suit or initiate non-judicial foreclosure without any reference to trusts. That was why forensic audits were initially required — when we thought that REMIC Trusts were the true players. Banks and servicers argued convincingly in court that the Trust was irrelevant. Now in most cases (with some notable CitiMortgage, Chase and BOA exceptions) the Plaintiff or beneficiary is identified as a Trustee, bank or servicer (US Bank usually is the Trustee these days) on behalf of a REMIC Trust. They are now saying that they have the right to be in court or initiate foreclosure because (1) the Trust received an assignment and endorsement of the note and mortgage (2) the servicer has a right to represent and even testify for the the Trustee on the basis of the rights set forth in the Pooling and Servicing Agreement or by virtue of Powers of Attorney that magically appear at trial.
So the banks, servicers and their attorneys are side-stepping the issue of consummation of the transaction. They are withholding the information where the right of rescission would first become apparent to the borrower. When they withhold the information longer than 3 years from the date of the purported “loan closing”, they claim the right of rescission has expired. That is cynical and circular reasoning. That “closing” may be the point in time that the borrower’s “liability” arose, but the liability did NOT arise with the creditor being the party named on the note, mortgage and required disclosure documents.
Instead, the Payee was a naked nominee regardless of whether the “lender” was a thinly capitalized mortgage broker or a 150 year old bank.
Neither one loaned the money. In both cases there were using money essentially stolen from clueless investors on Wall Street who advanced money for the purchase of shares (mortgage backed securities) issued by an unregistered Trust that existed only on paper, had no bank account, and never received the proceeds of the shares that were supposedly sold to pension funds and other “investors” (actually victims of a fraudulent scheme).
The real answer is, as I have repeatedly said, that there was no loan contract and therefore the note and mortgage were induced to sign by both fraud in the inducement and fraud in the execution.  But the courts may turn to a foggier notion that the disclosures were intentionally withheld and that this entitles the borrower to equitable tolling of the 3 day or three year statute of limitations. It seems highly doubtful that the US Supreme Court will reverse itself.
If they deny equitable tolling by allowing stonewalling from the Banks then no new Bank would be able to enter the picture which is the whole purpose of the TILA rescission. While courts might find the argument from the banks and servicers as appealing, history shows that the US Supreme Court is just as likely to effectively reverse thousands of decisions based upon the wrong premise that rules and doctrines for common law rescission can be applied to TILA rescission.
Yet my point goes further. The express wording of the TILA rescission as affirmed by a unanimous Supreme court in Jesinowski is that the rescission is effective by operation of law when it is dropped in the mailbox — and that there is nothing else required by the borrower. If the “lender” wants to challenge that rescission it must do so before the 20 day deadline for compliance — return of canceled note, satisfaction of mortgage and disgorgement of all money paid. This makes it very clear that stonewalling or bringing up defenses later when the borrower seeks to enforce the rescission is not permissible. The idea behind TILA rescission has been to allow a borrower to cancel one transaction and replace it with another — which means that title is clear for a new lender to offer a first or second mortgage free from claims of the prior pretender lender.
Thus the expected defense from the banks and servicersis going to be that the rescission was void ab initio because of the statute of limitations or some other reason. But these are affirmative defenseswhich is to say they are pleas for affirmative relief in a formal pleading with a court of competent jurisdiction. That court does not have any jurisdiction or discretion to find that the rescission was void ab initio if more than 20 days has expired after the notice of cancellation or rescission was made.Thus procedurally, the express wording of TILA and Jesinowski totally bars the banks and servicers from raising any defenses to the effectiveness of the rescission after 20 days from the date of notice of rescission. To interpret it any other way is to overrule Justice Scalia in Jesinowski. It would mean that the banks and servicers and Trustees could later bring up defenses to the rescission which would completely bar the ability of the borrower to apply for a substitute loan. No lender is going to offer a mortgage loan where they are taking on the risk that they are not getting the lien priority that is required to assure payment and collateral protection.

And the reason why there is no qualifying creditor to bring the action within 20 days will be taken up in an upcoming article “What if a Broker Sold an IPO and Kept the Proceeds? — The True Explanation of Securitization Fail.” Also see Adam Levitin on that.

RESCISSION: If no lender disclosed, then there was no consummation, no loan contract

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

RESCISSION IS NOT A GIMMICK. IT IS PUBLIC POLICY! TILA is designed to punish banks who play outside the rules. It is designed to put all the power into the hands of the borrower. AND it has worked up until it stopped working with hundreds of erroneous decisions by trial and appellate courts that only got corrected by a unanimous Supreme Court opinion written by Justice Scalia. The playing field is level again. Let the chips fall where they may.

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I received an email from one of my most knowledgeable anonymous contributors. It raises an interesting question. If the lender was not disclosed at closing, then is a TILA rescission effective? My first answer is that if the rescission notice is sent, then the mortgage and note are nullified by operation of law unless the “lender” files a lawsuit within 20 days contesting the notice of rescission. So whether you were right or wrong, it would be my opinion that if the “lender” does not respond, the matter is closed and that is the end of the note and mortgage. And if there is no note and mortgage then anything that happens afterwards is void because you can’t get a foreclosure on a mortgage that legally does not exist even if a copy of the mortgage is sitting in county records. And a sale would also be void. That is the way I see it.

But the interesting direct answer already found in the court system is that if the lender is not disclosed there can be no consummation because there is no loan contract unless you have at least two identified parties. If there is no loan contract there is nothing to rescind. But an admission from the “lender” or a finding by the court that TILA rescission is not available because the loan contract was never consummated or did not exist leads inexorably to one conclusion: the borrower still wins. The borrower can then sue to nullify the note, mortgage, debt, foreclosure and even auction on the basis that they are void by operation of law because there was no deal. And the borrower could then, in my opinion, sue to have the banks and servicers return the monthly payments and other payments they collected on the nonexistent contract for all the money they collected. This too is supported by some case decisions where Bank of America and others have been required to disgorge money they received when they had no right to collect it in the first place.

So while there is a specific legal theory on how to deal with this issue there is also a hidden issue that probably puts the pretender lenders in the corner. In order to challenge the rescission they must file a lawsuit within 20 days asking for declaratory relief that the rescission is not effective. If their grounds are that TILA rescission is not available because there was no contract, then they are essentially arguing that the borrower can’t rescind because there was no contract. Either way they lose the deal, the mortgage, the note etc.

But that is not the only problem for pretender lenders. In order to establish standing to challenge the rescission they must allege that they or their predecessors were the real lenders and were the actual source of funding. Those allegations puts the burden of proof on the pretender lenders. They must prove the original loan and the acquisition of the loan not just by paperwork that says it happened by by showing that money exchanged hands both at origination and acquisition of the loan.

Here are the thoughts of anonymous:

“Just of interest in regards to getting into TILA rescission attempts past the 3 year mark of when loan was supposedly “consummated”, and trying to use lack of such as an argument. I came across the following case of Weintraub in 4th circuit saying, “No consummation, No TILA rescission.”  http://www.bankersonline.com/infovault/weintraub.pdf

Then you have the following theory, no consummation, TILA never tolled, good for a past 3 year-er:
(1) Ramsey v. Vista Mortgage Corp, 176 BR 183 (TILA RESCISSION IN BANKRUPTCY CHAPTER 13 CASE).  In this case, the court laid down the test of when the three year right to rescind begins to run and specifically tackles the concept of when a loan is “consummated.”  Several internal citations also help clarify this point.  Here is what the Ramsey Court said:

“When Ramsey signed the loan documents on September 13, 1989, he knew who was going to provide the financing. Courts recognize the date of signing a binding loan contract as the date of consummation when the lender is identifiable.”   The Court also cited to the Jackson v. Grant, 890 F.2d case (9th Circuit 1989), a NON-BANKRUPTCY CASE, and said: “the Ninth Circuit held that under California law a loan contract was not consummated when the borrower signed the promissory note and deed of trust because the actual lender was not known at that time. Under these circumstances, the loan is not “consummated” until the actual lender is identified, because until that point there is no legally enforceable contract.”

Now, I have to say I am more in the camp of the 4th saying that if you have no contract, there is nothing to rescind, but I guess you could say that it’s merely a discovery point and the rescission is conditionally effective until discovery is complete as to what actually occurred and can be put together by the court from the evidence (Then maybe a TILA rescission will be effective, maybe not; if not because there is no contract, what does the homeowner care? Nearly same result, plus he gets to sue for fraud and other damages suffered I guess….?), but what’s a past 3 year-er to do when arguing TILA?

……. if it turns out that consummation did not occur because the bank willingly withheld the table funded partners identity, or alternatively was acting as straw-man for undisclosed investors, and was using their money directly instead of funneling through the REMIC to purchase the home loan (therefore it really was not a buy-sell transaction, it was a disguised buy using duped investors money who expected a legitimate buy-sell to occur, but REMIC was not properly funded), then what angle do you think is best for TILA- Leave consummation out of the initial argument, and hang your hat on equitable tolling if past 3 year mark, or keep it in and argue both points”

And here is an article I found that describes the process of rescission. I think some of the issues presented might not be entirely correct, but it is definitely one point of view that deserves consideration.

The procedural question of whether a notice of rescission can be challenged outside the 20 day period provided in the Federal Truth in Lending Act is something that lawyers need to consider before they tell a client they cannot rescind. If there is an arguable basis for sending the notice on the belief that it is proper, then the defenses to the rescission can only be raised by operation of a legal proceeding — in a court room.

Hence, it is my opinion, that while there are risks in doing so, the sending of a notice of rescission that is based upon incorrect assumptions does not mean the rescission is void. Quite the contrary, in my opinion.

The receipt of that rescission means there is no more mortgage and there is no more note until a court says otherwise. And the court can’t say otherwise unless the “lender” brings a lawsuit to challenge the rescission within 20 days of receipt. Since there have been no such lawsuits filed to my knowledge it therefore appears to me that all notices of rescission that were ignored or “rejected by letter” had the effect of making the mortgage and note permanently void by operation of law without any lawsuit needed to enforce that presumption (see US Supreme Court decision written by Justice Scalia).

Some people or perhaps most people regards this strategy as a gimmick. But Congress passed it to avoid a super size regulation system with thousands of agents. It was designed to punish banks who screwed with the system so they would essentially police themselves. Obviously that premise didn’t work until now. It is national public policy not a gimmick.  They gave the “lenders” a very short window to undo the damage if they thought the borrower was wrong but if we read the plain words of the statute and the plain words of the Supreme Court, if they don’t do it within the 20 day window, they have lost the loan. They might still theoretically be able to collect on the loan but only if they can prove they loaned the money or paid for the debt. Their action would essentially be for unjust enrichment. And it would be unsecured.

Right of rescission lets you back out of some loans

Federal law gives you a cooling-off period when you get a home equity loan or line of credit, or when you refinance with another lender.

It is called the right of rescission. It allows you to rescind, or cancel, some types of home loans and walk away without losing money.

The right of rescission provides a three-day period when you can back out of the loan before you get the borrowed money, no questions asked. Within 20 days, the lender must give up its claim to your property as collateral and must refund any fees you paid.

A law called the Truth in Lending Act, which is designed to shield borrowers from unscrupulous lenders, grants the right of rescission. The law is intended to thwart smooth-talking loan officers who try to fleece elderly or unsophisticated borrowers out of their money and even their homes.

The law also protects consumers from themselves. The homeowner who takes out a home equity line of credit to buy a car, then thinks it over for a couple of days and decides that such financing would be a bad move, can rescind the loan. Likewise for the homeowner who takes out a home equity loan, then finds a better deal a day or two later. The homeowner can rescind the first deal within three business days and take the second.

Right doesn’t apply to all loans
The right of rescission is not available for all mortgages. Most importantly, there is no right of rescission for a mortgage made to buy a house. Borrowers and lenders can get tangled up in whether a mortgage is a purchase loan. Take, for example, the way financing is set up for many built-to-order houses. You get a short-term construction loan while the house is being built; then, after the house is finished, you pay off the construction loan with a permanent mortgage. You don’t have a right of rescission with either loan because both are considered purchase money.

The right of rescission also is not available when you refinance your loan with the same lender, when the house in question is not your primary residence (in other words, if it’s your vacation home or an investment property), if you borrow the money for your business, or if you’re borrowing from a state agency.

That leaves a lot of situations where you do have the right of rescission: when you refinance your mortgage with another lender and when you take out a home equity loan or line of credit (unless it’s part of a “piggyback loan” designed to avoid paying mortgage insurance).

Cash-out refi rules
Things get complicated if you do a “cash-out refi” — refinancing for more than you owe on your current mortgage, and taking the difference in cash. If you do a cash-out refi with the same lender, you have the right to rescind only the cash-out portion; if you do a cash-out refi with a different lender, the entire amount can be rescinded.

It doesn’t matter what kind of home you have: if it’s a single-family house, a condominium, a floating home or a manufactured home permanently anchored to land you own, you have the right of rescission.

A borrower must exercise the right of rescission within three business days of signing the loan papers, receiving all the loan disclosures, and getting a copy of the notice that there is a right of rescission. Usually, all three of those requirements are met on the same day; if they aren’t, the clock starts ticking only after all three conditions have been satisfied.

When the clock ticks …
That clock ticks only on business days. Much has been written by federal regulators about what counts as a business day. In general, every day is a business day except Sundays and federal holidays. Saturday counts as a business day, even if the lender’s office is closed on Saturdays. The right of rescission expires at midnight concluding the third full business day after the papers are signed and all other conditions are met. So, for example, if you close a home equity loan on Thursday, the clock starts ticking Friday, continues to tick on Saturday, stops on Sunday and resumes on Monday. The right of rescission ends Monday at midnight.

To exercise your right of rescission, you must inform the lender in writing — a phone call won’t do. The letter doesn’t have to be postmarked by the deadline — you merely have to drop it in a mailbox by the deadline. That means that if your right of rescission ends at midnight Saturday night, and you mail the letter just before the deadline, and Monday is a federal holiday so the letter isn’t postmarked until Tuesday, you still have rescinded the loan.

Not surprisingly, the loan officer might call after the rescission period has ended, just to ask if you’re still going ahead with the loan.

It is possible to waive the right of rescission so you can get the money immediately, but only in emergencies. To stay out of trouble with regulators, your lender is unlikely to let you waive the right of rescission unless the loan officer is convinced that you truly have an emergency and you’re not simply impatient. Examples of acceptable emergencies: your roof has blown off in a storm and you need a home equity loan right now to pay for a repair, or you need the money immediately to pay for a medical procedure.

 

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