Pondering TILA Rescission

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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


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.”
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