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.

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