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Recently, the United States Court of Appeals for the 4th Circuit
held that a mortgage servicer’s failure to provide a required
disclosure informing borrowers of their three-day right to rescind
the loan under the Truth in Lending Act (TILA) does not relieve
borrowers of their obligation to return disbursed loan proceeds
upon an effective rescission. The ruling reversed a West Virginia
District Court’s ruling against the mortgage servicer in a
purported class action.
The parties had agreed that the mortgage servicer failed to
provide the borrower with the Notice of Right to Cancel required
under TILA, that the borrower had thereafter delivered a timely
notice of rescission following consummation of the reverse mortgage
loan, and that the servicer had not taken the actions required
under TILA to effectuate the rescission. The question before the
Court was whether, under these circumstances, the borrower was
still required to tender the loan proceeds to the servicer, or
whether the borrower was excused as a matter of law from having to
tender the loan proceeds.
The Circuit Court reviewed the text of TILA, case law from the
4th Circuit and other United States Circuit Courts and the U.S.
Supreme Court decision in Jesinoski v. Countrywide Home Loans,
Inc., 574 U.S. 259, 261 (2015), and held that all of these
precedents demonstrated that the plaintiff was not entitled to the
relief sought — namely to keep the property lien-free and
avoid any requirement to tender. The 4th Circuit held that
“neither § 1635(b) nor any other provision of TILA
provides that the failure of a lender to voluntarily unwind a loan
or respond to a notice of intent to rescind allows a borrower to
avoid tendering the loan proceeds as part of rescission.” The
court noted that “to decide otherwise would bestow a
remarkable windfall on a borrower and penalty on the lender
divorced from the text of TILA and the entire purpose of
rescission,” which is to place the parties in the positions
they would have occupied had the loan transaction not occurred.
Putting It Into Practice: While TILA does lay
out a path for effectuating rescission, there has remained some
question as to whether the borrower must still remain ready and
able to tender the loan proceeds back to the creditor when the
creditor has failed to take the actions mandated by the TILA. Here,
the Circuit ruled that as a matter of law the borrower must remain
ready to tender the loan proceeds back to the creditor once the
creditor has taken the actions that place the ball back in the
borrower’s court to complete the rescission. While the decision
may be correct on its face, it is not necessarily settled law in
every Circuit. The best approach by a creditor in dealing with a
notice of rescission is to take the actions mandated by TILA
(i.e., return any finance and other charges collected to
the borrower and release the creditor’s security interest in
the borrower’s property) and then demand tender of the loan
proceeds by the consumer, so as not to potentially put the
creditor’s ability to demand tender at risk.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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