How to Rescind Your Home Equity Line of Credit under Tila
The Truth in Lending Act (“TILA"), 15 U.S.C. §1601 et seq., provides a consumer with an unconditional right of rescission within three (3) business days following consummation of certain residential loans. The residential loans that TILA rescission rights apply to are those that are not used to fund the construction or purchase of property. In certain cases, TILA provides a three-year extended right of rescission of the loan. The three-year extended right of rescission is available where the creditor’s fails to provide certain material disclosures at or before closing.
For the applicable transactions, there is an unconditional right to rescind through midnight on the third business day following consummation of the loan. Where certain material disclosures were not provided, this three-day right to rescission never begins to tick until those material disclosures are provided, and it can extend up to three years. 15 U.S.C. § 1635(f); 12 C.F.R. §§226.15(a)(3), 226.23(a)(3). Even a technical violation in a material disclosure, and especially a total failure to provide a material disclosure, will give rise to a three-year extended right of rescission.
Rescission rights apply to equity lines of credit so long if they secure the borrower’s principal dwelling. A Home Equity Line of Credit (“HELOC") is considered an “open-end" credit plan under TILA. The three-year extended right of rescission for certain disclosure violations is available for open-end credit plans so long as they secure the borrower’s principal dwelling. See 15 U.S.C. § 1637. A HELOC is an open-end plan because it involves revolving, or more than one, extension of credit over time. As opposed to a “closed-end" transaction that involves a single extension of credit, like a traditional mortgage.
The material disclosure required for an open-end transaction that secures a principal dwelling, such as a HELOC are:
[T]he annual percentage rate, the method of determining the finance charge and the balance upon which a finance charge will be imposed, the amount of the finance charge, the amount to be financed, the total of payments, the number and amount of payments, the due dates or periods of payments scheduled to repay the indebtedness, and the disclosures required by section 1639(a) of this title.
15 U.S.C. § 1602(u).
The right of rescission applies at the time of opening a HELOC or when there is substantial increase in the credit limit or modification of the HELOC terms. See Official Staff Commentary § 226.15(a)(1).
You may have grounds to rescind within three years of consummation of your HELOC if your lender failed to provide you with the required material disclosures. Such as:
1) Failure to disclose the annual percentage rate, including variable rate disclosures; how and when, under what circumstances the rate may increase and other limitations on the APR.
2) Failure to disclose the method of determining the finance charge and the balance upon which a finance charge will be imposed, as explained in 12 C.F.R. § 226.6.
3) As it directly pertains to material disclosure requirements for a HELOC, a failure to disclose the plan’s payment terms, including the length of the draw period and repayment period; an explanation, for both the draw period and the repayment period, of how the minimum periodic payment would not repay any of the principal or may repay less that the outstanding balance and a statement of how a balloon payment may repay less than the outstanding balance, and a statement that a balloon payment may result.
Once you realize the disclosure violation, you must submit your notice of rescission to your loan servicer, current holder of your loan, and loan originator, and do so within three years of the loans consumation. It is best to call the bank and ask them where to send your rescission notice and mail it certified mail return receipt requested. You may choose to sign the notice of right to cancel if one was give to you at closing and mail it in. Or you may also send a more formal notice of rescission that cites to TILA and the reasons for rescission. Be sure to make your intent to rescind clear.
TILA itself cites few requirements in order to properly notify your creditor of a rescission. A notice of rescission under TILA is effective against assignees of the loan. Schmit v. Bank Uninted FSC, 2009 WL 320490 at *3 (N.D.Ill. Feb. 6, 2009) (“Assignees…may not ‘hide behind the assignment’; timely notice to the original creditor rescinds the transaction in its entirety.") quoting Hubbard v. Ameriquest Mortgage Co., 2008 WL 4449888 (N.D.Ill. Sept. 30, 2008).
The federal statute that governs exercising your rescission rights is 15 U.S.C. §1635(f). Section 1635(f) simply requires that the consumer exercise its right to rescind within three years and not how the consumer must rescind. According to the federal Regulation Z, §226.23(a)(2):
To exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram or other means of written communication. Notice is considered given when mailed, when filed for telegraphic transmission or, if sent by other means, when delivered to the creditor's designated place of business.
If the creditor does not honor the rescission within 20 days after receipt as required by the statute, then the consumer has one year after the creditor refuses rescission to file suit to declare that the consumer properly rescinded the loan and for damages. 15 U.S.C. §1635.
The applicable section of TILA, 15 U.S.C. §1635(b), states :
When an obligor exercises his right to rescind under subsection (a) of this section, he is not liable for any finance or other charge, and any security interest given by the obligor, including any such interest arising by operation of law, becomes void upon such a rescission. Within 20 days after receipt of a notice of rescission, the creditor shall return to the obligor 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. If the creditor has delivered any property to the obligor, the obligor may retain possession of it. Upon the performance of the creditor's obligations under this section, the obligor shall tender the property to the creditor, except that if return of the property in kind would be impracticable or inequitable, the obligor shall tender its reasonable value. Tender shall be made at the location of the property or at the residence of the obligor, at the option of the obligor. If the creditor does not take possession of the property within 20 days after tender by the obligor, ownership of the property vests in the obligor without obligation on his part to pay for it. The procedures prescribed by this subsection shall apply except when otherwise ordered by a court.
If rescission is effective and the creditor releases their security interest in your home, you may need to consider obtaining financing if you are unwilling to give up your home in exchange for tender. Otherwise, if the bank does not honor your rescission, seek legal representation to file a complaint with the court to enforce it. You must do so within a year from the date that the lender received your rescision notice.