Understanding Truth In Lending Act Rescission
The federal Truth In Lending Act ("TILA") allows a borrower to rescind a mortgage loan in very limited circumstances. Recently, there have been several lawsuits attempting to exercise this right; however, there has been limited success for borrowers. This guide is to help borrowers and attorneys better understand the right to rescind under TILA.
First, it is important to understand that the right to rescind only comes into play on a refinanced property. It is not applicable to a purchase money loan.
In addition to the standard TILA disclosures, the borrowers must be given two completed copies of the Notice of Right to Rescind. Typically, a borrower will have three business days to rescind the loan (under the law, Saturday is considered a business day). However, if certain material disclosures are not made, the rescission period could extend to three years.
The material disclosures are those included in the standard TILA disclosure statement (the amount of the loan, the annual percentage rate, the finance charges, the total to be paid over the course of the loan, and the monthly payments). In a case where rescission is allowed, the material disclosures extend to the Notice of Right to Rescind, and include: the date of the transaction; the last date to rescind; and, the name/address of the lender.
In order to exercise the right to rescind, the borrower must make a written demand for rescission. This can be accomplished either by signing and returning one copy of the Notice of Right to Rescind or by letter. The rescission demand must be in writing and delivered personally, by fax, by telegraph, or by mail. The filing of a lawsuit may also constitute notice.
The lender than has twenty days to unwind the transaction. Upon doing so, the borrower must tender any loan proceeds. This can often cause problems for borrowers seeking rescission outside the three day period, as they would have to tender any remaining principle owed on the loan (any interest payments made would be credited toward the tender).
If litigation is required to enforce the right to rescind, the trial court will have discretion to modify the rescission process. This will likely result in a court ordered loan modification.