QUESTION
We did not get a receipt for a Notice of Right to Cancel. We usually do, but we messed up in this case.
The borrower wants to rescind the loan, even though we closed the loan well over a year ago, outside the rescission period. She is claiming that she didn't receive the Notice. But she also says the right to rescind is tantamount to the right to cancel. So, she should be able to cancel the loan.
We have never had a borrower make such a claim. How could she think that rescinding a loan somehow means she can cancel it? It makes no sense.
How is it that a borrower can mix up the right to rescind with the right to cancel?
And, how important is it to get a receipt for the Notice of Right to Cancel?
ANSWER
Financial people may not realize that a consumer does not necessarily understand the meaning of specific mortgage banking words, or maybe they do, but the meaning is not what they expect it to mean.
“But 'glory' doesn't mean
'a nice knock-down argument,'” Alice objected.
“When I use a word,”
Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it
to mean – neither more nor less.”
“The question is,”
said Alice, “whether you can make words mean so many different things.”
“The question is,”
said Humpty Dumpty, “which is to be master – that’s all.”
Alice in Wonderland, Lewis Carroll
Would you know what "rescind" means if you weren't a financial person? You might; then, again, you might not! Or, you might know what "cancel" usually means, such as voiding an arrangement, contract, or obligation of some kind, but you might not know what canceling has to do with rescinding – especially if you don't know what rescinding means.
Unless specifically exempted by the Truth in Lending Act (TILA), for any credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, Regulation Z[i], TILA’s implementing regulation, gives each consumer residing in the subject dwelling whose ownership interest is (or will be) subject to the security interest the right to rescind the transaction.
A case comes to mind that resembles some of your issues, although it concerns a trust. But, in this instance, that’s alright since credit extended to a trust established for tax or estate planning purposes is considered credit extended to a natural person.[ii] These trusts are considered consumers entitled to TILA disclosures and the right to rescind.
The case is Alejandro v Freedom Mortgage Corp.[iii] It partially touches on your concerns in a way that helps to respond to your question.
On January 22, 2021, Olivia Alejandro, individually, and Olivia Alejandro and Jonathan Alejandro, trustees of the Alejandro Family Revocable Living Trust, obtained a mortgage loan from Finance of America Mortgage to refinance a prior mortgage loan secured by their home. On March 26, 2021, the mortgage note was assigned to Freedom Mortgage Corp. (“FMC”).
On March 8, 2022, the Alejandros filed a complaint, alleging violations of TILA and the FDCPA. They claimed they had not received notices of their right to rescind and all the required TILA disclosures. They also claimed FMC had harassed them by calling them "almost every day at our workplace" and at home, "sabotaged" their credit ratings, "defamed our character," and "sunk our credibility."
The court dismissed the claims. Their Fair Debt Collection Practices Act (FDCPA) claim failed because the Alejandros had not alleged facts to show that FMC fell within the definition of "debt collector." Specifically, none of their allegations suggested that FMC was (1) an entity whose most important aim was the collection of debts; (2) collecting the debts of another; or (3) a servicer assigned the loan after it went into default.
As happened with your loan, the TILA damages claim was time-barred because the Alejandros filed their claim more than one year after the alleged violation.
However, it is the rescission claim that I want to zero in on. Their TILA claim for rescission failed because the Alejandros had not alleged any facts to rebut the presumption of delivery created by their signing of the "Notice of Right to Cancel" that FMC attached to its motion to dismiss.
Similar to the assertion made by your borrower, the Alejandros made an unusual argument that the "Notice of Right to Cancel" they received was misleading because it used the term "cancel" instead of "rescind." So much for plain language! But it might be interesting to survey the public to determine how many people know what the term "rescind" means or whether they have ever heard the term outside the TILA context. In any event, the court rejected this argument because the notice contained substantially similar language and an identical heading, "Notice of Right to Cancel," as the model rescission (i.e., cancellation) forms set out in Regulation Z.
Even if the claim was timely, though, the TILA claims failed because they were inadequately pleaded: the Alejandros had not alleged that the violations were apparent on the face of the disclosure documents, as necessary to charge the assignee with liability. The notices attached to the motion to dismiss did not reveal any apparent TILA violations.
A brief thought about assignees. Assignees are exempt from any alleged disclosure violations except as provided under TILA[iv]. TILA[v] provides, in essence, that assignees may be liable for disclosure violations only if the disclosures are apparent on the face of the disclosure statement, except when the assignment was involuntary. A "violation apparent on the face of the disclosure statement" is held to include, but is not limited to, either (1) a disclosure that can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents assigned, or (2) a disclosure that does not use the precise terms required to be used by TILA and Regulation Z. TILA also excludes high-cost mortgage loans from the general rule exonerating assignees.[vi]
My view is that it is useful and often critical to obtain signed acknowledgments of the receipt of disclosures, including receipt of the "Notice of Right to Cancel." Under TILA[vii] written acknowledgments are specifically addressed, with a limitation:
"Notwithstanding any rule of evidence, written acknowledgment of receipt of any disclosures required under [TILA] by a person to whom information, forms, and a statement is required to be given pursuant to [TILA § 125 (right of rescission)] does no more than create a rebuttable presumption of delivery thereof."
Thus, although TILA does not elsewhere so provide, this TILA subsection certainly implies that a written acknowledgment of receipt of disclosures in a nonrescindable transaction would be at least some evidence that the disclosures were actually received.
TILA offers even more specific protection to assignees, except as to rescindable transactions:
"[I]n any action or proceeding by or against any subsequent assignee of the original creditor without knowledge to the contrary by the assignee when he acquires the obligation, written acknowledgment of receipt by a person to whom a statement is required to be given pursuant to [TILA] shall be conclusive proof of the delivery thereof and, except as provided in subsection (a), of compliance with [TILA chapter 2]."[viii]
This TILA subsection does not affect the obligor's rights in any action brought against the original creditor (as opposed to an assignee).
One final observation: Regulation Z generally provides that the segregated closed-end disclosures (including the TILA disclosures that must be presented in a "federal box")[ix] may not contain any information not directly related to their required disclosure items, and the regulation expressly authorizes the inclusion of an "acknowledgment of receipt" among the segregated disclosures or in the federal box.
We’ll let Humpty have the last word, words being his expertise:
“So here’s a question
for you” [says Humpty]. "How old did you say you were?”
Alice made a short calculation, and said “Seven
years and six months.”
“Wrong!” Humpty Dumpty exclaimed triumphantly.
“You never said a word like it.”
“I thought you meant ‘How
old are you?’” Alice explained.
“If I’d meant that,
I’d have said it,” said Humpty Dumpty.
Alice in Wonderland, Lewis Carroll
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
[i] Regulation Z § 1026.23(a)(1)
[ii] Comment 2(a)(11)-3 clarifies that "Credit
extended to trusts established for tax or estate planning purposes, as described
in comment 3(a)-10, is considered to be extended to a natural person for
purposes of the definition of consumer."
[iii] Alejandro
v. Freedom Mortgage Corp., 2022 U.S. Dist. (E.D. Pa. June 8, 2022)
[iv]
TILA § 131(a) and (d) (12
U.S.C. § 1641)
[v] TILA § 131(a)
[vi] TILA § 131(d)
[vii] TILA § 125(c) (12 U.S.C. § 1635)
[viii] TILA § 131(b)
[ix] A “federal
box” is a place on the document where all TILA disclosures are grouped
together, separating them from all other information. It is a term for the TILA
disclosure requirements set forth in Regulation Z § 226.17.
