Top Five Silliest Real Estate Laws: No. 2: Extended Rescission Rights Under TILA
Deciding between the No. 1 silliest real estate law and the runner-up was a not an easy decision. However, when I post about No. 1, you’ll see why this law ended up in the No. 2 slot, even though it was a photo finish: the “extended rescission rights” of the Federal Truth in Lending Act of 1968 (“TILA”), found at 12 CFR 226.15(a)(3).
TILA was enacted to protect consumers in certain credit transactions by requiring disclosures of certain information about the transaction prior to the consumer entering into the transaction. Where a transaction leads to a lien on a consumer’s property – such as a mortgage lien – the consumer is given the right to rescind, or cancel, the transaction, within a specified time period. TILA also requires that the consumer be provided with two (2) copies of a document called a “Notice of Right to Cancel” which informs the consumer of this right of rescission.
In regards to mortgage refinancing transactions, the rescission period is three (3) days…in most cases. However, under a provision which was paid little attention to until the recent housing market collapse, the rescission period can be extended to three years. How does this happen? If the borrower is not provided with the two (2) copies of the Notice of Right to Cancel, 226.15(a)(3) pushes the time for rescission out to three (3) years.
Here’s the astounding part: the Notice contains a recital that the borrower received two copies of the Notice at closing, and is required to be signed at closing. TILA, however, provides that the existence of a signed document from the borrower stating that he or she received two (2) copies only creates a rebuttable presumption that the two (2) copies were actually received. Here’s the more astounding part: even if the loan is refinanced and paid off, the borrower can still rescind it within the three year period.
With several property owners defaulting on their mortgage loans, the extended rescission rights provision has become the weapon of choice of the consumer law bar. Defaulting borrowers simply have to claim that they did not receive two copies of the Notice of Right to Cancel – remember, having their signature to the contrary only creates a rebuttable presumption that they actually received it – and they can create a major headache for their lender (or, in some cases, their former lender). Thus, attempts to exercise these rescission rights have become a tool to force a modification of a mortgage loan which is in default.
Here’s the part that angers me the most: attorneys who know better are, in my opinion, misleading people who are already struggling financially into thinking that they can “cancel” their mortgage entirely. That’s not, however, how the TILA rescission rights work. These rights only give the borrower the opportunity to redeem their property at a price less than the full outstanding balance of the loan. Any closing costs and interests paid on a loan where the rescission rights apply are subtracted from the outstanding balance of the loan, and the resulting sum must be paid by the borrower in order to rescind. I question how many borrowers who have defaulted on their mortgage loan(s) because of an inability to pay can afford to redeem for much more than the payments missed in the first place. What’s worse is that these folks are being solicited, sometimes to pay money up front to try this “Hail Mary” pass and save their property.
TILA’s rescission rights were enacted to prevent predatory lending practices; they were not intended to be used as a means for borrowers to get out of a legitimate obligation. Unfortunately, that’s not currently the case, which means that TILA’s extended rescission rights lands on my list of the five silliest real estate laws.
Stay tuned for the winner…