Garfield Rescission Theory Leads Borrowers into Trouble

 

Neil Garfield:

I write to disagree with your explanation of TILA rescission in your blog entry “Rescission is not a claim – No Lawsuit Necessary” (appended below) because it leads borrowers into trouble.

You wrote:

“Rescission is an event. Either it happened or it didn’t. If the notice was sent, it happened. If the notice wasn’t sent then it didn’t happen.”

Rescission is a process, not an event.  The process consists of several events including mutual tender and release of lien.  If the parties don’t agree, one or the other must act to press the issue.  Typically the creditor will foreclose or the borrower will sue to enforce the rescission or raise the rescission defensively in foreclosure or bankruptcy.

TILA allows the borrower to rescind for any or no reason within 3 days after loan consummation.  Rescission beyond that requires timely notice by the borrower to the creditor AND a TILA violation – creditor failure to deliver required disclosures to the borrower.

TILA rescission more than 3 days after consummation requires the borrower to mail notice of intent to rescind to the creditor, tender and release of lien by the creditor, tender by the borrower, and finally a handover of respective properties to finish unwinding the transaction and return the parties to their condition prior to the loan, as though the loan had not occurred.

TILA and Regulation Z impose a condition upon initiation of the rescission process:  failure of the creditor to deliver required disclosures or notice.  If this condition does not exist, the borrower has no right to rescind more than 3 days after consummation under TILA .

Regulation Z – 12 C.F.R. 1026.23(3)(i).

“If the required notice or material disclosures are not delivered, the right to rescind shall expire 3 years after consummation, upon transfer of all of the consumer‘s interest in the property, or upon sale of the property, whichever occurs first.”

The above three year repose window never opens if the creditor timely delivered the required documents to the borrower. If the borrower sends the creditor a notice of intent to rescind, and the the creditor knows he did not violate TILA, then the creditor will typically acknowledge the notice of intent to rescind, deny the rescission, and then take no further action until the time comes to foreclose.

The process can continue or abort in a number of ways.

The process will abort if the loan does not qualify for TILA rescission, OR if no TILA violation occurred, OR if the creditor fails to tender and release the lien and the borrower and creditor fail to raise the issue in court, OR if the borrower fails to tender and the creditor sues, OR if the court orders a dismissal of the borrower’s TILA rescission complaint for cause.

In many cases, the creditor receives the notice of intent to rescind, acknowledges it, and rejects it. Often the borrower, after having signed an acknowledgement of receipt of the disclosures, will claim he did not receive them. The court always rules in favor of the creditor in such cases unless the borrower can demonstrate that he left closing without the disclosures and the creditor never mailed them.

The court may modify the rescission.  In some cases, the court will help the borrower and creditor work out the borrower’s inability to tender, such as through a periodic payment program.  In that case the TILA rescission process can take a long time to finish.

You wrote:

” The moment that a rescission notice is dropped in US Mail the note and mortgage are void ‘by operation of law.'”

As I stated above, and as corroborated by 12 C.F.R. 1026.23(3)(i), the mortgage does not become void upon mailing of notice of rescission UNLESS the creditor violated TILA by not timely delivering the required notices/disclosures to the borrower.

I imagine if the creditor knew he did not violate TILA and the borrower recorded the rescission notice with the county clerk to cloud the creditor’s mortgage, the creditor would most likely initiate foreclosure or sue to remove the cloud.

Yes, the elements of TILA rescission can become draconian against the creditor who does not timely tender and release the lien.  But ONLY if he violated TILA as above.

You wrote:

“it remains a question of fact as to the exact moment of consummation — assuming there was any ‘consummation’ with anyone in the chain upon which the present forecloser relies.”

No court that I know of has embraced your pet theory that consummation never occurred because the lender was unknown.  If you have a supporting citation, please pass it over to me.

The name of the lender appears on the note, and the borrower, in signing it, states “For a loan I have received, I hereby promise to pay…”  Now, the funds might be withheld for 3 days to allow the unconditional right to cancel to expire, so as to ensure that the borrower doesn’t abscond with funds and then cancel.  But once the borrower has signed the note and security instrument and the closer has released the funds to the proper parties, that loan has become consummated.

I consider reckless your preachment that borrowers should send notice of intent to rescind more than 3 years after consummation.  A borrower who does that will stop making mortgage payments and that will put him in jeopardy of foreclosure, all in the hope that some court will idiotically embrace your theory that consummation did not occur at or within 3 days of closing.

A borrower who wants to prove some tardy date of consummation should bring the question before a judge in a declaratory judgment action before sending out a notice of intent to rescind.

In summary, Neil, you are

1. wrong about TILA rescission being merely an event,
2. wrong about the 3-year right to rescind being unconditional, and
3. wrong about consummation occurring a long time after closing.I have no trouble pulling up hundreds of post-Jesinoski court opinons to prove my assertions above.  I have shown a bunch of them at my web site.  I have yet to see any court opinion supporting your theory on the issues above.

I find it appalling that you, a seasoned attorney, so blithely lead borrowers astray with a frivolous and failing legal theory that can get them into a lot of trouble with a mortgage.

Bob Hurt
727 669 5511
http://mortgageattack.com

To those who think that this a gotcha moment consider this: Your lack of understanding of civil court procedure is what is preventing you from seeing the obvious — claims are not granted relief unless they are litigated — no matter how “obvious” the outcome. Rescission is an event not a claim. It’s the contest of the rescission that is the claim. It is therefore the contest of rescission that must be litigated.

Rescission is not a claim. Rescission is an event. Either it happened or it didn’t. If the notice was sent, it happened. If the notice wasn’t sent then it didn’t happen.

If the rescission is contested it is still effective and the note and mortgage are still void. If anyone thinks the rescission was not sent under the right circumstances they must establish standing and sue to vacate the rescission — not just ignore it. SCOTUS specifically stated that there is no difference between a contested rescission or an uncontested one. They are both effective on mailing.

Those who take a contrary view are ignoring basic procedural law. Under their “theory” the fact that someone contests it is enough to require the borrower to prove a “claim.” That is exactly the opposite of what is stated in the statute and what was confirmed by a unanimous SCOTUS opinion in Jesinoski. There is no “claim” of rescission under the TILA rescission statute. There is only an event that either happened or didn’t happen.

Since this is a jurisdictional matter it can be raised at any time. Assuming nobody has stepped in to plead and prove ownership of the debt, there is nobody with standing that can attack the rescission. Once the 20 days expires, and no court has extended the period during which the actual creditor could bring a claim, the “lender” duties require compliance no matter how wrongful they think the rescission notice was sent.

If the lender remains in noncompliance for more than a year, their right to claim tender of the amount due expires by the express terms of the TILA statute. So at that point the note is void, the mortgage is void, the loan contract is canceled and the right to receive the principal back is time barred.

The standing issue is the key. The moment that a rescission notice is dropped in US Mail the note and mortgage are void “by operation of law.” Any “holder” of the note or mortgage is no longer the holder of anything that is legally relevant. The note and mortgage don’t exist. Hence while some named party might have had standing to foreclose they no longer have standing to foreclose or contest the rescission unless they can plead and prove standing by establishing themselves as the owner of the debt.

Some people consider it a slam dunk against the borrower if the rescission notice is sent more than 3 years from presumed consummation — i.e., the date on the documents. But we all know that funding usually doesn’t occur until hours, days, weeks and sometimes months after the loan documents are signed. So consummation is a question of fact UNLESS the homeowner admits that consummation of a loan contract occurred on specific date more than three years before the notice of rescission.

Many people, including those who see rescission as I do (as SCOTUS does) believe that SCOTUS will ultimately carve out an exception to accommodate the three year limitation on rescission under TILA. I admit that is possible but here is why I think they won’t.

In order to establish a doctrine that a rescission is to be conclusively presumed to be beyond the three year limitation you need a statute, not common law, stating exactly that. The Courts lack the authority to invent a new law of evidence. While it may be “obvious” to some people that the rescission notice was sent more than 3 years after consummation, it remains a question of fact as to the exact moment of consummation — assuming there was any “consummation” with anyone in the chain upon which the present forecloser relies.

Proving the loan and the status of the “lender” would therefore be a requirement to establish that the rescission was sent beyond three years from consummation. Proving that requires showing the holy grail of foreclosure litigation that the banks have successfully hidden since the 1990’s — who paid who for what and when?

Could SCOTUS go the other way? Of course! There is no appeal from their decision. I’m more optimistic that eventually SCOTUS will rule consistently with the Jesinoski decision. That means that if anyone has a gripe about a rescission they must file a lawsuit, establish standing and then plead and prove their case to vacate the rescission.