Recently, the United States Court of Appeals for the 4th Circuit held that a mortgage servicer’s failure to provide a required disclosure informing borrowers of their three-day right to rescind the loan under the Truth in Lending Act (TILA) does not relieve borrowers of their obligation to return disbursed loan proceeds upon an effective rescission. The ruling reversed a West Virginia District Court’s ruling against the mortgage servicer in a purported class action.
The parties had agreed that the mortgage servicer failed to provide the borrower with the Notice of Right to Cancel required under TILA, that the borrower had thereafter delivered a timely notice of rescission following consummation of the reverse mortgage loan, and that the servicer had not taken the actions required under TILA to effectuate the rescission. The question before the Court was whether, under these circumstances, the borrower was still required to tender the loan proceeds to the servicer, or whether the borrower was excused as a matter of law from having to tender the loan proceeds.
The Circuit Court reviewed the text of TILA, case law from the 4th Circuit and other United States Circuit Courts and the U.S. Supreme Court decision in Jesinoski v. Countrywide Home Loans, Inc., 574 U.S. 259, 261 (2015), and held that all of these precedents demonstrated that the plaintiff was not entitled to the relief sought — namely to keep the property lien-free and avoid any requirement to tender. The 4th Circuit held that “neither § 1635(b) nor any other provision of TILA provides that the failure of a lender to voluntarily unwind a loan or respond to a notice of intent to rescind allows a borrower to avoid tendering the loan proceeds as part of rescission.” The court noted that “to decide otherwise would bestow a remarkable windfall on a borrower and penalty on the lender divorced from the text of TILA and the entire purpose of rescission,” which is to place the parties in the positions they would have occupied had the loan transaction not occurred.
Putting It Into Practice: While TILA does lay out a path for effectuating rescission, there has remained some question as to whether the borrower must still remain ready and able to tender the loan proceeds back to the creditor when the creditor has failed to take the actions mandated by the TILA. Here, the Circuit ruled that as a matter of law the borrower must remain ready to tender the loan proceeds back to the creditor once the creditor has taken the actions that place the ball back in the borrower’s court to complete the rescission. While the decision may be correct on its face, it is not necessarily settled law in every Circuit. The best approach by a creditor in dealing with a notice of rescission is to take the actions mandated by TILA (i.e., return any finance and other charges collected to the borrower and release the creditor’s security interest in the borrower’s property) and then demand tender of the loan proceeds by the consumer, so as not to potentially put the creditor’s ability to demand tender at risk.