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No TILA No Problem

JUL 25, 2013 2:57pm ET
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WE’RE HEARING  today from the great state of Minnesota where the U.S. Court of Appeals for the Eighth Circuit last week issued a decision involving a claim for money damages and rescission of a mortgage loan based on the alleged failure of the lender to provide a Truth in Lending Act form to the buyers at closing. Rescission is a nice way of saying cancelling.

The case involved two different plaintiffs with similar claims. Among other things the case illustrates that the TILA form actually is very important and not just something taking up room in your file.

Both plaintiffs in the Minnesota case claimed that they did not receive two copies of the TILA at their closing. Without getting in to particulars the court pointed out that each of the lenders files contained a signed acknowledgment from the borrowers that they had in fact received the TILA at closing. More significant issues were involved in this case. So significant that the CFPB filed a friend of the court brief in this case.

Everyone knows that on a refi the borrower has three business days to change their mind. Well it also means that if at closing you do not get a copy of the TILA you actually get three years to rescind and change your mind. The issue in this case was what the borrower had to do during the three-year period to actually rescind the loan. In each case each borrower sent a notice (letter) to the bank (actually the bank’s assignee) requesting to rescind the loan. In one case the letter was sent to the bank almost three years after closing and in the other case it was sent out almost two years after closing and almost one year after the buyer stopped making loan payments.

However, in both cases neither borrower started a law suit to rescind the loan within three years. The CFPB says this is not required and two other federal circuits follow that rule. The CFPB says that in these cases where a borrower does not get a TILA at closing all the borrower has to do is send a notice to the bank within three years. To confuse you there are two federal circuits that hold the opposite. That is if you want to rescind because you did not get a TILA you have to start a law suit. Well now there are three federal circuits that require a law suit because this is how the Minnesota cases were decided.

Both of the plaintiff’s claims for money damages were thrown out in these Minnesota cases, which was no doubt a blow to the bottom line of their attorney’s pocketbooks. As I have said before there are a lot of foreclosure cases out there where unique defenses to nonpayment are being made. Sometimes though the defenses do have merit. I came across one this week out of the Massachusetts Supreme Court. I did not say great state of Massachusetts because Massachusetts is actually a commonwealth and I have no idea what the difference is.

In Drakopoulis v. US Bank NA, the Massachusetts Supreme Court sent back to a lower court for rehearing a case involving predatory lending accusations and a claim by the borrowers that the loan was unconscionable. The trial court judge had dismissed the borrowers’ claims and ruled that the borrowers were “reasonably sophisticated” and “knew what they were doing.” The loan in question was a stated income product that ended up being foreclosed. The court analyzed the case a little differently than the trial court.

In fact it turned out that one of the borrowers had some sort of significant cognitive impairment and read at a fourth-grade level. The lender’s underwriting file contained cautionary notes about the income stated by the loan borrower. In fact the borrower’s stated income was rather unbelievable based on his occupation. Specifically the income was 150% higher than someone in the 90th percentile of income for the particular profession. Yeah, that’s if I am quarterback for the Patriots. Well once in a while things do get rectified.

Based in Chelsea, Mich., John McDermott is a real estate and elder care attorney who represents both consumers and businesses. He can be emailed at jamcd@comcast.net.

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