NON-JUDICIAL CANCELATION OF LOAN DOCS: Rescission Litigation Coming on Many Fronts

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This is not a legal opinion on any one case, even if the transaction is a Florida transaction where I am licensed as an attorney. Consult with licensed legal counsel before taking any action or deciding not to take any action. I advise people to obtain our Rescission Analysis Package (RAP) before taking any action in or out of court.

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see Beach v Ocwen Federal bank 692 so2d 146 (US Supreme Court).

Opposing counsel will rely on Beach v. Ocwen Federal Bank, 692 So. 2d 146, on certiorari to the Supreme Court of Florida and then to the Supreme Court of the United States, decided on April 21, 1998. My suggestion to attorneys is that they should use the same case (in addition to Jesinoski). In Beach, the “lender” did file an action or affirmative pleading contesting the rescission. Nobody argued that it was outside the 20 day window so that was not an issue. Nobody denied or contested the date of consummation so no hearing was required to determine the moment of consummation which is usually hours, days, weeks, or even months or years after the date the borrower executed loan documents. Nobody denied the 3 years had expired. This is all procedural, so heads up, this is not for pro se litigants to argue.

The loan was originated by Great Western. Ocwen was later substituted for Great Western. The Beaches acknowledge their default by raised affirmative defenses alleging among other things that the bank’s failure to make disclosures under the Truth in Lending Act gave them the right under 15 USC § 1635 to rescind the mortgage agreement. The Florida Trial Court rejected that defense and that was affirmed by the District Court of Appeal which was then affirmed by the Florida Supreme Court. The point raised by the Florida Supreme Court was that Section 1635(f) in plain language evidenced an unconditional congressional intent to limit the right of rescission to three years and distinguished its prior cases permitting a recoupment defense by ostensibly barred claims as involving statutes of limitations, not statutes extinguishing rights defensively asserted. The lessen is that rescission should not be in your pleading as a defense. It is an event and no pleading is necessary. it is effective by operation of law.

The holding of the court in the US. Supreme Court was that a borrower may not assert the Section 1635 right to rescind as an affirmative defense in a collection action brought by the lender after the three-year period has run. The Supreme Court said that the three-year period is not a statute of limitation that governs only the institution of suit; instead it operates, with the lapse of time, to extinguish the right of rescission. The language in the statute that the borrower’s right “shall expire” with the running of time manifests a congressional intent to extinguish completely the right of rescission at the end of the three-year period. The matching provision is that if after one year neither the borrower nor the “lender” has taken legal action on the rescission, the borrower loses all rights to enforce the rescission and the lender loses all rights to make a claim on the debt which is no longer represented by a note or mortgage (they were rendered void by operation of law immediately upon mailing the rescission notice).

The court stated “the absence of a provision authorizing rescission as a defense stands in stark contrast to Section 1640(e) which provides that the one‑year limitation on actions for recovery of damages does not bar assertion of a violation in an action brought more than one year from the date of the violation as a matter of defense by recoupment.” The court went further to state that “this quite different treatment of recoupment of damages and rescission and the nature of recoupment must be understood to reflect a deliberate intent on the part of congress. Since a statutory rescission right could cloud a bank’s title on foreclosure, congress may well have chosen to circumscribe that risk, while permitting recoupment of damages regardless of the date a collection action may be brought.”

SUMMARY OF MY ANALYSIS

1. The admission by Beach that there was a default causes a number of logical consequences. It is an implicit admission that the loan is owed to the party bringing the foreclosure and an implicit admission that the documents signed at closing were correct as well as an implicit admission that the loan was consummated (see below) at the time that the documents were executed.

2. While the decision states in unequivocal terms that the right of rescission expires at the end of three years it does not address the starting point in time that the three years begins to run. This is answered in other cases where the general term that is used, as per the statute, is that the time limit on both the three-day and the three-year rescission starts to run from the date of “consummation.” The question is when did consummation occur? This is a question of fact that must be brought up by any party seeking to defend or vacate a notice of rescission that has been received.

3. Consummation has not been defined as the time when the documents were signed. Obviously if the loan was not funded, the documents do not represent consummation of the loan contract. Rather, consummation occurs when the liability of the borrower arises by virtue of the fact that they have received consideration. In the case of these mortgage closings, the practice is to have the borrower sign the closing papers, which are then forwarded to some undisclosed third party for underwriting after closing, at which point they either “approve” the closing papers or not. At that point if the funds are sent to the closing agent and if the funds were provided by the party disclosed as the lender, the three years ( and the three days) would obviously commence running.

4. The difference between the Beach case and the Jesinoski case is that the Jesinoski case makes a distinction between the effective date of the rescission which cancels the loan contract and renders the note and mortgage void, and the timeliness, which is an issue of fact that must be brought up by the alleged “lender” who clearly has the option to accept the rescission or to contest it. If they contest it they need to bring a lawsuit in order to have a court order which would vacate the rescission, which is effective by operation of law.

DISCUSSION

It is my conclusion that in the absence of a lawsuit from an alleged “lender” seeking to vacate a notice of rescission which has become effective by operation of law, according to the U.S. Supreme Court, the Truth in Lending Act, and the Federal Reserve (Regulation Z), they must bring a lawsuit within 20 days from their receipt of the notice of rescission or they have automatically and perhaps involuntarily accepted the rescission.

As stated in the Jesinoski decision the rescission is effective with the mailing of a letter from the borrower. This is an unusual procedure, which is very distinct in the statute and which is referenced by Justice Scalia in the Jesinoski decision. No such provision exists in favor of the lender to contest the rescission; and this is simply because congress had a very clear intent to

provide the lender with an opportunity to accept the rescission but no opportunity to stonewall the effectiveness of the rescission, which is affected by operation of law on the day that it is mailed. The time periods that run for the lawsuit from the alleged “lender” to contest the rescission and the time periods for the borrower to enforce the rescission start running from the date of receipt by the parties asserting either an ownership or representative (servicing) interest in the loan. It is during that period that the lender has the option of simply accepting the rescission and disbursing back all monies paid along with returning the cancelled note and if necessary filing a satisfaction of mortgage (if indeed the mortgage has even been submitted for recording). In the real world none of these actions tend to occur at the time of the execution of the documents by the borrower. They occur some unknown period of time after the borrower executes the loan documents based upon the borrower’s understanding of who the lender is and the terms of the transaction.

In the usual case we don’t know if the originating bank actually funded the loan and all indications or that they did not. Thus the disclosures are automatically wrong and predatory per se according to Regulation Z because if the originating bank did not fund the loan then it was a table-funded loan and presumably followed a pattern of conduct which makes it predatory per se and thus against public policy. See Regulation Z)

The fundamental defect in relying upon the Beach case, is that the Beach case is all about whether the borrower can raise the right of rescission as an affirmative defense to the foreclosure action. It does not address whether the borrower’s right of rescission ever became effective by operation of law. Only the Jesinoski decision does that.

The essential question here is not so much whether the statute operates as a statute of limitations or simply an expired right as set forth in the Florida Supreme Court and U.S. Supreme Court decision. The issue is procedural. If the lender believes that the rescission is invalid, then the lender must file some pleading in a court of competent jurisdiction in which it contests the rescission and seeks to vacate it, since the rescission is already effective by operation of law when it is mailed.

The point is that Congress wanted to make it possible for a borrower to cancel a deal without being required to hire an attorney, file a lawsuit, file affirmative defenses or anything else. The Congressional intent as stated by Justice Scalia in Jesinoski was clearly to put the burden on the lender to either decide to accept the rescission or to raise the issues of whether or not the right to rescind should be considered to have expired or was beyond the statute of limitations all of which hinge on questions of fact about whether consummation ever occurred or if it did when the consummation did occur and when the three-year period expired. There is also the question of equitable tolling given the fact that it is both public policy and common law policy not to allow a party who commits a criminal or civil act to benefit from their fraudulent behavior withholding the true information from the borrower until after the three years has run. This would defeat the entire purpose of the right of rescission which is all about complete and accurate disclosure, failing which the alleged “lender” would face criminal and civil liability.

The Beach decision, in 1997, obviously precedes Jesinoski by 18 years, at which time it was generally assumed that in order to have a rescission the borrower would be required to file some legal action for the rescission to be effective. The Beach court does not address that issue because it was not raised. But in the courts below in Florida it was a general assumption that some pleading by the borrower would be required in order to raise rescission.

Instead, it is quite obvious that rescission raises a jurisdictional issue. If the rescission is effective upon mailing, and it renders the loan contract void and it renders the note and mortgage void then the loan contract, then it follows that the note and mortgage cannot be used in any way at any subsequent time without the lender legally raising the issue and demanding affirmative relief from a court of law. This probably did not come up in the Beach case because that is exactly what the lender did. The borrower asserted the effectiveness of the rescission and the lender contested it by virtue of the expiration of three years. Both sides filed their claims in court, which is exactly what I have been saying since 2007. Where the lender has asserted that attack to vacate the rescission, the court is free to decide whether or not that lender was correct based upon the facts that are admitted or which are proven by one side or the other.

In the usual case that is not the case. In the usual case the borrowers have sent a notice of rescission and the only thing that has been received by borrower or borrower’s counsel is a letter or an email directing his attention to the Beach case. In addition counsel might receive a call from opposing counsel who states in quite definite terms that in order to have a rescission tender of money or property was required, a position which is clearly incorrect under the Jesinoski decision, the Truth in Lending Act, and Regulation Z.

BOTTOM LINE: TILA Rescission is an extreme remedy but it also extremely simple and it was meant to be both. Congressional intent was to hurt the banks if they failed to adequately disclose who was involved in the closing, how much money they were making and why. Like other specific statutory schemes a very small window is allowed to lenders just as a very small window is allowed to borrowers in non-judicial states. The same arguments the banks use against borrowers complaining about non-judicial foreclosure may be used to support non-judicial cancellation of the loan contract, the note, the mortgage and ultimately the debt itself.

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