Sending Notice of TILA Rescission: The importance of the procedure

First let me say you can rescind any deal if you prove fraud or mistake and tender back whatever you got out of the deal — at common law. My comments are limited to TILA rescission which is a specific statutory remedy that works in very specific ways and favors the borrower, not the alleged lender.

I failed to address one specific question (see above) last night when I was on my radio show. There are many conditions and provisions regarding what loans are subject to rescission or the other disclosure requirements of TILA. Whether a specific loan is actually eligible for rescission is a matter of fact, legal argument and conclusions. Some analysis and consultation with a licensed attorney in your jurisdiction is required.  But the way TILA was written if the borrower has reason to believe that the disclosures were not adequate (within the  tolerances specified by TILA) the borrower can send the notice of TILA rescission and make demand for the note, mortgage and money. What the US Supreme Court unanimously ruled about one month ago was that hundreds of judges on trial benches and appellate benches were completely wrong in applying principles of common law rescission to TILA rescission. No lawsuit is required to have the rescission effective. A letter does it all. And no tender is required from the borrower — quite the opposite the creditor must return all money ever paid by the borrower going all the way back to origination.

Those issues are ONLY addressed IF a creditor files a declaratory action against the borrower seeking a judicial determination that the rescission should not be allowed to stand. So the question about whether it was right to send the notice doesn’t stop anyone from sending it. But if the creditor files a challenge in court (not a letter stating its rejection), then and only then a Judge may decide whether the the rescission stands. But in order to do that the creditor must allege and prove the loan disclosures were complete and accurate; they must prove the loan origination, the loan acquisition and the money trail to establish standing (in my opinion). Without that, the burden of proof cannot shift to the borrower without violating the spirit and express wording of TILA.

There is a reason why it works that way. The purpose of allowing a borrower to cancel a deal (TILA rescission) with a simple letter is to take away the power of the “lender” to tie up the borrower and extort the borrower into complying with predatory loan terms or inadequate disclosures. Rescission is “effective” the date of the notice. It’s done. The mortgage and note are gone.

The purpose of TILA rescission is actually pretty specific. The idea is to allow a borrower to completely cancel the old deal especially the note and mortgage by operation of law without a lawsuit or tender so that the borrower can then go to an alternate lender and get a new loan from a new lender and give the new lender an enforceable first mortgage lien on the property without the risk of the prior lender contesting the right of the new lender to be in first position on the chain of title. Without stating that the mortgage and note are gone the borrower would not have the alternative which is what TILA is all about — choice. Stonewalling and “rejection” letters are exactly what TILA does not allow.

So what happens if you send a notice of rescission and you were wrong about whether you or your loan qualifies for rescission? Let me state that you don’t know if you are really wrong until the issues are litigated. And I would state that if you have no arguable right to send the rescission there might be some exposure to a claim of abuse of process and damages for attorneys fees, costs or even sanctions. But it seems very unlikely to me that such a result will occur given the current track record of apparently zero actions filed by creditors within the 20 day window since the the whole securitization myth was propagated. And if they don’t file the action within 20 days it doesn’t appear to matter how wrong the borrower was — the issue is over. This is just like non-judicial foreclosure where the borrower must file for a TRO within a short window or a judicial foreclosure where the borrower must answer within a short time period.

The answer is that you can draft anything and you can send anything. The banks have proven this with their fabricated assignments, endorsements, allonges, powers of attorney etc. The real question is what happens if you send a notice of rescission when there are potentially factors that could have a court rule in favor of the bank if the bank filed the required challenge within 20 days of the notice.