2425 Porter Street, Suite 10
Soquel, CA 95073
Phone: (831) 464-6884
Fax: (831) 464-6886
A. The Law
The rescission process was intended to be self-enforcing and able to be completed without the necessity of going to court. If the homeowner does not sell the home, the extended right of rescission can last up to three years after the loan consummation and longer if the lender initiates foreclosure proceedings. 15 USC §1635(f); Reg Z §§226.15(a)(3), 226.23(a)(3). The regulations set up a three-step process to rescind a loan.
First, the borrower must notify the lender, in writing, of the cancellation of the loan. While the notice must be in writing, it can be transmitted by mail, telegram, or other means. Reg Z §§226.15(a)(2), 226.23(a)(2). It should be sent to the lender's designated place of business. A rescission notice sent by the borrower's attorney is also effective. Official Staff Commentary §226.2(a)(22)-2. While signing the right to cancel and sending it to the lender is effective, my practice is to draft a letter notifying the lender of the rescission and the reasons for it. I usually send the letter to the address provided on the right to cancel form, if there is such a form, as well as any other address that the borrower may have for the lender.
A note on loan servicers: Currently, rescission letters sent to loan servicers are not effective notice to the lender. Many borrowers do not understand the difference between the owner of the loan and a loan servicer. Even savvy attorneys have trouble determining who owns the loan, because assignments are no longer routinely recorded. It is important to review the loan file to determine who was the lender at the time the loan was consum-mated. Additionally, I always check the chain of title to see if the loan has been assigned. If so, I send a copy of the rescission letter to the new lender as well. A call to the servicer can reveal who the owner is, although they generally do not like to give that information. Additionally, a proper written request under RESPA should work, if you have the time. A new Commentary states that, when the creditor fails to provide an address for a designated agent to whom rescission notice may be sent, delivery to the entity that the borrower makes the payments to will be effective notice to the lender or the lender's assignee. Official Staff Commentary §226.23(a)(2)-1.
Once the loan is rescinded, the security interest or lien becomes automatically void, by operation of law. 15 USC §1635(b); Reg Z §§226.15(d)(1), 226.23(d)(1). The note also is voided. The lender's interest in the property is "automatically negated, regardless of its status and whether or not it was recorded or perfected." Official Staff Commentary §§226.15(d)(1)-1, 226.23(d)(1)-1.
Within 20 days of receipt of the notice of cancellation, the lender must return to the borrower any money or property that has been given to anyone in connection with the loan. 15 USC §1635(b); Reg Z §§226.15(d)(2), 226.23(d)(2). The lender must also take steps to reflect that the security interest has terminated.
Once the lender has terminated the security interest and returned any money or property it received, the borrower is then required to tender any property or money received from the lender. 15 USC §1635(b); Reg Z §§226.15(d)(3), 226.23(d)(3); Official Staff Commentary §§226.15(d)(3)-1, 226.23(d)(3)-1. This step is the reverse of most states' rescission law. The statute does not prescribe a time period in which tender must be accomplished.
As a result of the rescission, the lender retroactively loses the right to charge interest, fees, and costs on the loan, even costs paid to outside third parties such as the title insurer. The amount, therefore, of tender is calculated by first determining what funds the borrower actually received for his or her direct benefit. (Cash out to the borrower and funds released to pay the borrower's debts are examples of uses for the borrower's direct benefit.) Once that amount is determined, it is reduced by the total payments the borrower has made on the loan. Attorney fees are available against a violating lender, as well as actual and statutory damages. 15 USC §1640(a). The remaining balance is the amount due on tender. Once tender is delivered, the rescission process is complete.
B. How Rescissions Work in Practice
TILA grants the courts power to modify certain aspects of the statutory rescission scheme. In particular, Reg Z enables the courts to modify the second and third steps of the rescission process. Reg Z §§226.15(d), 226.23(d). However, some courts have been uncomfortable with enforcing the statutes' first step as well-the voiding of the security interest. For that reason, I have never forced a lender to remove their security interest prior to tender. I generally require the lender to indicate an acceptance of the rescission within the required 20-day period. Once the rescission has been accepted, I work with the lender to determine the amount of tender. Generally, clients refinance or sell their property to fund the tender. Sometimes lenders agree to rewrite the loan at the new loan balance. Either way, the lender submits a payoff demand, equal to the tender amount, into escrow and title insurance is obtained.
A note on attorney fees: I always require the lenders to pay the reasonable attorney fees in rescission matters. Because it is the lender who is paying the attorney fees, I generally submit my own demand directly into escrow, indicating that the bill should be paid out of the lender's proceeds. Of course, the lender must agree to this in advance.