The Illinois Appellate Court, First District, recently held that only an "obligor" has a right to rescind a loan transaction under the federal Truth in Lending Act (“TILA”).
A copy of the opinion is available at: http://www.illinoiscourts.gov/Opinions/AppellateCourt/2014/1stDistrict/1120982.pdf
A mortgagee filed its complaint for foreclosure following the death of the borrower (“Borrower”). The note was signed by both the Borrower and a land trust that held title to the real estate collateral (“Record Owner”), but the loan documents provided that the Record Owner would not be personally liable for the amounts due. The Record Owner was only the mortgagor and sole signatory on the mortgage, but the mortgage included an exculpatory clause that expressly disclaimed any obligation by the Record Owner under the note and mortgage.
In the mortgagee’s foreclosure action, the Record Owner filed a counterclaim, alleging that the mortgagee: (1) failed to deliver material disclosures as required by TILA; and (2) violated TILA by failing to respond to the Record Owner's notice of rescission.
The lower court dismissed the counterclaim with prejudice, and the mortgagee thereafter voluntarily dismissed the foreclosure action with prejudice. Despite the voluntary dismissal of the foreclosure action, the Record Owner timely appealed the lower court's ruling dismissing its counterclaim.
As you may recall, TILA provides that “the obligor shall have the right to rescind *** by notifying the creditor, in accordance with regulations of the Board, of his intention to do so.” 15 U.S.C. § 1635(a). The obligor has three business days following the consummation of the transaction to rescind the loan “until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section together with a statement containing the material disclosures required under this subchapter, whichever is later, by notifying the creditor, in accordance with regulations of the Board, of his intention to do so.” 15 U.S.C. § 1635(a). However, if the obligor is not provided the required disclosures, with exceptions not relevant here, “An obligor’s right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first ***.” 15 U.S.C. § 1635(f).
The Appellate Court affirmed the lower court’s dismissal of the TILA counterclaim, ruling that the Record Owner was not entitled to rescind the loan transaction under TILA. The Appellate Court reasoned that based on the exculpatory clause in the mortgage, the Trustee was not an “obligor” as that term is used in the rescission provisions of TILA, 15 U.S.C. 1635(a).
The Appellate Court held that only "obligors" have the right to rescission under TILA. The Court noted that “[n]either TILA nor Regulation Z defines ‘obligor.’”
The Court did not analyze or mention the provision in Regulation Z that “[i]n a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section.” 12 CFR 1026.23(a).
In addition, the Appellate Court found that the Record Owner forfeited its argument regarding statutory damages under TILA because the Record Owner failed to raise the issue on appeal. The Court noted, however, that the Record Owner's claim for statutory damages might have been time-barred even if the Record Owner had not waived its argument.
The Appellate Court therefore affirmed the lower court's judgment in favor of the mortgagee and against the Record Owner.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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