Maryland’s highest court recently rejected a borrower’s argument that he had rescinded a loan transaction under the Truth-in-Lending Act, 15 U.S.C. § 1601, et seq. (“TILA”), before closing.
Upholding an order ratifying a foreclosure sale, the Court of Appeals of Maryland reasoned that a borrower cannot claim a TILA right to rescind a transaction which does not yet exist.
A copy of the opinion is available at: http://www.mdcourts.gov/opinions/coa/2014/2a14.pdf
Appellee (“Borrower”) obtained a refinance loan in the amount of $350,000 (the “Loan”), which was evidenced by an adjustable rate note and secured by a deed of trust (the “Loan Documents”). The Loan Documents were dated April 17, 2007. One or two days earlier, Borrower allegedly transmitted a notice of rescission of the Loan to their refinance lender. Despite this, Borrower accepted the benefits of the Loan, which were used to satisfy a prior mortgage and Borrower’s credit card debts, with an additional sum of money given directly to Borrower.
Regarding his purported cancellation of the Loan under TILA, Borrower claimed that he sent a Notice of Right to Cancel on April 16, 2007, which matched the date of the notice itself. However, the transmission verification report indicated that the notice was faxed on April 15, 2007. Borrower further alleged that, at some point after he faxed this notice, the lender told him that his rescission was not effective, and that he could not rescind.
Nevertheless, the closing went through. For two years after closing, Borrower paid according to the terms of the Loan documents. After he experienced financial difficulty, he defaulted on the Loan, and a foreclosure action was filed.
In the foreclosure action, Borrower filed a Motion to Stay or Dismiss, in which he argued that he had rescinded his loan under TILA. Borrower also filed a third-party complaint against his lender and loan servicer, again arguing that he timely exercised his to rescind. After Borrowers’ Motion to Stay or Dismiss was denied, and his third-party complaint dismissed, the property was sold.
Borrower filed exceptions to the foreclosure sale, claiming again that he had rescinded the Loan under TILA. Borrower’s argument was again denied, and the exceptions overruled. Following the Court’s entry of an order ratifying the sale, Borrower appealed.
The Court of Special Appeals reversed, determining that the three-day window for rescinding under TILA “remained open throughout the negotiation process for a loan commitment leading up to closing and lapsed at the end of three days after closing.” Slip. Op. at pp. 9-10. Thereafter, the substitute trustees under the deed of trust filed a petition for certiorari to Maryland’s highest court, which resulted in the present appeal.
As you may recall, TILA grants homeowners a right to rescission under certain circumstances. Specifically, “in the case of any consumer credit transaction. . . the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction.” 15 U.S.C. § 1635(a); see also 12 C.F.R. § 226.15(a)(3) (same). Once the right to rescission has been exercised timely and properly, the consumer is “not liable for any finance or other charge, and any security interest given by the obligor, including any such interest arising by operation of law, becomes void upon such a rescission.” 15 U.S.C. § 1635(b); see also 12 C.F.R. § 226.15(d)(1) (“When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void, and the consumer shall not be liable for any amount, including any finance charge.”).
On appeal before Maryland’s highest court, the Court of Appeals held that Borrower’s exercise of his right to rescind was invalid because the Loan had not yet consummated. According to the Court, “[u]nder TILA, a borrower cannot rescind that which has not occurred yet.” Slip. Op. at p. 20.
On this issue, the Court first considered the language of the statute and its implementing regulations. The Court noted that federal law provides that the right exists only with a “consumer credit transaction” and that the right lasts until midnight of the third business day following the “consummation” of the transaction, or three years following consummation in certain circumstances not relevant here. See 15 U.S.C. § 1635(a).
Regulation Z defines “consummation” as “the time that a consumer becomes contractually obligated on a credit transaction.” 12 C.F.R. § 226.2(a)(13). Notably, here, the Court observed that, “neither party alleged that the consummation date was some date in the negotiation process other than the date that the [Loan Documents] were signed and dated.” Slip. Op. at p. 19 n. 20. Accordingly, the Court determined that the consummation date was April 17, 2007. See id.
Likewise, although TILA does not define the terms “consumer credit transaction,” or “transaction,” the Court noted that definitions of similar terms each “presuppose that the ‘transaction’ must be consummated.” Slip. Op. at p. 19 (citing Weintraub v. Quicken Loans, Inc., 594 F.3d 270, 273 (4th Cir. 2010)). As held in Weintraub, both the definitions of the terms “residential mortgage transaction” and “reverse mortgage transaction” indicate that “any credit transaction under § 1635(a) must be consummated for the right to rescind to attach.” Weintraub, 594 F.3d at 275.
The Court also reasoned that Regulation Z presumes that, at the time a borrower wishes to exercise his or her rescission right, there is something to rescind. See Slip. Op. at p. 20; 12 C.F.R. § 226.15(d)(1) (explaining that the effect of rescission is to render void “the security interest giving rise to the right of rescission.”). According to the Court, there must be a security interest in being to rescind in order for it to be rendered void. See Slip. Op. at p. 20; see also 12 C.F.R. Pt. 226, Supp. I, pp. 709-10 (Official Staff Commentary) (“In order for the right of rescission to apply, the security interest must be retained as part of the credit transaction.”).
Ultimately, the Court determined that the Loan consummated at closing, or “the moment when the note and deed of trust or mortgage are signed.” Slip. Op. at p. 20. Thus, until Borrower consummated the Loan, there is no consumer credit transaction, and the consumer has no right of rescission under TILA. See id. As noted by the Court, “[i]f the loan was not consummated yet, the borrower could decline simply to sign the loan documents and avoid liability.” Id.
Accordingly, the Court of Appeals of Maryland reversed the Court of Special Appeals, and affirmed the judgment of the circuit court, which denied Borrower’s rescission defense.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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