In 2015, the Supreme Court issued a decision that affirmed the right of homeowners to rescind their mortgages when lenders have not fully disclosed the terms of the loan agreement. The ruling seeks to protect consumers from violations under the Truth in Lending Act (Act) and is a welcomed reprieve for borrowers who encountered difficulty in paying their mortgages.
Under the Act., a lending institution must make certain disclosures about the loan, including the types of payments to be made, the terms under which the lender can demand repayment of interest or principal, and the action that the lender is permitted to take if the homeowner sells or refinances his home. The law has historically allowed a “right of rescission” for borrowers to annul their loans within three days of signing the loan documents for any reason. The borrower is not obligated to provide a basis for his desire to cancel the loan. The three-day rule only applies to properties occupied by the owners of the property. The right to rescind is intended to protect a homeowner’s equity in his home and therefore applies to home equity loans, home equity lines of credit, mortgage refinances and cash-out refinances.
The law states that there is an exception to this three-day rule. If the lender failed to make required disclosures under the Act, such as relaying information about finance charges, then the Act authorizes a three-year period to rescind the mortgage. If the lender never provided the requisite disclosures under federal law, the borrowers have no recourse unless they exercise this right within three years after the consummation of the transaction or the sale of the property.
In the Supreme Court decision highlighting this provision of the Act, the Court issued guidance as to how rescission should be exercised. Accordingly, homeowners are obligated only to provide a letter to the lender to take advantage the three-year rescission law. The borrowers are not required to bring formal action against the lender to cancel their mortgages. The Court stated that “rescission is effected when the borrower notifies the creditor of his intention to rescind” even though lower courts have differed with respect to the details of initiating this process.
Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.