Ignored Rescission Notice = Free Loan?

You made an owner-occupied consumer loan, but you violated the Truth in Lending Act (TILA).  You attempt to foreclose, but the borrower sends you a rescission notice.  You blow it off and never respond.  Can your borrower erase the loan and lien to keep your money?

These exact facts were tested in Teresa Lavis v. Reverse Mortgage Solutions, Inc., Record No. 18-2180, from the Fourth Circuit Court of Appeals.  Teresa Lavis, took out a reverse mortgage on her home in West Virginia from Reverse Mortgage Solutions, Inc.  Lavis netted about $60,000 from the loan.  RMS did not provide TILA disclosures or a three day right to cancel when the loan was made.  After Lavis defaulted on her taxes and insurance, RMS called the loan.  With the threat of foreclosure looming, Lavis sent a rescission letter to RMS.  RMS got the notice but ignored it.  As you know, a lender must respond to a rescission notice within 20 days.

Lavis then sued RMS to clear title to her home and for violation of her rescission rights.  She met a sympathetic judge at trial, who ruled that she could not only rescind the loan, but also enjoy the benefit of a free loan.

On appeal, RMS asserted that no provision of TILA permitted Lavis to keep the loan proceeds after rescission.  However, there is a provision in the TILA regulation that says:

If the creditor does not take possession of the money or property within 20 calendar days after the consumer’s tender, the consumer may keep it without further obligation. Reg. Z 1026.35.

In addition, the Fifth Circuit allowed a forfeiture decades earlier in Sosa v. Fite, 498 F.2d 114 (1974) where the borrower’s rescission letter included an offer to tender the proceeds owed after rescission.  (For the amount owed after rescission, see Semar v. Platte Valley Fed. S&L, 791 F.2d 699 (9th Cir. 1986) (a case litigated by our Dennis Doss).

The Court of Appeals agreed that Lavis’s rescission notice was valid, and that RMS’s had failed to respond to it as required by TILA.  However, the Court felt “under TILA, the purpose of rescission is to place the parties in the position they were before the loan – not allow the borrower to enjoy the benefits of the loan without the burdens of it.”  The Court went on to note that permitting a borrower to rescind the loan yet keep the loan proceeds “would bestow a remarkable windfall on a borrower and penalty on the lender divorced from the text of TILA and the entire purpose of rescission.”  Ruling: Lavis had to pay back the loan free of fees, interest and other finance charges.

With Sosa’s forfeiture threat lurking around, a lender would be well advised to take a borrower’s rescission notice seriously.  For Decades, Doss Law, LLP has been fully versed in consumer credit law if you have needs in that area.

Prudent legal advice comes from experience.  We have over 50 years of it.

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