With all the talk of fraudulent mortgage loans these days, the right of rescission has become quite a hot button topic. Unfortunately, most of what people hear, either from so-called internet "experts" or even from misinformed attorneys, tends not to be entirely accurate. The most common misperception is that if you are able to successfully litigate a loan rescission case, you get to cancel the note (true) and keep the property free and clear (not true). Here's how it actually works, and the practical effect of mortgage rescission on the borrower.
What is the Right of Rescission and when does it apply?
The right of rescission is the right to void the lender's security interest in your home, thereby taking away their lien, foreclosure interest, and their leverage. This powerful right arises from the Truth in Lending Act (TILA), which was designed to provide consumers with accurate information about loan transactions in order to facilitate informed decisions. Certain TILA violations on the part of the lender may give the homeowner the right to rescind the loan.
This right, however, does not extend to all home loans. If the credit was used for the purchase of a home (a "purchase money mortgage"), the right of rescission does not apply. Common examples of rescindable transactions include: home equity loans, transactions that refinance purchase money mortgages, and home improvement loans or credit sales.
Is there a time limit imposed on asserting the right of rescission for TILA violations?
Yes. Borrowers have an absolute rescission right for three days following the transaction. This period may be extended for up to three years if certain "material" TIL disclosures were not provided correctly at the time of the credit transaction, or a proper notice of the right to cancel was not given.
What does a rescission mean to the borrower?
When the homeowner has successfully rescinded a mortgage transaction, he is obligated to tender the loan proceeds, or the fair market value of any property received. The tender obligation is the net amount owed after voiding all finance charges, interest, and other charges, and after crediting all prior payments directly to principal. These reductions can dramatically lower the principal amount, especially if the interest rate or fees were high, or if substantial payments have been made. However, it should be noted that the homeowner may have to come up with a large amount of money to fulfill his tender obligation. The homeowner must present a realistic tender plan to the Court if he wants to prevail in his rescission action. Some tender options include refinancing with a more affordable lender, obtaining a reverse mortgage (only for elderly homeowners), or selling the home.
Conclusion
Though mortgage rescission is certainly a valuable tool in certain circumstances, it is by no means a "free ride" or a one-size fits-all remedy. Keep in mind that litigation is expensive and there are no guarantees that you will prevail. Even if you do, you must be financially prepared to fulfill your tender obligation to the lender. In many cases, having your attorney negotiate a substantial loan modification with the lender (instead of exercising your right of rescission) may turn out to be in your best financial interests.
The author of this article, Lisa Torelli McCue of the McCue Law Firm, PA, has been a Consumer Advocate Attorney since 1995. She practices law in Fort Lauderdale, Florida, in partnership with her husband, Christian. They focus their Florida practice on consumer bankruptcy, credit defense, foreclosure defense, and personal injury law (http://www.mccuelaw.com). In addition, they represent clients nationwide for loan modification and workout agreement negotiations under their subsidiary, http://www.homesaverplans.com
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