Avoid a Three-Year Right of Rescission

Reg Z compliance requires delivery of accurate notices and disclosures.

ALTHOUGH THE Truth in Lending Act (TIL) and Regulation Z's rescission requirements are easy to comprehend and to comply with, some creditors have been sued recently for noncompliance.

When creditors comply with Reg Z's rescission requirements, the borrower's right to rescind lasts for three days. But it extends to three years if the required notice and disclosures (annual percentage rate, finance charge, amount financed, total of payments, and payment schedule) aren't delivered or are incorrect.

Common reasons creditors fail to comply include:

1. Wrong language in the rescission notice. In a 2002 California case, the creditor provided a rescission notice to the plaintiff, Mr. Gibbons, that was identical to the H-9 model form in the appendix to Reg Z. Form H-9 is intended for consumers who are entering into loan transactions with the same creditor that financed a previous loan secured by the consumer's home.

Because this wasn't the case, Mr. Gibbons should have received model form H-8, which is intended for loans from a lender that doesn't already hold a security interest in the borrower's home.

Ordinarily, using language identical to the model forms in Reg Z's appendix shields a lender from liability. However, the court noted that when a creditor uses the wrong form, it isn't shielded from liability.

2. Incorrect number of copies of the notice. In a 2003 Kansas case, the lender retained a closing agent to close a mortgage for the plaintiffs, Mr. and Mrs. Davidson. The lender told the closing agent to comply with all federal and state guidelines, and provide borrowers with the correct number of copies of closing documents, including the TIL disclosure statement and rescission notices.

The closing agent provided only one copy to each borrower instead of two. The lender argued the Davidsons shouldn't be allowed to rescind their loan because the failure to provide two copies was unintentional and a bona fide error.

The court, however, stated that through a clerical or copying error, the closing agent didn't do what she knew she was required to do. The lender should have maintained procedures, such as requiring the closing agent to complete a checklist at closing, to avoid such errors.

The court stated that TIL is a strict liability statute and this type of technical violation is sufficient to impose liability on a lender.

3. Incorrect date for the rescission period. In a 2002 Rhode Island case, the lender provided Mr. and Mrs. Rodrigues with two copies each of the rescission notice. The notices weren't completed and didn't disclose the rescission period's expiration date, thereby violating TIL, the court stated.

In another case, a lender gave the borrowers six days to rescind vs. three days, again violating Reg Z and TIL.

4. Not providing the rescission notice to all required parties. In a 2003 Pennsylvania case, the lender approved a loan for Mr. Apgar, secured by a mortgage on the Apgars' home. Although Mrs. Apgar wasn't a borrower, she was required to cosign the mortgage agreement because she and her husband were joint property owners.

The lender provided two copies of the rescission notice to the husband but none to the wife. Reg Z requires rescission notices to be provided to any person whose ownership interest in the property is or will be subject to the security interest. The court ruled the lender should have provided two copies to the wife.

In all of these cases, the courts ruled the rescission period was extended to three years because the lenders didn't comply with TIL and Reg Z.

MICHAEL MCLAIN is senior compliance counsel for the Credit Union National Association. Contact him at 608-231-4185 or at mmclain@cuna.com.

Copyright Credit Union National Association, Inc. Nov 2004
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