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Mortgage borrower may rescind loan transaction under Truth in Lending Act without filing lawsuit, but if lender does not acquiesce to rescission, court has authority to decide whether (1) TILA disclosure was deficient, (2) rescission notice was timely, and (3) equity requires modification of TILA rescission procedures.
U.S. Bank Nat’l Ass’n v Naifeh (2016) 1 CA5th 767
Borrower defaulted on her residential home loan in 2008. The $500,000 home loan originated on March 14, 2007, and was secured by a deed of trust recorded against the home on April 6, 2007. The note was assigned twice—first by Original Lender to Successor Lender, who transferred it again. After the default, Successor Lender recorded a Notice of Trustee’s Sale, reflecting a sale date in July 2009. The sale was postponed until May 2010. Directly after the Notice of Trustee’s Sale, on July 18, 2009, Borrower sent a notice of rescission under the Truth in Lending Act (TILA) (12 CFR §226.33(b)) to Original Lender and Successor Lender, asserting fatal defects in the required TILA disclosures. Borrower sent the same notice to Second Successor Lender in January 2010.
Beginning in April 2010, Borrower and a friend recorded eight fraudulent documents, without proper legal authority, essentially asserting that Second Successor Lender no longer had any interest in the property. At the trustee’s sale on May 24, 2010, Borrower passed out “buyer beware” notices stating there were contrary claims to the property title. There were no bids on the property and the trustee granted title to Second Successor Lender. In November 2010, Borrower recorded a warranty deed transferring the property to another individual for $407,500.
Second Successor Lender filed a complaint against various parties, including Borrower, for cancellation of the eight fraudulent instruments (among other claims). The defendants asserted two affirmative defenses:
· The TILA rescission of the loan; and
· Lack of standing or unclean hands.
The trial court ruled in favor of Second Successor Lender, noting the fraudulently (and arguably void or voidable) recorded documents placed the defendants in a particularly weak position from which to claim unclean hands. The court of appeal vacated the judgment and remanded the case to the trial court to determine if the TILA disclosures were actually deficient. If so, the trial court was to determine whether the circumstances and facts of the case required Borrower to equitably tender all or part of the loan proceeds she received.
TILA protects borrowers from predatory lending; the rescission procedure is intended to bring the parties back to their original positions before the transaction. Notably, a borrower need not tender payment before giving the TILA rescission notice, so the lender may be left in a position of losing its security in the property and with a borrower without funds to return the principal. Two statutes of limitations apply to TILA rescission notices:
· First, a borrower who has secured a credit transaction with a lien on his or her principal dwelling may rescind the loan within 3 business days. 15 USC §1635(a).
· Second, if the statutorily required TILA disclosures have not been appropriately made to the borrower, then that borrower has 3 years to rescind after the date of the transaction, or on the sale of the property, whichever occurs first. 15 USC §1635(f); 12 CFR §1026.23(a)(3)(i).
Here, since the loan originated on March 14, 2007, Borrower’s notice of rescission on July 18, 2009, arguably was timely within the extended 3-year period. The court of appeal interpreted TILA rescission law in light of the U.S. Supreme Court decision in Jesinoski v Countrywide Home Loans, Inc. (2015) ___ US ___, 135 S Ct 790. Jesinoski instructs a borrower need only send the notice of rescission, not file a lawsuit, within the 3-year extended statute of limitations period.
However, because Second Successor Lender here sought to foreclose on the property, it did not acquiesce to the rescission notice. The case does not end there because making rescission automatic and final on notice would allow any borrower to falsely allege the lack of required disclosures and potentially inequitably divest their lender of an interest in the property. Such a circumstance would not bring the parties back to the status quo before the loan transaction. If a lender contests the rescission notice, and disclosure actually was deficient, a court has the discretion to modify the TILA rescission procedure and equitably require a borrower to tender first, before the creditor must give up its security interest. 15 USC §1635(b); Yamamoto v Bank of N.Y. (9th Cir 2003) 329 F3d 1167, 1170, reported at 26 CEB RPLR 163 (July 2003).
The court of appeal remanded the case to the trial court to determine the validity of the affirmative defense of rescission, i.e., if the TILA disclosures were deficient. If not, Borrower’s rescission notice was subject to the 3-day statute of limitations and was not timely. If the TILA disclosures were deficient, both the security interest in the property and the foreclosure were void and the trial court may determine what procedure might return the parties to the status quo, including at what point in the litigation and how much Borrower should be required to tender.
THE EDITOR’S TAKE: Stephanie Naifeh took three different approaches in attempting to defeat the lender’s foreclosure of her mortgage. She
Gave notice of rescission under the Truth in Lending Act (TILA);
Recorded a number of documents purporting to, e.g., modify and reconvey the deed of trust, substitute out the trustee under it, and rescind the trustee’s deed upon sale (TDUS); and
Distributed “buyer beware” notices to persons attending the trustee sale.
The lender brought this lawsuit to cancel those various documents she had recorded, although the substance of the opinion dealt with the effectiveness of her attempt to rescind under TILA. The cancellation issue might ultimately be resolved differently if the claim of rescission is found defensible after remand. The “buyer beware” strategy was only mentioned and not discussed, although I cannot find anything actionable in a borrower attempting to chill the bidding at her own foreclosure sale. (Warning prospective bidders is an uncertain device because, on the one hand, it probably deters third-party bidders by potentially depriving them of potential bona fide purchaser defenses while, on the other hand, it may simply just chill the bidding, eliminating the trustor’s possibility of receiving any surplus if the sale is upheld.)
The cancellation issue is also interesting in itself. The documents that Naifeh recorded would have invalidated the deed of trust, the foreclosure sale, and the TDUS, if they were effective, and even if not effective, would certainly have clouded the lender’s or any foreclosure bidder’s title, thus making cancellation imperative for a lender whose loan was proper. Cancellation is available under CC §3412 and criminal prosecution may also be available under Pen C §115 (because those instruments had been recorded). But our statutes are not explicit as to the extent of relief, unlike some statutes in other jurisdictions that provide for general and punitive damages, fines, and attorney fee awards in addition to cancellation. If a false recorder is subject to those kinds of penalties in California, this recording strategy may be too risky to contemplate.—Roger Bernhardt
39 Real Property Law Reporter 122 (Cal CEB Sept. 2016), © The Regents of the University of California, reprinted with permission of CEB.