Recently, the United States Court of Appeals for the 4th Circuit ruled that a mortgage servicer’s failure to provide required disclosure advising borrowers of their three-day right to cancel the loan under the Truth in Lending Act (TILA) does not relieve borrowers of their obligation to return disbursed loan proceeds upon effective termination. The decision overturned a West Virginia district court ruling against the mortgage manager in an alleged class action lawsuit.
The parties had agreed that the Mortgage Officer had failed to provide the Borrower with the notice of right to rescind required under TILA, that the Borrower subsequently provided timely notice of rescission. after consummation of the Reverse Mortgage and the Administrative Agent had not taken the actions required under TILA to effect the termination. The question before the Court was whether, in these circumstances, the borrower was still required to return the loan proceeds to the administrator or whether the borrower was legally excused from having to return the loan proceeds.
The Circuit Court reviewed the TILA text, case law from the 4th Circuit and other U.S. circuit courts, and the U.S. Supreme Court’s decision in Jesinosky c. Countrywide Home Loans, Inc.., 574 US 259, 261 (2015), and held that all of these precedents demonstrated that the plaintiff was not entitled to the remedy sought – namely, to keep the property free of lien and avoid any obligation to submit. The 4th Circuit held that “neither § 1635(b) nor any other provision of TILA provides that a lender’s failure to voluntarily unwind a loan or respond to a notice of intent to cancel entitles a borrower to avoid presenting the proceeds of the loan in connection with termination”. The court noted that “to decide otherwise would confer a remarkable windfall on a borrower and a penalty on the lender divorced from the text of TILA and the very subject matter of the termination “, which is to place the parties in the positions they would have occupied if the loan transaction had not taken place.
Put into practice : Although the TILA charts a course for effecting termination, there remains a question as to whether the borrower must still remain ready and able to return the loan proceeds to the creditor when the creditor has not taken the action prescribed by the TILA. . Here, the circuit ruled that under the law, the borrower must remain prepared to return loan proceeds to the creditor once the creditor has taken steps that put the ball back in the borrower’s court to complete cancellation. While the decision may be correct on its face, it is not necessarily settled law in every circuit. The best approach by a creditor in dealing with a Notice of Termination is to take the steps prescribed by TILA (that’s to sayreturn to the borrower all finance charges and other charges levied and release the creditor’s security interest in the borrower’s property), and then require the return of the loan proceeds by the consumer, so as not to jeopardize the ability of the creditor to request the submission.
Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 217