During its September term, the Illinois Supreme Court agreed to decide an issue of importance to property and banking practitioners: is the statutory right to rescind a reverse mortgage limited to the original property owner? The Court granted leave to appeal from a decision of Division 6 of the First District, Financial Freedom Acquisition, LLC v. Standard Bank & Trust Co.

The plaintiff filed a complaint to foreclose a home mortgage following the death of the original borrower. The mortgage, which was attached to the complaint, was an adjustable rate home equity conversion mortgage – a type of reverse mortgage insured by the federal government. The mortgage was executed by the defendant as trustee, but an exculpatory clause in the mortgage provided that the defendant couldn’t have any liability for payment of the note; instead, the note would ultimately be paid by the sale of the property – either upon the death of the borrower, or should she fail to use the property as her principal residence for more than a year.

The defendant answered and counterclaimed, alleging that the plaintiff had failed to deliver disclosures required by the Truth in Lending Act, and had failed to respond to the defendant’s notice of rescission of the mortgage. The defendant sought rescission, termination of the plaintiff’s security interest, and statutory damages.

The plaintiff moved to dismiss the counterclaim. The Circuit Court granted the motion, and when the plaintiff subsequently voluntarily dismissed the foreclosure complaint, the defendant appealed.

In a split decision, the Appellate Court affirmed. The defendant sought rescission based on the Truth in Lending Act. The TILA provides that “the obligor” may rescind the transaction until midnight of the third business day following consummation of the transaction. But if the creditor doesn’t give the required disclosures – and the defendant alleged the plaintiff hadn’t – then the limitation on filing for rescission is three years. The defendant filed more than three days, but less than three years following consummation of the loan transaction.

The problem, according to the majority, was that the defendant wasn’t the “obligor,” which the Court defined as the person to whom credit is extended. Since the defendant had no possible liability on the note (pursuant to the exculpatory clause), it had no right to rescind.

Justice Robert E. Gordon dissented. Justice Gordon argued that the defendant had satisfied all three elements of the statutory test to establish a right to rescind: (1) it was acting “in the case of any consumer credit transaction”; (2) it had retained or acquired a security interest in the property; and (3) it alleged that the property was used as the principal dwelling of the person to whom credit was extended. Justice Gordon argued that since the statute referred separately to the “person to whom credit was extended” and “the obligor,” contrary to the majority’s conclusion, they must mean different things. Although the majority concluded that the consumer was the “obligor,” Justice Gordon pointed out that in a reverse mortgage, the consumer pays nothing to the bank – it is the bank that has an obligation to the consumer.

We expect Financial Freedom to be decided in six to eight months.

Image courtesy of Flickr by Diana Parkhouse (no changes).