The federal Truth in Lending Act provides that in all consumer credit transactions involving a retained security interest in the principal dwelling of the borrower, the lender is required to provide the borrower with certain disclosure statements. If those disclosures aren’t made, the consumer may rescind the transaction for up to three years.
In Financial Freedom Acquisition, LLC v. Standard Bank & Trust Co., the Illinois Supreme Court addressed the question of whether the TILA right of rescission extended to a bank holding property as a trustee as a result of a reverse mortgage. In a unanimous opinion by Justice Burke, the Court held that the answer was “yes.” Our detailed summary of the underlying facts and lower court holdings in Financial Freedom is here.
Financial Freedom began in 2009 when a homeowner and the defendant entered into an “adjustable rate home equity conversion mortgage” – a reverse mortgage – secured by the homeowner’s condominium. The mortgage stated that the defendant bank was executing the instrument solely as a trustee, and would not have any liability whatsoever on the note. The note provided that the loan became immediately due in full if the borrower died, sold the property, or failed to use it as her principal residence for 12 months. The homeowner received the necessary TILA disclosures, but she never delivered them to the defendant bank as trustee.
The homeowner died in early 2010. A few months later, the plaintiff sued the defendant bank to foreclose the mortgage. The defendant responded by sending a notice of rescission. A month later, the defendant filed a counterclaim in the foreclosure action seeking rescission, statutory damages and attorneys’ fees. The plaintiff successfully moved to dismiss the counterclaim, and the defendant appealed. A divided panel of the Appellate Court affirmed the dismissal, holding that the defendant bank was not an “obligor” under TILA and therefore had no right to rescind.
The Supreme Court reversed. The Court noted that the US Supreme Court has stated that the Federal Reserve Board’s interpretations and Staff Commentary on TILA are entitled to considerable deference from the courts. Although Section 1635 of TILA states that the right to rescind is in the “obligor,” Regulation Z and the Official Staff Commentary suggest that Congress intended something broader than the usual definition of an “obligor” – both the regulation and commentary refer to “a consumer” as being allowed to rescind. When administrative authority over TILA was recently moved from the Federal Reserve Board to the Consumer Finance Protection Bureau, Congress made no attempt to correct the applicable regulations or commentary, suggesting that it accepted the interpretation.
Besides, there was no “obligor” in the usual sense of the term in a reverse mortgage, the Court pointed out. Consumers make no payments on a reverse mortgage at all; it is a nonrecourse credit transaction secured by the consumer’s principal dwelling. Thus, if the right to rescind is limited to the “obligor” defined in the usual way, then there is no right to rescind at all in reverse mortgages. Therefore, the Court held that the right to rescind extended to “each consumer whose ownership interest is or will be subject to the security interest.”
Such a definition plainly extended to land trusts in reverse mortgages, the Court found. Upon execution of a reverse mortgage, the land trust is the only entity which holds a property interest in the subject dwelling. The consumer’s only interest is a personal property interest in the trust. It is the trustee’s interest, not the consumer’s, which is subject to the security interest. Therefore, the defendant bank had the right to rescind the transaction.
In the alternative, the plaintiff argued that the defendant’s right to rescind had terminated upon the sale of the property, citing section 226.23 of Regulation Z (12 CFR § 226.23(a)(3).) But Section 226.23 only imposed a time limit for exercising the right to rescind, the Court concluded. So long as notice of rescission was given before sale of the property – which it was in this case – the rescission was effective.
The Court remanded the action back to the Circuit Court for consideration of the defendant’s claim for statutory damages.