The right of rescission and its limits

Just about everyone knows that when they take out a home equity loan to remodel the kitchen, they have three business days to rescind the transaction.  This right comes to us courtesy of 15 USC 1635(a) and its corresponding regulations at 12 CFR 226.23(a)(2).  It applies to any individual who receives consumer credit in exchange for a security interest in his or her principle dwelling.  This provision occasionally scares the bejebies out of credit unions because if its notice requirements aren’t followed, the homeowner has three years to rescind the loan.

This sounds like a big deal but a recent decision by the federal Court of Appeals Seventh Circuit underscores that the right of rescission has its limits.  The ruling is consistent with what New York’s federal courts have said about the issue and the decision is worth filing away if and when a member defaults on a home loan.

Iroanyah v. Bank of America involved homeowners who took out two mortgages against their home.  As required by the Truth in Lending Act, they were given a disclosure statement explaining the repayment schedule, including the number of payments, the amount due for each loan, and the due dates for the first and last payments.  However, the disclosures did not include the date on which each payment was due, nor the frequency with which payments were to be made.  As my wife just pointed out, this seems like a fairy significant oversight, and indeed it was.

When the homeowners stopped making payments and the evil bank moved to foreclose on the property, the homeowners argued, and the court agreed, that their right of rescission had been violated.  At this point of the decision, the homeowners probably thought it was time to uncork the champagne.

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