Basic Rescission Rights under the Truth-in-Lending Act
By Nicholas Ortiz, Attorney at Law on Sep 28, 2009 in Mortgage Issues In Bankruptcy
The Truth in Lending Act (15 U.S.C. § 1601, et seq.) requires that lenders in consumer credit transactions disclose certain facts. In mortgage transactions lenders must disclose:
- Identity of the creditor.
- Amount financed,
- Itemization of amount financed
- Annual percentage rate, including applicable variable-rate disclosures,
- Finance charge,
- Total of payments,
- Payment schedule,
- Prepayment/late payment penalties,
- If applicable to the transaction: (1) Total sales cost, (2) Demand feature, (3) Security interest, (4) Insurance, (5) Required deposit, and (6) Reference to contract.
For non-purchase money loans, like a first mortgage refinancing or second mortgage like a HELOC, a lender must also provide notice that a consumer may void or “rescind” a loan within three business days of the transaction. However, this is the key: the right to rescind is extended beyond three days if the lender fails to give adequate disclosure. Rescission of a mortgage loan voids any security interest granted to the lender and requires the lender to return any money or property received or paid to other parties in connection with the loan. The debtor then has to tender back the value they received from the lender. In the context of bankruptcy, rescission can be a very interesting and useful tool. In bankruptcy, a debtor can sometimes seek to rescind a transaction and then modify or discharge the tender obligation as part of the bankruptcy.
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