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From Banking and Finance Law Daily, October 24, 2014

Borrower cannot rescind home loan before its ‘consummation’

By Thomas G. Wolfe, J.D.

Although a borrower attempted to rescind a refinanced home loan, Maryland’s highest state court ruled that the borrower could not effectively do so under the federal Truth in Lending Act because he invoked rescission prior to consummation of the loan transaction. Maintaining that its decision was consistent with TILA and Regulation Z—Truth in Lending (12 CFR Part 1026), the Court of Appeals of Maryland reversed a decision by the Maryland Court of Special Appeals determining that neither TILA nor Reg. Z prohibited the borrower from rescinding prior to consummation (Burson v. Capps, Oct. 23, 2014, Harrell, Judge).

Background. In early 2007, Jeffrey Capps worked with a loan broker to refinance his home loan with EquiFirst Corporation. Although Capps rejected two refinancing proposals by EquiFirst, he accepted a third refinance package in April 2007.

On April 15 or 16, 2007, Capps attempted to rescind the loan arrangement by faxing to EquiFirst a form titled “Notice of Right to Cancel.” According to Capps, after EquiFirst received his fax reflecting his desire to rescind the loan, an unidentified EquiFirst employee told him that “his rescission was not effective, that he could not rescind, and that the mortgage would remain in effect.”

On April 17, 2007, claiming that he believed what EquiFirst told him, Capps signed a Deed of Trust and an Adjustable Rate Note securing the refinanced home loan for $350,000. At the closing, the loan proceeds were distributed as had been agreed. After the loan closing, Capps made monthly payments on the refinanced home loan for approximately two years. However, in 2009, Capps lost his job and no longer was able to make the mortgage payments; he defaulted on the mortgage loan.

Procedural context. At some point, EquiFirst transferred the Adjustable Rate Note to a trust administered by Wells Fargo Bank, N.A. Meanwhile, John Burson and others functioned as substitute trustees (collectively, the Burson Trustees). Accordingly, in September 2009, the Burson Trustees initiated a foreclosure proceeding against Capps’s property in Maryland state court. Eventually, in December 2011, the note holder in the foreclosure proceeding purchased Capps’s home for $275,000 at a public auction.

In April 2012, after the court entered an order ratifying the sale resulting from the public auction, Capps appealed to the Maryland Court of Special Appeals, arguing that he had lawfully rescinded the refinanced loan transaction. In reversing the ruling of the state trial court, the Maryland Court of Special Appeals determined that Capps was entitled to rescind the mortgage loan. In the intermediate appellate court’s view, there was no language in TILA or Reg. Zprohibiting a borrower from rescinding a loan prior to consummation of the transaction. If it were to rule otherwise, the “rights of borrowers to protect themselves would be restricted severely, contrary to Congress’ stated goals in TILA,” the court asserted.

Arguments on appeal. The Burson Trustees appealed to the Maryland Court of Appeals, contending that Capps could not have rescinded the loan when he had not yet signed the deed of trust, note, and other loan documents. The Burson Trustees further argued that if Capps had truly wanted to avoid the obligations of the loan, he should not have signed the note and deed of trust, nor should he have accepted the net loan proceeds and authorized the lender to pay off the existing mortgage and his other creditors.

For his part, Capps contended that the decision of the Maryland Court of Special Appeals should be upheld because the faxed “Notice of Right to Cancel,” regardless of when it was sent, operated to cancel the transaction; the funds never should have been disbursed.

TILA, Reg. Z. The Maryland high court reviewed the right of rescission under TILA (15 U.S.C. § 1635(a)), observing that, in the case of a consumer credit transaction in which a security interest is present in property and used as the principal dwelling of the person to whom credit is extended, “the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction.” In addition, Reg. Z (12 C.F.R. §226.15(a)(2)) provides that the consumer must “notify the creditor of the rescission by mail, telegram, or other means of written communication” to exercise the rescission right.

Court’s analysis. Against this backdrop, the Maryland Court of Appeals stated that “Capps bows, as he must, to what the statute provides as to when the three-day window for rescission shuts—at midnight three business days after closing, or, if the notice was delivered after closing, three days after that later date.”

In its review of Reg. Z, the court emphasized that the regulation “presumes that, at the time a borrower wishes to exercise his or her rescission right, there is something to rescind.” Since the effect of rescission is to “render void the security interest giving rise to the right of rescission,” the court reasoned that there must be an established security interest to actually rescind in order for it to be rendered void. In other words, said the court, “Capps could not have rescinded what he had not yet created.”

In concluding that Capps had deployed his “Notice of Right to Cancel” prematurely, the Maryland Court of Appeals reversed the decision of the intermediate appellate court. Also, the Maryland high court maintained that its ruling was compatible with TILA case law within the U.S. Court of Appeals for the Fourth Circuit.

Concurring/Dissenting opinion. In a concurring and dissenting opinion by Judge McDonald, in which Judge Adkins joined, McDonald communicated that he had “no quarrel” with the legal proposition of the Majority opinion. At the same time, however, he stressed that the “Majority opinion essentially engages in its own fact-finding in an effort to apply that holding and to resolve this case. But that is not our role.” Thus, McDonald favored remanding the matter for further factual development.

The case is No. 2, September Term 2014.

Attorneys: Joshua Tropper (Baker, Donelson, Bearman, Caldwell & Berkowitz, PC) for John Burson. Richard Chaifetz (Chaifetz & Coyle, PC) for Jeffrey Capps.

Companies: EquiFirst Corporation; Wells Fargo Bank, N.A.

MainStory: TopStory Loans MarylandNews Mortgages TruthInLending

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