What a recent rescission case win means for other servicers

Mortgage servicers took a big win home from the U.S. Court of Appeals for the Fourth Circuit, which ruled borrowers had to return loan proceeds if they rescinded, even if the lender erred in the first place.

In a unanimous ruling issued on July 14, the court overturned a West Virginia judge’s decision against Reverse Mortgage Solutions in a Truth in Lending Act rescission case, declaring borrower Teresa Lavis had to return approximately $60,000.

The trial judge, Irene Berger of the U.S. District Court for the Southern District of West Virginia, had reversed a jury decision in favor of RMS and then ruled Lavis did not have to give back the money as normally would be the case if a loan is rescinded.

“The impact changes the bargaining position of both the borrower and the lender, and means that the lender maintains its lien and can foreclose on the residence unless and until the loan proceeds (as calculated under TILA rescission rules) are repaid,” said Joseph Lynyak, a partner in the law firm of Dorsey & Whitney, which has handled TILA enforcement-related cases in the past. “Under an analysis rejected by the court, if the lender would be required to remove the mortgage lien before it receives the loan proceeds back, it is left at best with an unsecured loan that increases the risk that the loan will not be repayable.”

Lavis used provisions of TILA that allow the borrower to unwind the transaction within three years if the statute was violated, rather than the three days normally allowed for refinancings.

In this case, RMS failed to provide the required disclosures to Lavis when a reverse mortgage loan closed in 2013, putting the three-year timeline into play. Approximately two years after closing, RMS attempted to call the loan for failure to pay taxes, but after speaking with Lavis’ attorney, canceled a foreclosure sale.

In 2016, Lavis sent a notice of rescission to RMS, but the lender did not unwind the transaction or otherwise respond.

Lavis sued in a West Virginia state court in November of that year and the case was later moved to the federal system for trial.

A jury ruled in favor of RMS, arguing it didn’t owe Lavis damages under TILA. But prior to the case going to the jury, Judge Berger cited a 2015 U.S. Supreme Court decision named Jesinoski v. Countrywide, to declare that as a matter of law RMS was not entitled to the loan proceeds back, a ruling that was enforced following the verdict.

However, the appellate court ruling written by Justice A. Marvin Quattlebaum Jr. said the reading of TILA means RMS’s failure to comply didn’t absolve Lavis of the requirement of returning the funds. Furthermore, this particular Appellate Circuit had three prior rescission cases with similar rulings.

Finally, the opinion addressed the Supreme Court decision, “which did not hold that rescission was automatic without consideration of tender,” Quattlebaum wrote. “Finally, but importantly, Jesinoski does not even mention anything about a borrower being relieved of the obligation to tender the loan proceeds as part of rescission.” Rescission under TILA is supposed to put both parties back in the same spot they were before the loan, and not for the borrower to benefit from the proceeds without having to pay it back, the ruling said.

The Fourth Circuit decision vacated Judge Berger’s ruling and remanded the case back to the lower court.

A message was left with Lavis’ attorney, Mountain States Justice, which was not returned by press time.

“This decision may ultimately be reviewed by the Supreme Court, but for the moment provides substantially greater protection (i.e., negotiating strength) to mortgage lenders to resolve TILA rescission claims,” Lynyak said.