By Richard A. Roth, J.D.
A land trust used by a homeowner to hold title to her home was a consumer under the Truth in Lending Act and Reg. Z—Truth in Lending (12 CFR Part 1026), the Illinois Supreme Court has determined. This means the trust should have been given TILA-required disclosures when a reverse mortgage was granted on the home and had a three-year right to rescind the loan transaction when those disclosures were not given, the court said (Financial Freedom Acquisition, LLV v. Standard Bank and Trust Company, Sept. 24, 2015, Burke, A.).
According to the court, the homeowner and the land trust entered into a reverse mortgage transaction in 2009. The mortgage identified the trust as the borrower and mortgagor, although both the trust and homeowner signed the note. The mortgage included a clause making clear the trust had no liability to repay the note and providing that foreclosure was the creditor’s only collection avenue. Since the loan transaction was a reverse mortgage, the loan became due on the homeowner’s death or if she failed to use the home as her principal residence for a year.
According to the opinion, TILA-required disclosures, including a description of her right to rescind the transaction, were given to the homeowner. A set of disclosures was prepared for the trust, but it was not delivered.
The homeowner died less than a year later, and the creditor soon filed a foreclosure suit against the trust, the court continued. The trust responded by notifying the creditor that it was exercising its right to rescind the transaction and, when the creditor did not respond, the trust filed a counterclaim in the foreclosure suit. The counterclaim asserted that the trust had not been given TILA-required disclosures and demanded rescission, damages for the TILA violations, and damages for the refusal to rescind the transaction.
Trial court dismissal. The trial court judge dismissed the counterclaim. Shortly thereafter, the trust paid the creditor the full amount due on the note and transferred the property to an unidentified third party. The creditor then dismissed the foreclosure complaint, but the trust appealed the dismissal of the counterclaim.
Appellate court proceedings. The appellate court concluded that the rescission demand was timely but that the trust could not rescind the transaction because it was not an obligor. Under TILA and Reg. Z, only obligors have rescission rights, the court said. The mortgage made clear that the trust had no duties under the loan or mortgage, and the trust received no benefit from the transaction, so it was not an obligor. Under those circumstances, only the homeowner could rescind the transaction, the appellate court decided.
The trust had forfeited any claim for damages by not raising those claims on appeal, the court continued. It also suggested that such claims might have been untimely.
The trust appealed the ruling to the state Supreme Court.
Obligors only? The court first noted a discrepancy between TILA and Reg. Z—TILA says that an obligor has the right to rescind a mortgage transaction (12 U.S.C. §1635(a)), while Reg. Z says that “each consumer” whose interest will be subject to the mortgage has a right to rescind (12 CFR 1026.23(2)). Moreover, the staff comments (12 CFR 1026.23) say that “consumer” includes “any natural person” whose interest in the home will be affected, even a person who is not obligated to repay the loan.
As a result, the right to rescind was not restricted to obligors, according to the court. Reg. Z and the staff comments have been in existence since 1968, and if Congress disagreed with the regulation it could have amended TILA, in the court’s opinion. Certainly Congress could have acted when it moved TILA enforcement authority from the Federal Reserve Board to the Consumer Financial Protection Bureau.
Effect of reverse mortgage. The decision was influenced by the fact that the case involved a reverse mortgage. A reverse mortgage is to be repaid only by a sale of the property, the court pointed out. Nobody is personally liable, meaning there is no obligor under the ordinary meaning of the word. That would mean lenders had no duty to provide disclosures to anyone, and no one would have a right to rescind, a conclusion that clearly was contrary to TILA and Reg. Z.
Land trust’s interest. Under Illinois law, the trust held the legal title to the property for the benefit of the homeowner, the court then observed. The homeowner’s real property ownership interest was converted to a personal property interest in the trust. The comments to 12 CFR 1026.2(a) say that consumer credit extended to a land trust is considered to be credit extended to a natural person, the court added.
If property is in a land trust, the trust holds the ownership; in fact, since the beneficiary holds only a personal property interest in the trust, the trust is the only person who holds an interest in the real property. Thus, it is the trust’s interest that is subject to the mortgage, the court reasoned.
If credit to a land trust is considered to be credit to a natural person, and the land trust’s interest is subject to the mortgage, then the trust was entitled to receive the TILA-required disclosures, the court decided. Also, if the disclosures were not given, the trust was entitled to the three-year right to rescind the transaction.
Effect of property sale. The court also rejected the creditor’s argument that the trust’s transfer of the property extinguished the right to rescind. Both TILA and Reg. Z say the right to rescind expires on the sale of the property, but that refers to the exercise of the right as opposed to the enforcement of the right. The trust exercised the right by notifying the creditor of the rescission demand long before it acquired and then transferred the home.
If a transfer of the property ended the ability to enforce the right to rescind, the trust would lose not only the ability to rescind but also the ability to recover damages for the creditor’s wrongful failure to rescind, the court pointed out.
Statutory damages. The trust also wanted statutory damages for the creditor’s failures to provide required disclosures required by TILA and to rescind the transaction on demand. The appellate court had decided that these claims had not been preserved for appeal. The appellate court was wrong, the court said.
The trial court judge dismissed the counterclaim because he decided the trust could not describe a viable claim, meaning he never addressed the issue of statutory damages, the court pointed out. There was no order about the damages claim from which the trust could have appealed, so there was no need to preserve the issue.
The appellate court’s belief that the claims could be untimely was wrong as well, the court said. The claim for statutory damages was filed well within the one-year statute of limitations.
This story previously appeared in the Banking and Finance Law Daily.
