Barrett vs. JP Morgan Chase Bank, N.A.,
(United States Court of Appeals for the Sixth Circuit)
In this appeal decided by the 6th Circuit on April 18, 2006, the court dealt with an issue involving the right of rescission under Regulation Z and the Truth in Lending Act. The underlying question is, "will extinguishing a debt such as with a refinancing cure errors affecting the ability to rescind the loan?"
1989, Mr. and Mrs. Barrett purchased their home and later refinanced this with another lender
March 2000, home improvement loan funded by a government assistance program
May 2000, Bank One refinanced the purchase loan
January 2001, Bank One consolidated and refinanced debts including the March and May 2000 debts above
May 2001, Mr. and Mrs. Barrett refinanced with a new lender
September 2002, the Barrett's asked to rescind the January 2001 loan
January 2003, the Barrett's asked to rescind the May 2000 loan
The Truth in Lending Act (TILA) was enacted in 1968. In the Act, Congress was clear that meaningful disclosure of credit terms was vital so that the consumer will be able to compare credit terms available and avoid the uninformed use of credit. This is the foundation which requires complete and accurate disclosures.
Regulation Z implements TILA. Reg. Z provides that rescission is available:
until midnight of the third business day following consummation,
delivery of the rescission notices, or
delivery of all material disclosures,
whichever occurs last.
If the required notice or material disclosures are not delivered as required,
the right to rescind shall expire 3 years after consummation,
upon transfer of all of the consumer's interest in the property, or
upon sale of the property,
whichever occurs first.
Reg. Z is clear in that rescission is within three business days, three years, or when those who had the right to rescind no longer own the property. Any refinance or renewal of the loan is not a condition affecting rescission.
Without the disclosure rules being met, the ability to compare credit choices and make informed credit decisions does not exist. It is these errors which lead to longer periods where the transaction is rescindable. In King v. State of California, the court ruled that a loan which had been refinanced no longer existed and was therefore no longer rescindable. The decision focused on the security interest and the fact that the loan in question no longer existed, instead of what had existed. Based on this case, some lenders have used this (refinance) as a means to cure rescission errors and subsequent court decisions were also based on this premise.
In the Barrett case, the Sixth Circuit said, "Not only does King of course not bind us, but it does not address the provisions of the Truth in Lending Act that undermine its conclusion." The Sixth Circuit was not being innovative as two cases cited in it agree with King, and six others do not. They hold instead that the transaction itself is rescindable. When a rescission occurs, two basic actions are taken: the lender voids their security interest and returns items such as prepayment penalties, mortgage filing fees, loan transaction fees, appraisal, and closing costs. When a refinance has occurred, especially in the case of a new lender, this court held that just because there is no security interest to reverse, does not mean there are no fees to refund and therefore make the consumer "whole".
A key issue in cases such a this are the time allowed to rescind and the fees a lender may have to refund up to years later. If a borrower rescinds within the first three business day period any security interest is voided. The lender cannot then claim that because there is no lien, there is no need to refund monies paid. The same test holds true in an extended rescission period. This means that a refinance is not a means to cure an error. The premise is, while one part of the transaction may no longer exist (the security interest) the monies were still paid and under the disclosure rules, may not have been had the disclosures been accurate and timely. The consumer was not able to make their informed decision. The entire transaction must then be "un-done" and this includes any security interest and monies paid.
This case does not say JP Morgan Chase Bank is at fault. The Sixth Circuit did not determine if a rescission error occurred. They have, for the Sixth Circuit however, said that extinguishing a debt does not cure violations.