The new rules provide that effective August 1, 2015, the extension of credit to a revocable trust or to an irrevocable trust for a consumer purpose is treated as the extension of credit to an individual. If the principal residence where a trust beneficiary lives is collateral for the loan, what parties need to receive copies of the Closing Disclosure and the Right of Rescission notice forms? The legal title to the principal residence would be in the trust and not the beneficiary. However, in its final rule, the CFPB stated that “the Bureau believes that the intent of the comment is to clarify that those provisions of Regulation Z that apply to consumers will also apply to trust beneficiaries who are in essence acting as consumers.” See 78 FR 79772. Regulation Z section 1026.23(a)(1) provides that, subject to certain exceptions, “each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction.” Regulation Z section 1026.2(a)(11) provides that for purposes of rescission under section 1026.23, the term “consumer” includes a natural person in whose principal dwelling a security interest is or will be retained or acquired, if that person’s ownership interest in the dwelling is or will be subject to the security interest. Because a trust beneficiary is not the owner of the principal residence, it does not seem like they should have a right to rescind. If a lender is required to provide the disclosures to a trust beneficiary, what if one of the beneficiaries is a minor who elects to rescind the transaction? In most states, a minor cannot enter into a legal contract and it would seem that such a beneficiary could not provide a valid election to rescind.

The trusts described in the updated comment to 1026.3 are grantor trusts. The fact that for such trusts, the grantor(s) and beneficiary(ies) are typically the same individuals during the grantors' lifetimes may confuse lenders.

As long as a grantor trust remains revocable, the grantors retain an ownership interest. Any other beneficiary of the trust does not have such an interest. So if the grantors use the dwelling as their principal residence, they have rescission rights.

John, thanks for the information. This is a tricky and confusing area of the TRID rules.

If I am accurately interpreting your message, there are 2 rules to consider - (1) there is no right of rescission for an irrevocable trust because each grantor does not retain an ownership interest in a dwelling used as the principal residence and (2) for a revocable trust that has not become irrevocable, each grantor who retains an ownership interest in a dwelling used as the principal residence so only the grantor or grantors have a right of rescission.

That's how I am reading the rules. I do wonder whether others have any different views on the question.

John, do we have the grantor sign the right of rescission as a trustee of the trust or as an individual? Thanks

Not to throw a monkey wrench in but, on the advice of our counsel, we have long had mortgages where the collateral is in a revocable trust signed by the borrowers as both individuals and the trustees.

Ex: Homestead is held by the John Smith and Mary Smith Revocable Trust. The Mortgage shows the borrowers as John Smith and Mary Smith, husband and wife and John Smith and Mary Smith as Trustees of the John and Mary Smith Revocable Trust. There are four signature lines, one for each of the parties shown on p.1 of the mortgage.

This keeps our mortgage in first lien position even if John and Mary take the property out of the trust at a later date. Right of rescission is given to John and Mary.

The trust doesn't live there; the individuals do. The trust doesn't have a right to rescind; the individuals do. They sign as individuals.

Please let me know if I have this right:

John Doe and Mary Smith Trust, John and Mary are both trustees and their 18 yr old daughter, Anna is the sole beneficiary. John, Mary and sometimes Anna live in the house that is part of the trust as well as John's office building. The loan is to be secured by the office building wih the purpose of financing Anna's college education.

The note would be signed by the Trust, via its Trustees. The LE would be delivered to John, Mary and Anna, as individuals, and John and Mary as Trustees. The ROR would not apply because the collateral is not their principal residence. The CloD would go to all the same people as the LE.

Assuming the collateral was the principal residence, then ROR would go to John, Mary and Anna, individually.


Is that all correct?

Anna is not a trustee and therefore is not part of the transaction, even though she has a beneficial interest in the trust. You are correct that there is no ROR because the house isn't part of the mortgaged property.

Assuming that the trust is a revocable grantor trust, the delivery of disclosures is made as if the trust doesn't exist. The LE and CloD can go to either John or Mary (it doesn't have to go to both).

If the collateral included the residence, Anna is still out of the picture. Treating the trust as if it doesn't exist, John or Mary can receive the LE, but John and Mary must each receive the CloD and each of them gets two copies of the notice of right to cancel.

Thanks John, but I am confused on why we need to know the beneficiaries of the trust now. I thought the whole change was so we could disclose to them.

The Bureau used misleading terminology in its update to comment 3(a)-10.i. In the case of a grantor trust, the only beneficiaries with an enforceable ownership interest while the grantors are still alive are the grantors/trustees. That's because the trust is revocable. So the beneficiaries who don't yet have a vested interest in the property can't grant a mortgage interest in the property, nor can they rescind such an interest.

Another way to view this: Suppose that you and your spouse have a "boomerang child" who moved back under the parental roof while waiting for his job situation to improve. Your home is therefore his principal dwelling.

You and your spouse decide that you need to add a bedroom to your home so that Junior can move back upstairs and out of the basement (you had downsized when you and your spouse became "empty nesters" ten years ago). You apply to refinance your mortgage to finance the addition. You and your spouse will have a right to rescind the transaction. Junior won't, because, although it's his principal residence, he isn't an owner.

He wouldn't have an ownership interest if you and your spouse had put the house into a grantor trust naming him as a beneficiary, either.

OK - I just misinformed a whole group of people. TIme to fess up. :"(

Is there ever a time we need to know the beneficiaries - such as in an irrevocable trust or land trust?

Sorry - but I need help with the above question as I am about to rescind my original direction to the lines of business. Is there every a time we need to know the beneficiaries? I am guessing in an irrevocable trust situation. Is that right?

Yes, if the trust is irrevocable, any beneficiary for whom the dwelling is his/her principal dwelling will have rescission rights if the transaction is subject to 1026.23.

Land trusts treatment has not changed.

Thanks John, are you saying since they have ROR they get the LE and CD? I'm sorry I am so slow but this is just blowing my mind.

They get the CloD, three days before consummation. They get two copies of the rescission notice (one if sent electronically) at or before consummation (normally AT). The LE only has to be provided to the primary borrower, just like the early TILA last week,

OK, thanks. No one is agreeing with my revised opinion now. I am going to suggest we just don't lend to Trusts!

Tesla, I'm willing to bet that you don't come across many irrevocable trusts. People don't like the finality of them and investors won't buy them. For revocable trusts, you treat the trustees just like individuals on a loan giving them the CloD and the RoR. Beneficiaries don't factor in at all. It just looks like it should be more complicated but it's really not.

The only purpose of the amended Comment 3(b)-10.i. was to bring those tax and estate planning revocable trusts under Regulation Z. Some states' courts have done that already, albeit after the fact when the lender was sued for not providing TILA disclosures. It's smarter to make it clear that Reg Z applies.

Truffle - you are right. I did a search and found four loans. One will be renewing shortly. So for that lovely loan, what do we do? The note is signed by the Trustee. Does anything change? Do I need to find out who the beneficiaries are?

four loans to irrevocable trusts? or to revocable ones?

Irrevocable