A transaction dated 03/2004 was not given a ROR. When sending this to the customer, what date should be used by the borrower?

First, I'm in the camp that does not believe sending a ROR after the fact cures the violation. However, if you are sending one now the borrower has 3 business days from the date of receipt.

We are under tight scrutiny by our last safety and soundness exam. Don't you think trying to take care of the problem prior to a compliance exam would be better than just ignoring? Your thoughts?

Unfortunately, there is no way to correct this error. Just document what happened, verify the procedures so it won't happen again and go on.

My experience from our recent (April 2004) FDIC Compliance Exam is that since it cannot be cured, it should be documented in some way as an exception which will exist until the 3 year period expires or the loan is refinanced or otherwise paid off.

The regulators like seeing this type of exception on some sort of report that is in turn reviewed by senior management or the BOD.

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The regulators like seeing this type of exception on some sort of report that is in turn reviewed by senior management or the BOD.

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Sure they do, then they only have to request your reports and not look at files.

Seriously, I do document all compliance exceptions and the full report is sent to senior management and an abbreviated report (still with the exceptions) is sent to the BOD.

Some folks believe that you can deliver the disclosures late and avoid the 3-year clock. I've seen it debated both ways but haven't seen a "final" accepted ruling yet. If you are under the gun with your regulators you should have good communications with them. They'll see this anyway when they come in and look at your audit reports. Call them now and ask if they believe it is curable. Tell them how your compliance program is working, it caught the error. You are putting a plan into action now to avoid a recurrence by doing X,Y and Z. Although you can track this for the 3-year period, you wanted their opinion on the ability to correct it, yada, yada, yada.

If they do opine, let us know what they say.

While the exception cannot be "cured", you can cut off the consumer's 3 year rescission period by providing the correct diclosures and notice. This will give them another 3 days from that date or they lose their right to cancel.

How does that cure the rescission violation? You violated the ROR by advancing funds before the ROR expired. How do you cure that?

I want to amplify Dan's comment here. In court, how will you defend the argument that the borrower did not feel as if they had a right to cancel the transaction, because they received the funds? Most borrowers will not be sophisticated enough to make the distinction between the advantages and costs of secured vs. unsecured credit (a rescinded loan already advanced would become essentially an unsecured credit). IMO, courts are likely to side with the consumers and say the rescission period would be extended to three years.

While the regulation would seem to indicate that if you provided the rescission late, in practice I don't see how that can be the case.

The borrower has no reason to believe that the bank should not have disbursed prior to the end of rescission. Why would that make a difference to him?

The whole point of rescission is to give the borrower an opportunity to back out of the transaction without any consequences. If the borrower rescinds after the funds are already advanced, there will still be consequences - the borrower will have to repay the loan. If the borrower still has to pay, they will likely conclude that there is no point in cancelling the transaction. Have they really been given a chance to cancel the transaction without consequence as the statute and regulation intended?

The regulation addresses the fact that the customer may have already received "money or property" from the creditor, and gives the method and timing as to when that has to be returned to the creditor. 226.15 (d)(3)

By the way, I am not disputing the fact that there is a regulatory violation and that there is no way to "cure" it once it happens. As far as the regulators are concerned, Reg Z was violated not only because improper disvclosures were given, but that money was disbursed prior to the end of the rescission period. I'm only saying there is a way to ameliorate the action that could be brought by the consumer.

If regulatory risk was the only risk involved, I would agree with you. The regulation is clearly written to accommodate providing the notice at any time. But the regulatory risk is not the only risk involved. There is also legal risk, and in this case the legal risk is far greater.

The intent of Congress in passing this provision in the Truth In Lending Act is pretty clear: Congress intended for consumers to be able to change their mind within three business days of the transaction without any consequences whatever. Congress wanted people to be able to walk away without any penalty or cost. That is a principal reason for requiring the delay in performance until it is clear the customer does not intend to exercise their right to cancel.

Once the funds have been advanced, the ability of the borrwoer to change their mind is irrevocably compromised. Suppose the bank send a rescission notice to the borrower in this case, and the customer exercises their right to cancel. What happens under the regulation?

Lender must release the lien and return all amounts paid by the borrower (including principal and interest). Only after all this has occurred can the lender request its money back. Oh, and since the lender had to reverse all those payments, now it will accrue interest on the total loan amount for the entire time the loan has been outstanding. So, in order to exercise the right to cancel, the borrower has to pay the penalty of additional interest. So, if you are the borrower, are you going to exercise your right to cancel when that notice arrives after the funds are disbursed?

Not bloody likely. And suddenly, the right to a cost-free change of mind is right out the window. All because the lender screwed up.

So, now, it's two years and 9 months after closing, and the borrower is getting ready to file bankruptcy. The borrower visits their favorit bankrupcy lawyer, who also has a good knowledge of the Reg Z rescission rules. He has the borrower rescind his loan, and we're in court trying to enforce our lien. What happens?

The court says the borrower never received an effective rescission right, because there was never a "no-cost" chance for the borrower to change their mind. The borrower's rescission is effective, because the error extended the rescission period to three years.

The result? I have to give the borrower almost three years of interest, plus whatever principal they may have paid. I have an unsecured loan that is about to be discharged in bankruptcy. Oh, and I get to pay the borrower's legal fees.

It doesn't require a great stretch of the imagination to envision that scenario. Congress gave borrowers that right for a reason. The courts are not going to require consumers to forfeit that right because we couldn't remember to give the customer the right paperwork on time.

Paul, I agree with everything you say except I am questioning this statement:

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So, in order to exercise the right to cancel, the borrower has to pay the penalty of additional interest.

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I have always been under the impression all they would need to repay is the principal amount of the loan.

Now having said that. You fail to give the ROR and disburse the funds to me. Several weeks, months, whatever you send me a ROR. Jeez, you mean I had the right to back out of this loan? Well since you gave me the money I thought it was a done deal, but I actually thought some of the charges were too high. I think I'll rescind the loan now. What's that, I have to repay the money all at once that you gave me and that I already spent. Jeez, I'll have to take out another loan to do that. I might as well keep yours.

Rescission does not effect the contract to repay, only the security interest. When a customer rescinds, they rescind the security interest. The bank is then assumed to rescind its approval of the credit. But that's difficult to do if the funds are already disbursed.

Dan, if you were making making monthly payments, and the loan was a simple interest loan, when I refund the payments you have made to me, the contract still exists. Since I have essentially received no payments from you, I am going to go back and re-accrue interest from the loan date. Accruing for the life of the loan on the original balance will result in more interest from you than you paid when we were amortizing the loan with monthly payments.

In the same way that it is unreasonable to expect the consumer to suffer because the bank did not provide the required notice of his right to cancel the mortgage, I don't beelieve that it's reasonable to expect the bank to forego its right to the interest due on the funds advanced.

Even if this argument is incorrect, however, I would maintain that there is still no effective rescission. Based on your comments, I think we agree on that.

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I would maintain that there is still no effective rescission. Based on your comments, I think we agree on that.

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Definitely.

I never gave your argument a thought before. As I said, I was always under the impression the rescission negated the whole transaction and the borrower was only required to "tender" back to the lender any monies advanced and the lender had to refund any "expense" related to the transaction to put the borrower back to a financial position before the transaction took place. If the borrower, properly rescinds the transaction, would charging "accumulated interest" put the borrower back to their financial position before the transaction took place?

Interesting concept and one that I'm not sure about now.

I don't agree with your contention in the fourth paragraph that the lender will accrue interest. The borrower is required to repay "moneys paid", but there is no requirement for the borrower to pay interest. The object is to return the consumer to where he was prior to the loan.

Well, you guys got me interested. Either I'm really confused by rescission (very probable) or Dan is basically right in saying:
"I have always been under the impression all they would need to repay is the principal amount of the loan."

The way I always thought of this, the consumer's sole obligation after the security interest is released is to return any money or property delivered to the consumer.

(d) Effects of rescission. (1) When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void, and the consumer shall not be liable for any amount, including any finance charge.

Surely the entire transaction is part of the occurrence subject to the right of rescission? If you went back and reaccrued interest on the loan after releasing and refunding, the effect would be to void rescission - all the creditor would be penalized, in effect, would be the amount of the fees.

And how can any "promise to pay" note be effective if the transaction itself is voided? I can't imagine any court ruling this way. Okay, okay, maybe that Oklahoma judge who enjoyed his job so much might.

Now I think you could try to accrue interest as allowed by state law *after* you have released the security interest and refunded any amounts you owe the consumer, because at that point the consumer, under the statute, is required to return the money or property the consumer received - so a legal obligation now exists.

Supplement I:
Paragraph 15(d)(2).

1. Refunds to consumer. The consumer cannot be required to pay any amount in the form of money or property either to the creditor or to a third party as part of the occurrence subject to the right of rescission. Any amounts of this nature already paid by the consumer must be refunded. “Any amount” includes finance charges already accrued, as well as other charges such as broker fees, application and commitment fees, or fees for a title search or appraisal, whether paid to the creditor, paid by the consumer directly to a third party, or passed on from the creditor to the third party. It is irrelevant that these amounts may not represent profit to the creditor.

Of course, I'm no lawyer, YMMV.

Kathy the eternally puzzled

I just want to weigh in on the side of "you have to refund interest accrued". I think the paragraph Kathy quoted from the OSC is pretty clear, although the corresponding paragraph from 226.23 is even clearer.

Paragraph 23(d)(2).
1. Refunds to consumer. The consumer cannot be required to pay any amount in the form of money or property either to the creditor or to a third party as part of the credit transaction. Any amounts of this nature already paid by the consumer must be refunded. "Any amount" includes finance charges already accrued, as well as other charges, such as broker fees, application and commitment fees, or fees for a title search or appraisal, whether paid to the creditor, paid directly to a third party, or passed on from the creditor to the third party. It is irrelevant that these amounts may not represent profit to the creditor.
(Emphasis added, of course)

My reasoning behind the statement in my paragraph 4 above is based on the idea that if funds have already been advanced, the rescission rescinds the security interest, but it cannot rescind the entire transaction. If funds have been advanced to the consumer, the lender is entitled to receive those funds. It is equitable that the consumer should have to repay the loan according to its terms, with the sole exception that the security interest is voided.

Kathy and Jill, my thought process regarding the interest due is based on the above. My working theroy has always been that the sections of Commentary you cited were always meant to indicate that the lender would have to refund all monies paid, including interest and principal. The validity of the borrowing contract would remain intact. However, I am willing to concede, for the sake of clearing up an issue that muddies the larger picture, that you may be correct.

The larger picture remains. That larger picture is that once you have advanced the funds, any rescission provided cannot be valid, as the consumer cannot rescind without penalty as provided in the Act and Reg Z. While I have not seen any court cases on this issue, I believe that the courts would follow the reasoning I outlined above (theroy about interest excepted, of course) and reach this same conclusion.

The only way to mitigate this risk, IMO, is to refinance the credit. Whatever rescission right that may have existed would die with the payoff.

What about a bridge loan for construction? ROR was not given. For some reason it appears that our platform did not identify the need for ROR. The arguement to provide late being that no funds have been advanced. "If a consumer whose principal dwelling is currently A builds B, to be occupied by the consumer upon completion of construction, a construction loan to finance B and secured by A is subject to the right of rescission. A loan secured by both A and B is, likewise, rescindable." (Commentary 226.23)

If you have not yet advanced the funds, then I think that providing the rescission notice now is a viable solution. If the funds have already been disbursed, then I am in favor of letting that dog sleep on in any event. Since the loan is by definition supposed to be short-term, your error should be eliminated soon by the permanent financing.