Looking for some guidance on a question that has been a source of debate at our bank.

Would Right of Rescission be required on a loan made to individuals where their principal dwelling is held in the name of a trust?

Example: John and Jane Doe are approved for a home equity loan on their principal dwelling that is held in the name of the John Doe and Jane Doe Revocable Living Trust.

Not under Reg. Z, however check your state laws. They may be more restrictive.

A trust is not a natural person and does not meet the definition of a consumer in Reg. Z for the purposes of rescission.

Does it depend on your borrowers though Dan? If we have Joe and Jane as borrowers, and the 'Joe and Jane trust' as owner, we still give Joe and Jane the right of recission. Maybe we don't need to, but we do...

Some advise that for a revocable trust you should give the ROR in case the trust is revoked, however, at the time of consummation the trust was in existence and regardless whether the trust is revocable or irrevocable a trust still is not a natural person therefore it does not meet the definition of a consumer for the purposes of rescission. However, let me repeat myself, some states may have more stringent rescission rules so be sure to check there also. AND if you have been advised by legal to give the ROR, then follow your legal advice.

If by some outside chance the trust is a land trust as defined in Reg. Z, then it would be subject to rescission, however I haven't seen a true land trust in over 20 years. I know they're out there, they're just that common in this area.

Throwback Thursday! I'm resurrecting this thread to discuss it in light of this particular 10/3/15 change:

1026.(a)(2) Commentary item 10: "Trusts. Credit extended for consumer purposes to certain trusts is considered to be credit extended to a natural person rather than credit extended to an organization. Specifically:

i. Trusts for tax or estate planning purposes. In some instances, a creditor may extend credit for consumer purposes to a trust that a consumer has created for tax or estate planning purposes (or both). Consumers sometimes place their assets in trust, with themselves or themselves and their families or other prospective heirs as beneficiaries, to obtain certain tax benefits and to facilitate the future administration of their estates. During their lifetimes, however, such consumers may continue to use the assets and/or income of such trusts as their property. A creditor extending credit to finance the acquisition of, for example, a consumer's dwelling that is held in such a trust, or to refinance existing debt secured by such a dwelling, may prepare the note, security instrument, and similar loan documents for execution by a trustee, rather than the beneficiaries of the trust. Regardless of the capacity or capacities in which the loan documents are executed, assuming the transaction is primarily for personal, family, or household purposes, the transaction is subject to the regulation because in substance (if not form) consumer credit is being extended."

So, if the borrowers are natural persons, but the property grantor is a trust, does the right of rescission now apply?!

I'm not certain, because the reg says "credit extended for consumer purposes to certain trusts", which isn't the case (the credit is extended to natural persons). However, the asset is owned by the trust, and consumer credit is still being extended.

Any takers?!

1. What is the purpose of the trust?
2. Who are the grantors of the trust?
3. Who are the beneficiaries?
4. Who are the borrowers?
5. Does the trust actually allow the trust to pledge assets for the purpose of the loan?
6. Who lives in the house?

Randy, I don't think some of your questions have real bearing on this topic as discussed at length in this thread from just the other day.

All discussions I've read so far (including the other thread) are still based on the trust as the borrower.

Before splitting the trust hairs, I'm first just trying to determine if rescission even applies to a consumer loan in which the borrowers are people and the trust is only the collateral grantor.

The new Reg Z commentary at 1026.3(a) -10 speaks within the context of the trust receiving the extension of credit (thereby making it subject to Reg Z).

However, 1026.2(a)(11) Commentary says "2. Rescission rules. For purposes of rescission under §§1026.15 and 1026.23, a consumer includes any natural person whose ownership interest in his or her principal dwelling is subject to the risk of loss..."

A trust doesn't live anywhere and therefore doesn't have a principal dwelling. So, I'm leaning toward the whole trust issue being a moot point if the trust is merely the collateral grantor and not the borrower.

. . . . A creditor extending credit to finance the acquisition of, for example, a consumer's dwelling that is held in such a trust, or to refinance existing debt secured by such a dwelling, may prepare the note, security instrument, and similar loan documents for execution by a trustee, rather than the beneficiaries of the trust. Regardless of the capacity or capacities in which the loan documents are executed, assuming the transaction is primarily for personal, family, or household purposes, the transaction is subject to the regulation because in substance (if not form) consumer credit is being extended."

The above is from your cite. IMO you would provide rescission.

Except for some frustration on not getting funds for a few days, your borrower can't sue you for providing and enforcing a rescission right when it's not technically available. But if you guess wrong and don't give rescission rights when they are applicable, you've got thirty-eight flavors of potential trouble.

Thanks everyone! Dan, it was that language originally was giving me pause, but because it comes as a subparagraph under "10. Trusts. Credit extended for consumer purposes to certain trusts...", and because of the seeming contradiction with 1026.2(a)(11) Commentary, I started wondering if I was overextending the trust applicability.

I think there's still argument for that, but since we have plenty of other things in life to contemplate , I'll move along to the next hurdle.

If the trust gets the rescission right, how should it be signed? By the trustees in their individual or trustee capacity? Does it matter if they do or do not live in the home?

Why not?

1. What is the purpose of the trust?

Is this a tax planning trust?

2. Who are the grantors of the trust?

What is the relationship between who owned the property originally and the trust?

3. Who are the beneficiaries?

Who ends up with the property?

4. Who are the borrowers?

What is the relationship of the borrower to all of the above?

5. Does the trust actually allow the trust to pledge assets for the purpose of the loan?

Can you legally make this loan??

6. Who lives in the house?

Who might potentially have the right to rescind?

Sorry, but I think that if you are not asking yourself these questions, you don't have the answers you need to make your decisions. And like John said, you can't afford to make a mistake.