We are new at purchasing loans. One of the findings that came up in our due diligence is that the incorrect model form was used. From what we are told the loan we are looking to purchase was a refinance with the same lender. They used form H8, not H9. 1026.23(b)(2) states: To satisfy the disclosure requirements of paragraph (b)(1) of this section, the creditor shall provide the appropriate model form in appendix H of this part or a substantially similar notice.

Does using the incorrect form void the RTC given. Will this give the customer 3 years to rescind the loan if we purchase it?

I'm not sure what "void the RTC given" means.

Will it give the customer 3 years to rescind? This is a legal question, but probably not. I am aware of a few court cases where this was brought up. In the most recent, judges have all agreed 1) the borrower got the right to rescind; 2) it was a technical violation of Reg Z, but not something that caused the borrower harm and 3) not something that justified the borrower getting 3 years to rescind.

I don't beleive this is necessarily even a violation. Most doc vendors I see just offer H-8 regardless of what is being paid off, and I don't believe many lenders use a different form for refis of portfolio loans than they do for refis of other mortgages. I think the H-9 is just there to clarify that if a borrower rescinds, it doesn't cancel the original obligation with the lender. Nothing in H-8 is "incorrect" for these transactions and all required content is there. If nothing else, you could say that H-8 is substantially similar to H-9.

If H-9 was used instead of H-8, I could see some borrower confusion, but I don't think using H-8 in these situations in incorrect or rare.

Edit: Note that there definitely WAS a lot of court cases on this back in the day about this. I believe one circuit found H-8 instead of H-9 was not ok. The rest said it didn't matter.

I believe you are right Inherent_Risk. "Back in the day" was about 15-20 years ago. Agree? I haven't seen one of these for that long.

I think this was handled in the amendments to TILA in 1995

§ 125. Right of rescission as to certain transactions

(h) LIMITATION ON RESCISSION.--An obligor shall have no rescission rights arising solely from the form of written notice used by the creditor to inform the obligor of the rights of the obligor under this section, if the creditor provided the obligor the appropriate form of written notice published and adopted by the Bureau, or a comparable written notice of the rights of the obligor, that was properly completed by the creditor, and otherwise complied with all other requirements of this section regarding notice.

Also, many investors require H-8 regardless of the original creditor, as they do not want to have to research it.

I certainly thought this was settled, but I looked into it out of curiousity to answer David's questions, and the most recent case I can find was 2011 (Watkins v. SunTrust), which is much more recent than I thought. Most were 10-20 years ago (ancient history!). The SunTrust case found that H-8 was ok for same lender refi, but there was a dissenting opinion. So at least one appeals court judge thought the difference mattered in 2011.

I also could find anything that overruled the 2006 7th Circuit opinion that stated H-9 was not an ok replacement for H-8 (lender gave 4 copies of H-9 and 1 of H-8). It's always nice when the court specifically says that TILA doesn't care about common sense.

Handy v. Anchor Mortgage Corp, 200 F.3d 511, 515 (7th Cir.1999).

"Although we are sympathetic to the district court's common-sense observation that “had Mrs. Handy wanted to rescind and looked at her closing documents and found either of [the H-8 or H-9] forms, either one of them would have led her to rescind[ ],” we nevertheless conclude that Anchor's simultaneous provision of both a Form H-8 and a Form H-9 did not meet TILA's clear and conspicuous disclosure requirement, especially with regard to the “effects of rescission.”   TILA does not easily forgive “technical” errors.   See Cowen v. Bank United of Texas, FSB, 70 F.3d 937, 941 (7th Cir.1995) (stating that “hypertechnicality reigns” in TILA cases)."

Maybe not as settled as I thought, at least if you're in Illinois, Wisconsin, or Indiana.

Recap through 2011 here: https://consumercomplianceoutlook.org/2012/first-quarter/on-the-docket/

For what it is worth. I haven't seen regulators make an issue of the use of either form but I have seen due diligence and investors take exception to the wrong form being used, so in particular if you are selling loans to investors you will want to make sure you get it right.

Thank you all. During a conference call with our due diligence company they stated that H8 given instead or H9 has been found sufficient but not in the reverse. They specifically mention NY in their finding so I have to check out the state law on it:

"Model H-8 was provided; however, because the property is located in NY, model H-9 should have been used."

With NY forming their own CFPB I wonder if this will re-emerge as an issue. Thanks again.

David- by void out I meant something along of the lines of not having provided at all.

"Model H-8 was provided; however, because the property is located in NY, model H-9 should have been used."

It is nice that they feel that way, but did they provide their reasoning?? State law or regulation or case law for support??

No, I can only assume it was a CEMA and there was clear old and new money. I searched looking for something specific but can only locate the general requirement to issue the RTC under the NY tax law. There has to be more in the regulations. I will be asking them for more detail regarding that statement in the next round of emails or scheduled conference call. The overall finding was listed low on their side.