Defective Notice of Right to Cancel results in Truth in Lending Violation and extends borrowers right to rescind.

Here, New Maine National Bank granted a loan to the debtors secured by debtors’ residence.

At the closing of the loan, the loan officer supplied the debtors with a “Notice of Right to Cancel” (hereinafter “Notice”).

Pursuant to the Federal Truth-In-Lending Act (“the Act”), the debtors must be provided with a notice of the right to cancel the transaction with many loans secured by the borrowers’ residence.

In this case, the Notice was supplied to the borrowers, however, the Notice was defective insofar as it failed to advise the debtors of the date on which the borrowers’ statutory right to rescind would expire.

Approximately nine months after the loan was closed, the lender supplied another Notice to the debtors and, at that time, the debtors advised the lender that they were exercising the right to cancel.

The debtors had already received $175,619 from the bank.

The debtors also advised the bank that they were insolvent. Debtors subsequently filed for bankruptcy and demanded that the bank release its lien on their property.

The bank refused to release its lien and filed this action against the debtors seeking to enforce the lien. The Truth-In-Lending Act provides that if a borrower cancels the transaction, the debtors must return the funds received to the lender. The Maine statute, however, provides that:

If the creditor has delivered any property to the obligor, the obligor may retain possession of it.

The debtors sought to retain the money received from the bank and force the bank to discharge its lien.

Notwithstanding the Maine statute permitting the debtors to retain the funds, the Court held that equity may require that the funds be returned to the bank when the debtors exercise their right to cancel the transaction. Here, the Court ruled in favor of the bank. New Maine National Bank v. John Gendron (U.S. District Court, D. Maine, Case No. CIV-90-0181 P-C).

Author: Charles R. Harroun, Attorney at Law