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23
Sep
2021

Debtor Denied Right of Rescission By Court

Credit Union Violates Truth in Lending Act, but Court denies co-borrowers Right of Rescission of mortgage, as mortgage was not on co-debtors’ primary residence. 
 
Here, the Coxes (Borrowers) were indebted to Knox County School Employees Credit Union. Debtors wanted to borrow additional funds from the credit union to be secured by their residence.
 
Debtors did not qualify, however, for the additional loan as it would exceed the credit union’s internal lending limits.
 
The credit union manager suggested to debtors that the credit union’s internal lending limits could be avoided by debtors conveying title to their home to their daughter and then the daughter could apply for and receive the secured loan. Debtors agreed on the conveyance to their daughter; the daughter did complete the transaction by obtaining the loan and executing the loan documentation and mortgage.
 
The credit union supplied the daughter with a Truth in Lending disclosure which was later found by a court to contain inaccurate figures. The court found that the incorrect figures disclosed to borrower constituted a violation of the Truth in Lending Act and awarded $1,000 damages against the credit union.

The daughter also claimed that since the credit union did not supply her with a notice of her right to rescind the mortgage secured by her parents’ residence, that she could now rescind the transaction, that her parents should be able to retain the funds borrowed and the credit union compelled to release its mortgage on the parents’ residence.

The parents and daughter also filed separate bankruptcies in an attempt to avoid repayment of the debt.

The court reviewed the circumstances when a lender is required to provide a borrower with a notice of the right to rescind the transaction.

The court noted that the Truth in Lending Act provides, in pertinent part, that in the case of any consumer credit transaction in which a security interest is or will be retained or acquired in any property which is used as the principal dwelling of the debtor, the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the rescission forms, whichever is later, although not exceeding three years after the date of the transaction.

Here, the court found that the daughter could not rescind the transaction since the debt was not secured by her own primary residence and since the attempt to rescind was not made within three years from the date of the transaction. Hence, the Truth in Lending Right of Rescission did not apply to the daughter’s transaction and the credit union had no obligation to supply the rescission forms in this case.

The court further found that the parents’ and daughter’s actions were clearly based upon greed and manipulation, as they were attempting to keep the residence without paying for the loan.

The court held that either the parents or the daughter must make payments to the credit union, whether through the Bankruptcy Court or otherwise, or the credit union could foreclose on the mortgage and obtain possession of its collateral. Heritage Federal Credit Union, successor in Interest to Knox County School Employees Credit Union v. Coxet al. (U.S. Bankruptcy Court, C.D. Illinois, No. 91-82729).

Author: Charles R. Harroun, Attorney at Law



This entry was posted on Thursday, September 23rd, 2021 at 9:02 am and is filed under National, Secured Loans, Truth In Lending. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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