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Fall 2005-11 Reimbursement order altered in mortgage rescission

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Number 61
Fall 2005

Reimbursement order altered in mortgage rescission

In Egipciaco v. R&G Financial, 383 F. Supp. 2d 318 (2005), the federal court in Puerto Rico reversed the order in which the parties to a mortgage must return money when the mortgage is rescinded.

The Truth-in-Lending Act and its implementing Regulation Z grant a property owner the right to rescind a mortgage under certain circumstances. Only mortgages with the following characteristics may be rescinded:

The borrower is an individual.

The loan money if to be used for personal, family or household purposes.

The mortgage is in the principal dwelling of its owner.

The loan money is not used to purchase the dwelling.

The owner of the property has three business days to notify the lender of his or her decision to rescind, and the lender may not disburse the loan money until after this term expires. There are times, however, when because of an error rescission takes place after the money changed hands. In the Egipciaco case this was due to the fact that the creditor disclosed incorrect Truth-in-Lending information.

When a mortgage is rescinded, the creditor must return all closing costs and other expenses incurred as a result of the loan. Regulation Z specifies that the lender must return the money within 20 calendar days. Once the creditor has complied with this requirement, the borrower must then return the money that he or she had received upon disbursement of the loan proceeds.

However, § 226.23(d)(4) of Regulation Z adds that "the procedures outlined in paragraphs (d)(2) and (3) of this section may be modified by court order."

In Egipciaco lender R&G Financial requested the federal judge to reverse the disbursement order-i.e., that the borrower first return the loan principal-and that the lender's obligation to reimburse all charges collected be conditioned thereto. R&G's request was based on a number of equitable circumstances present:

debtor Egipciaco had filed in bankruptcy;

he had consistently missed numerous payments on the mortgage;

according to the bankruptcy petition his payment capacity was of only $150 per month;

Egipciaco even missed payments under his bankruptcy plan

The judge found that "in this case equities dictate a modification of the rescission procedure" as per § 226.23(d)(4).

He further ruled that rescission would be conditioned upon the debtor's payment of the amount of the loan to R&G.

‡‡ Note:

In a footnote the judge pointed out that "only those amounts which TILA and Regulation Z label as finance charges should be deducted" from the sum that R&G would have to return to Egipciaco. This does not seem to take into account the official staff commentary to Regulation Z, which clarifies that the charges subject to reimbursement include "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." What the creditor need not return, according to the official commentary, are moneys given by the borrower to third parties outside of the credit transaction, such as the cost of obtaining a building permit or a zoning variance.


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