Monday, November 23, 2015

Illinois Supremes OK Right Of Rescission For Corporate Trustee Of Illinois Land Trust In Reverse Mortgage Transaction Where Lender Failed To Provide TILA Disclosure Docs To Both Trustee & Since-Deceased Homeowner

From a recent article in The National Law Review:
  • The Illinois Supreme Court held in Financial Freedom Acquisition v. Standard Bank & Trust Co. et al., 2015 IL 117950 (2015) that a trustee of a land trust qualified as a consumer under the Truth in Lending Act (TILA) and had the statutory right to rescind a reverse mortgage transaction and obtain damages if it did not receive TILA disclosures.

    Although the trustee had no independent liability in the transaction, the trustee fell within TILA’s definition of a consumer as the legal and equitable owner of the mortgaged property. The decision serves as a reminder that careful loan documentation and delivery of all disclosures are critical to protecting creditors’ rights and limiting exposure to lender liability claims.

    Background

    In Financial Freedom, an individual borrower obtained a reverse mortgage on her condominium, which was held in a land trust. The transaction was evidenced by a mortgage granted by the corporate trustee of the land trust, and a note signed by both the individual and the trustee. The land trustee had no personal liability under the note, and the lender’s only recourse was to foreclose its security interest on the property.

    The individual borrower received the required TILA disclosures, but they were not delivered to the trustee. The loan became immediately due upon the individual borrower’s death, and the lender filed suit against the trustee and other potential claimants to foreclose its mortgage. After the foreclosure complaint was filed, the trustee served notice of its intent to rescind the transaction on the lender because it was not given the required TILA disclosures and filed a counterclaim seeking both rescission and statutory damages under TILA.

    During the foreclosure, the trustee paid off the loan, terminated the trust, and deeded its interest in the property to a third party. The lender then voluntarily dismissed the foreclosure and also moved to dismiss the trustee’s counterclaim. The trial court dismissed the counterclaim, and the appellate court affirmed, holding that the trustee had no right of rescission because it had no liability under the note, and thus only the individual borrower was an obligor entitled to rescission.

    The Illinois Supreme Court reversed the appellate court, finding that the trustee stated a viable counterclaim under TILA.(1)
    ***
    TILA violations are frequently raised both as counterclaims in foreclosure actions and in consumer class action lawsuits. The Illinois Supreme Court’s decision in Financial Freedom reinforces the importance of providing TILA disclosures to all persons whose ownership interest in mortgaged property may be subject to the lender’s security interest.
For more, see Illinois Supreme Court Holds Trustee of Land Trust is Entitled to Rescind Reverse Mortgage For Failure to Comply With TILA.
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(1) The intermediate appeals court ruling that was reversed was a 2-1 ruling with a dissenting opinion, a dissent that was accorded attention by the Illinois Supreme Court as part of its analysis when reaching its unanimous, 7-0 reversal in favor of the homeowner. Another situation where the lone voice of a dissenting, intermediate appeals court judge ultimately won the day. Financial Freedom v. Standard Bank, 13 NE 3d 776 (Ill. App. 1st Dist., 6th Div. 2014) (Gordon, J. dissenting).

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