RSK.IQ Question of the Week 12/18/17

Right of Rescission and Non-Borrower


The Bank made a mortgage loan to refinance an existing mortgage loan from another lender. The property securing the loan, which is located in New Jersey, is the principal residence of a married couple, although only one of them is on the deed. The Bank had the spouse who is on the deed execute the note, and both spouses executed the mortgage; however, only the spouse on the deed was provided with a Notice of Right to Cancel. If the spouse not on the deed has the right to rescind, what should the Bank do to correct the situation? What other disclosures should that person receive, other than the Notice of Right to Cancel?

Response Summary

Each consumer, whose ownership interest is subject to the mortgage, has the right to rescind the transaction. Under New Jersey law, a spouse has a life joint possessory interest in the principal marital residence, regardless of whether the name of that person appears in the title. Such a person is a consumer, for the purposes of Regulation Z, and must be provided with two copies of the Notice of Right to Cancel, as well as the material disclosures (i.e., the Closing Disclosure). Until these disclosures are provided, the right of rescission will continue to run until it lapses.

Response Detail

Under Regulation Z, when a security interest is taken in a consumer’s principal dwelling, each consumer, whose ownership interest is or will be subject to the security interest, shall have the right to rescind the transaction. In such a case, the creditor shall deliver a Notice of the Right to Cancel to each applicable consumer, which shall begin the rescission period. 12 CFR §1026.23(a),(b).

For the refinancing of closed-end credit, the right of rescission applies if a new creditor is involved or if a new advance is made by the existing creditor. Official Interpretations, 1026.23(f) – 4. Therefore, the loan in question, which is a refinancing by the Bank of a loan made by another creditor, would be subject to the rescission requirements.

The official commentary notes that in order to be a consumer with a right of rescission, such consumer must have an ownership interest in the dwelling that is encumbered by the creditor’s security interest, although such person need not be a signatory to the credit agreement. One example is when only one spouse signs the credit contract, while the other spouse is considered a consumer if the ownership interest of that person is subject to the security interest. Official Interpretations, 1026.23(a) – 2.

When more than one consumer has the right to rescind a transaction, any one of them may exercise that right and cancel the transaction on behalf of all. The official commentary provides an example of both husband and wife having the right to rescind a transaction, which may be exercised by either spouse acting alone, with both being bound by the rescission. Official Interpretations, 1026.23(a)(4) – 1.

In this case, the Bank had both spouses execute the mortgage, but gave the right of rescission notice only to the spouse whose name appeared on the title to the property. Under New Jersey law, however, the names set forth on a deed may not always reflect the interests of all parties in the real property. One such interest is the right of a spouse to joint possession regarding property occupied as a couple’s principal matrimonial residence. Every married individual is entitled during his or her lifetime to joint possession with his or her spouse of any real property which they occupy jointly as their principal matrimonial residence. The effect of this statute is that title to property acquired by only one spouse and occupied by both spouses as their principal matrimonial residence cannot be transferred without the consent of both spouses. N.J.S.A. 3B:28-3.

The right of joint possession, under New Jersey law, may be subject to the lien of a mortgage, provided:

  • The mortgage is placed upon the matrimonial residence prior to the time the title to the residence was acquired by the married individual
  • The mortgage is placed upon the matrimonial residence prior to the marriage
  • The mortgage is a purchase-money mortgage
  • The parties to the marriage have joined in the mortgage
  • The right of joint possession has been subordinated, released, or extinguished. N.J.S.A. 3B:28-3.1.

Other states have similar laws, or the common law right of dower or curtesy may prevail, which grants each spouse a life interest in the principal marital residence.

So, if the principal matrimonial residence is being refinanced during the marriage, even if the title to the property is in the name of only one spouse, the mortgage will have to be executed by both spouses.

Since in this case the spouse whose name is not on the deed executed the mortgage, the joint possessory interest of that person in the property is subject to the mortgage. This means that this person has the right to rescind the transaction, and should have been given the Notice of Right to Cancel. What does it mean if he was not given that notice?

The period within which the consumer may exercise the right to rescind runs for three business days, from the last of three events:

  • Consummation of the transaction
  • Delivery of all material disclosures
  • Delivery to the consumer of the required rescission notice. Official Interpretations, 1026.23(a)(3) – 1.

When the creditor has failed to take the action necessary to start the three-business day rescission period running, the right to rescind automatically lapses on the occurrence of the earliest of the following three events:

  • The expiration of three years after consummation of the transaction
  • Transfer of all the consumer’s interest in the property
  • Sale of the consumer’s interest in the property. Official Interpretations, 1026.23(a)(3) – 1.

In order to stop the running of the rescission period, the Bank will have to provide the following documentation to the spouse whose name is not on the deed:

  • Two copies of the Notice of Right to Cancel
  • The material disclosures

For closed-end transactions, the material disclosures are:

  • The APR
  • The finance charge
  • The total of payments
  • The payment schedule
  • The high-cost loan disclosures and restrictions
  • The restrictions on prepayment penalties for higher-priced mortgages. 12 CFR §1026.23(a)(3)(ii).

For a loan subject to the TRID rules, the material disclosures can be found in the Closing Disclosure. Each consumer who has the right to rescind, including non-applicant co-owners, must be given a copy of the Closing Disclosure. Official Interpretations, 1026.17(d) – 2.

When the Bank has given these disclosures to the spouse whose name is not on the deed, the right of rescission will expire three business days later, assuming that it has not been exercised in the meantime.

In any matter concerning New Jersey law, the Bank should consult outside legal counsel.

This entry was posted on Monday, December 18th, 2017 at 6:00 am.

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