The Right of Rescission When a Party in Interest is Not on the Deed

Issue/Inquiry

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, but 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 who is on the deed was provided with a Notice of Right to Cancel. If the spouse who is 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, whether or not the name of that person appears in the title. Such person is a consumer for the purposes of Regulation Z and must be provided with two copies of the Notice of Right to Cancel and 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 subject to the security interest has the right to rescind the transaction. The creditor must deliver a Notice of Right to Cancel to each consumer who has the right to cancel the transaction as well as provide material disclosures of the loan in order to 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 a new advance is made by the existing creditor. Official Interpretations, 1026.23(f) – 4. 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 considered a consumer with a right to rescind, such individual must have an ownership interest in the dwelling that is encumbered by the creditor’s security interest, whether or not that person is a signatory to the credit agreement. For example, if only one spouse signs the credit contract, the other spouse is still considered a consumer because 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 the 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 while binding both 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. However, under New Jersey law, the names set forth on a deed may not always reflect the interests of all parties in the real property.  One such interest includes the right of a spouse to joint possession in property occupied as a couple’s principal matrimonial residence.  Every married individual is entitled to joint possession with their spouse of any real property that they occupy jointly as their principal matrimonial residence during their lifetime. The effect of this statute is that the title to property acquired by one spouse, but 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 that:

• The mortgage is placed upon the matrimonial residence prior to the time that 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; however, the common law right of dower or curtesy may prevail, which gives each spouse a life interest in the principal marital residence. Therefore, 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.

With respect to this case, since 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 the spouse whose name is not on the deed still has the right to rescind the transaction and should have been provided with the Notice of Right to Cancel.

What happens when a spouse with an interest in the property is not given such notice? The period during which the consumer may exercise the right to rescind runs for three business days, beginning on the last day after the below three events have all occurred:

• 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 necessary actions in order to start the three-business-day rescission period, 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
• The 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 include the following:

• Annual percentage rate (“APR”)
• Finance charge
• Total of payments
• Payment schedule
• High-cost loan disclosures and restrictions
• 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 provided such 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 with outside legal counsel.

This entry was posted on Monday, May 13th, 2019 at 6:00 am.