Mortgage servicers won a big win with the U.S. Court of Appeals for the Fourth Circuit, which ruled that borrowers must return loan proceeds if the loan is canceled, even if the lender was at fault in the first place.
In a unanimous decision handed down on July 14, the court overturned a West Virginia judge’s ruling in the Truth in Lending Act repeal case in West Virginia v. Reverse Mortgage Solutions, declaring that borrower Teresa Lewis must repay approximately $60,000.
Trial Judge Irene Berger of the US District Court for the Southern District of West Virginia overturned the jury’s verdict in favor of RMS, then ruled that Levis is not required to repay the money, as is customary when the loan is canceled.
“The exposure changes the position of the loan and the lender and means that the lender retains a lien and can foreclose on the home until the loan funds (calculated under TILA’s foreclosure rules) are repaid,” said Joseph Liniak. , a partner at the law firm Dorsey & Whitney, which has handled TILA enforcement cases in the past. “According to the analysis rejected by the court, if the lender is required to remove the mortgage before it gets the loan back, at best it will be left with an unsecured loan, increasing the risk that the loan will not be repaid.”
Lavis used TILA provisions that allow the borrower to terminate the transaction within the limits three years when the statute was violatedrather than the three days normally allowed for refinancing.
In this case, RMS failed to provide Lavis with the necessary information when the reverse mortgage closed in 2013, putting a three-year timeline into play. About two years after the closing, RMS tried to foreclose on the loan for unpaid taxes, but after speaking with Lewis’ attorney, canceled the foreclosure.
In 2016, Lavis sent a cancellation notice to RMS, but the lender did not close the deal or otherwise respond.
In November of that year, Lewis sued in West Virginia state court, and the case was later transferred to the federal system for review.
A jury found in favor of RMS, arguing that it was not required to indemnify Lavis under TILA. But before the case went to a jury, Judge Berger cited a 2015 U.S. Supreme Court decision. Jesinoski vs. nationwidedeclare that RMS is not legally entitled to recover the loan, an order that was enforced after the verdict.
However, the appeals court’s ruling, written by Judge A. Marvin Quattlebaum Jr., said a reading of TILA meant RMS’s failure to comply did not exempt Lavis from seeking refunds. In addition, there were three prior reversal cases with similar rulings in this particular appellate circuit.
Finally, the opinion referred to a Supreme Court decision “that did not hold that the cancellation was automatic without a tender review,” Quattlebaum wrote. “Lastly, but importantly, Yesinoski doesn’t even mention anything about the borrower being released from the obligation to submit the loan as part of the cancellation.” A termination under TILA is supposed to put both parties back where they were before the loan, rather than allowing the borrower to benefit from the proceeds without having to pay them back, the ruling said.
The Fourth Circuit’s decision reversed Judge Berger’s ruling and remanded the case to a lower court.
A message left with Lewis’ attorney, Mountain States Justice, was not returned by press time.
“This decision may ultimately be subject to review by the Supreme Court, but for now provides much greater protection (i.e., bargaining power) for mortgage lenders to address TILA rescission claims,” Liniak said.