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Maryland Court of Appeals Holds that Borrower Cannot Rescind Mortgage Loan under Truth in Lending Act until Corresponding Note and Deed of Trust are Signed

Burson v. Capps
___ A.2d ___ (Md. Oct. 23, 2014)

by Wayne C. Heavener, Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.mdcourts.gov/opinions/coa/2014/2a14.pdf

In Burson v. Capps, the Court of Appeals of Maryland held that a borrower cannot invoke Section 1635 of the federal Truth in Lending Act (“TILA”) to rescind a mortgage loan prior to signing the corresponding deed of trust and note. Writing for the Court, Judge Glenn T. Harrell, Jr., stated that a borrower failed to effectuate his right of rescission under TILA when he faxed to the lender a notice of rescission, but later signed the lender’s deed of trust and note. Concurring with the Court’s legal reasoning, but dissenting as to the outcome in this case, Judges Robert N. McDonald and Sally D. Adkins stated that the Majority should have remanded the case for further fact-finding. In particular, Judges McDonald and Adkins were not persuaded that the record established whether the borrower provided his notice of rescission prior to signing the deed of trust and note.

In 2003, Jeffrey Capps (“Defendant”) purchased a home in Ijamsville, Maryland. Plaintiff sought to refinance his home in 2007, ultimately accepting a refinancing proposal from EquiFirst sometime before April 15, 2007. The exact sequence of events is somewhat unclear, but Defendant, by his own averment, apparently sought to rescind the loan by faxing to EquiFirst a form titled, “Notice of Right to Cancel” on either April 15 or 16, 2007. Defendant’s notice was dated April 16, 2007 but was received by EquiFirst late on April 15, 2007. Despite sending his notice of rescission, Defendant, on April 17, 2007, signed the new deed of trust and adjustable rate note securing a loan for $350,000.00. The settlement date on the financing statement was April 24, 2007, and the loan proceeds were disbursed on April 25, 2007. The proceeds satisfied Defendant’s pre-existing mortgage and credit card debts, with some money going to Defendant directly. In 2009, Defendant lost his job and defaulted on his monthly mortgage payments. After executing the EquiFirst loan in 2007, Defendant’s mortgage had been transferred to a securitized trust administrated by Wells Fargo Bank, N.A., the appointed trustee of which was John S. Burson (collectively, “Plaintiffs”). On September 30, 2009, Plaintiffs commenced a foreclosure action against Defendant. Defendant filed a Motion to Stay, arguing that the loan had been rescinded under 15 U.S.C. § 1635 of TILA. The Court denied Defendants’ motion, and the Defendant’s home was sold at public auction. Defendant filed Exceptions to the Foreclosure Sale on the same grounds, which was denied by the Circuit Court. Defendant appealed to the Court of Special Appeals which reversed the Circuit Court, reasoning that there was no language in either Section 1645 of TILA or its implementing regulation (“Regulation Z”) that prohibited a borrower from rescinding prior to consummation of the loan transaction. Plaintiffs filed a Petition for Writ of Certiorari to the Court of Appeals, which was granted.

The Court of Appeals held that Defendant did not rescind the loan under TILA, because a borrower could not rescind a loan that had yet to be consummated. The Court noted that TILA provided homeowners with a right to rescission where, “in the case of any consumer credit transaction . . . the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction.” 15 U.S.C. §1635 (a). The Court also observed that the borrower could rescind the loan for any reason during the statutory three-day window. Pursuant to Regulation Z, the consumer can effectuate rescission by “mail, telegram, or other means of written communication.” 12 C.F.R. § 226.15 (a)(2). The Court held that the right to rescission conferred by TILA can only be effectuated when there is, in fact, a loan to rescind. The Court stated that Regulation Z presumes the existence of a loan, as the effect of rescission is to render void “the security interest giving right to the right of rescission.” 12 C.F.R. § 226.15 (d)(1). The Court determined that the “consummation of the transaction” refers to closing, or, the moment when the note and deed of trust are signed. In this case, Defendant’s right of rescission came into being on April 17, 2007. By faxing his notice on April 15 or 16, Defendant failed to effectuate rescission.

Judges Robert N. McDonald and Sally D. Adkins dissented from the Majority Court, in part. Judge McDonald stated that this case should be remanded for further factual development before an opinion is rendered. Judge McDonald agreed with the legal proposition stated by the Majority, that a borrower cannot rescind under TILA until the note and deed and trust have been signed. Judge McDonald stated, however, that the Majority’s rule of law was being applied to an underdeveloped record. In particular, Judge McDonald found that the case should be remanded so that the Circuit Court could determine if Defendant did, in fact, send his fax to EquiFirst before signing the deed of trust and note on April 17, 2007.


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