Banking and Finance Law Daily No TILA right of rescission where consumer obtained loan to reacquire property
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Thursday, August 15, 2019

No TILA right of rescission where consumer obtained loan to reacquire property

By Nicole D. Prysby, J.D.

The loan was a residential mortgage transaction under TILA because the consumer had no existing ownership in the property; he obtained the loan to reacquire the property from his ex-wife by paying off the encumbrances she had placed on it.

A borrower who obtains a mortgage to reacquire a residential property in which he has retained no interest is conducting a residential mortgage transaction to which the Truth in Lending Act (TILA) right of rescission does not apply, the U.S. Court of Appeals for the Ninth Circuit has decided. The consumer quitclaimed the property to his wife and, when the couple divorced, was awarded the property subject to payment of encumbrances the wife had taken out on the property. After obtaining a loan and paying the encumbrances, he obtained title to the property. He had no right under TILA to rescind the loan because it met the definition of a residential mortgage transaction, for which there is no right of rescission. The "refinance" ordered by the consumer’s divorce judgment was not a loan taken out by someone who already owns the property (and thus excluded from the definition of a residential mortgage transaction), but was a "refinance" to pay off his ex-wife’s outstanding mortgage so as to make it possible for him to acquire the property in his own right (Barnes v. Chase Home Finance, LLC, Aug. 14, 2019, Rothstein, B.).

The consumer and his now ex-wife obtained title to the property in 1990. In 1997, the wife transferred title to the property to the consumer by quitclaim deed. In 2003, he quitclaimed the property back to his wife. She then encumbered the property with a series of deeds of trust, listing herself as the sole borrower. The couple divorced in 2007 and, under the divorce agreement, the consumer was awarded the property—subject to payment of the encumbrances and a cash payment to his ex-wife.

The consumer obtained a loan from Chase Bank and, on the same date, executed a deed of trust securing the note on the property. He used the loan proceeds to pay off the outstanding encumbrances on the property and to make the cash payment to his ex-wife. The ex-wife then conveyed title to the property to the consumer. The consumer then sought rescission of the 2007 mortgage loan.

Court’s analysis. The Ninth Circuit held that the consumer’s loan was a residential mortgage transaction with no right of rescission under TILA (15 U.S.C. Section 1635(e)(1)). TILA defines a residential mortgage transaction as "a transaction in which a mortgage … is created or retained against the consumer’s dwelling to finance the acquisition or initial construction of such dwelling" (15 U.S.C. Section 1602(x)). Under the plain language of the statute, the consumer’s loan was a residential mortgage transaction; the definition includes both an initial acquisition and a reacquisition of a property. In addition, the language of the Official Staff Interpretations to Regulation Z—providing that a residential mortgage transaction does not include a transaction where a borrower had previously acquired an interest in a property—unambiguously refers to a situation in which the borrower increases an existing ownership interest using loan proceeds, rather than a situation in which the borrower reacquires a property in which he had given up all ownership interest. The "refinance" ordered by the consumer’s divorce judgment was not the kind of mortgage addressed by the regulation—a loan taken out by someone who already owns the property. Rather, it was a "refinance" to pay off his ex-wife’s outstanding mortgage so as to make it possible for him to acquire the property in his own right.

The court also rejected the consumer’s argument that the 2003 quitclaim deed does not establish his subsequent lack of any ownership interest in the property because, once in divorce court, the property took on communal attributes. Even if he gained an interest in the property by operation of Oregon law upon the filing of the marital dissolution petition, he did not "acquire" this interest for purposes of TILA’s "residential mortgage transaction" provision. Some types of prior interests may change the substance of an acquisition to something more akin to a refinance, but that exception applies only where the prior interest was previously purchased and acquired before the transaction at issue. The fact that the lender characterized the loan as a "refinance" is not determinative; the consumer did not acquire title until the day after he signed the loan.

The consumer also argued that the purpose of the loan was not to finance his acquisition of the property, but to comply with the divorce judgment, which ordered him to make a cash payment to his ex-wife and pay off the encumbrances on the property. But by means of those payments, he obtained title to the property, and he obtained the loan in order to make those required payments.

The case is No. 18-35616.

Attorneys: Elizabeth Weinstein (Yarmuth LLP) for Timothy Barnes. Frederick B. Burnside (Davis Wright Tremaine LLP) for Chase Home Finance, LLC and Chase Bank USA. John M. Thomas (McCarthy & Holthus, LLP) for IBM Lender Business Process Services, Inc. and Federal National Mortgage Association.

Companies: Chase Home Finance, LLC; Chase Bank USA; IBM Lender Business Process Services, Inc.; Federal National Mortgage Association

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