A decision issued by the U.S. Court of Appeals for the Fourth Circuit on February 5, 2010, should help deter attempts by consumers to use the Truth in Lending Act's rescission remedy to obtain refunds of application fees and deposits on abandoned mortgage loans. In Weintraub v. Quicken Loans, Inc., the court held that the right to rescind under TILA is available only to rescind a consummated transaction.
The borrowers in the case had given the lender a $500 deposit for out-of-pocket expenses, such as appraisal and credit report costs, in connection with a proposed refinancing of their mortgage loan. The lender's deposit agreement provided that the deposit was nonrefundable if the borrowers chose not to close the loan for any reason, including a change in interest rates. After an appraisal showed that the borrowers' home was worth less than its estimated value, the lender added a half-point discount fee to the closing costs. As a result of the increase, the borrowers decided not to go through with the refinancing and sent the lender a copy of the Notice of Right to Cancel that had been included in the lender's closing package, together with a cover letter requesting return of the $500 deposit.
TILA provides that the right to rescind applies in a "consumer credit transaction." In affirming the lower court, the Fourth Circuit held that only when a loan is consummated does a "consumer credit transaction" exist to which the right of rescission can attach. The court found that a common-sense reading of TILA supported this conclusion because, until a loan is consummated, a consumer has incurred no binding legal obligation from which a statutory right to back out is needed.
The court also noted that its conclusion was consistent with Regulation Z's description of the rescission process, which provides that rescission voids the lender's security interest. According to the court, a lender can retain a security interest only upon consummation of the loan. The Fourth Circuit also observed that the borrowers' position, under which a "consumer credit transaction" could result anytime after loan negotiations began, would in effect give potential mortgage borrowers a right to a cost-free application process, regardless of whether a borrower intended to close the loan.