Cancel That Mortgage: The Grounds

31 Jul Cancel That Mortgage: The Grounds

Mortgages can be cancelled in a process called rescission. Here’s an overview. Grounds for exercising this right given borrowers by Congress are found in problems with the mortgage closing documents for a residential second mortgage or refinanced mortgage.

Problems include the absence of Truth In Lending Disclosures, such as the Annual Percentage Rate (APR) for interest and the amounts and schedule of payments. The absence of “monthly” in the payment schedule has been held to be a defect allowing rescission. The APR might not be calculated correctly, or the Truth In Lending Disclosure form might never have been given at all.

Another problem can be a failure to give two separate cancellation notices to each borrower. For example, a married couple should get a total of four cancellation notices. Here’s an earlier discussion of this.

A third problem can be the use of incomplete cancellation notices. The suggested form tells a borrower that the cancellation must take place within three business days of the date of the transaction, with a blank space for a date. It adds that the cancellation notice must be sent no later than midnight of the third business day following the triggering date, with another blank space for a date.

If both blanks are not completed, then the cancellation notice is defective and the right to cancel continues beyond the initial three days. This was the ruling in the recent Massachusetts federal case of Bonney v. Washington Mutual Bank.

Another ground might be an Unfair or Deceptive Trade Practice from the terms of the mortgage. A Massachusetts state judge has ruled that a mortgage might be subject to cancellation if a mortgage had (1) interest which adjusted within its first three years, and (2) an initial teaser rate was at least 3% lower than the fully indexed rate, and (3) a borrower with a debt-to-income ratio of over 50% if the fully indexed interest rate is used, and (4) either the loan-to-value ratio is 100% (no equity), or there is a substantial prepayment penalty, or any prepayment penalty extends beyond the introductory period.

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L. Jed Berliner practices exclusively in consumer bankruptcy, foreclosure defense, and related consumer protection litigation such as credit card defenses and suing debt collectors. He established his Springfield, MA practice in 1988. Attorney Berliner is a regular and active contributor to the Bankruptcy Law Network, the Bankruptcy Roundtable, and the National Association of Consumer Bankruptcy Attorneys, three specialized consumer bankruptcy forums on the Internet, and is an informal mentor to regional practitioners. He is recognized by his peers as an expert in consumer bankruptcy issues. He thoroughly enjoys being rated "excellent" in his client surveys.

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