July 15, 2010
AVELO MORTGAGE, LLC, PLAINTIFF-APPELLANT,
RODNEY JEFFERY AND LISA M. JEFFERY, DEFENDANTS-RESPONDENTS.
On appeal from the Superior Court of New Jersey, Chancery Division, Morris County, Docket No. F-19517-07.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued October 5, 2009
Before Judges Rodríguez and Chambers.
Avelo Mortgage, LLC (Avelo) appeals from a September 19, 2008 order in favor of Rodney and Lisa Jeffery (Borrowers), dismissing its mortgage foreclosure complaint and other relief. We disagree with the remedy. Therefore, we reverse and remand.
This dispute arises from a mortgage refinance closing that took place on December 7, 2006. On that date, the Borrowers executed a note for the sum of $297,600 to the lender, Avelo's assignor, New Century Mortgage Corporation (New Century). New Century paid off the Borrowers' prior mortgage loan to Citicorp Trust Bank (Citicorp) in the amount of $253,907.87 and other judgments in the amount of $7,850.65. The cash balance totaling $22,181.17 was given to the Borrowers. A mortgage was placed on the Borrowers' property located in Lincoln Park in order to secure the note. The mortgage and note were subsequently assigned to Avelo.
Jeffery stated in his certification that he believed that he would receive a thirty-year, six-percent fixed loan. After the Borrowers realized that the loan actually received was not what was promised, they timely exercised their right to cancel by sending, via certified mail return receipt requested, the right to cancel to New Century within three days of the closing. Six days after the rescission, Access New Jersey Title Agency (Access Title) faxed the Borrowers an affidavit to sign. Upon signing, the Borrowers would rescind. This fax served as evidence that Access Title had knowledge that the Borrowers rescinded. Moreover, Rodney testified that neither he nor his wife sent Access Title their rescission. Instead, notice of the rescission was sent to their lender, New Century. On the same day that the Borrowers received the fax from Access Title, they received a call from Marty at Access Title. According to the Borrowers, Marty told them that he thought it would be best to re-sign the mortgage and worry about the credit issues in the near future. The Borrowers sought the advice of an attorney. They did not at any time re-sign a mortgage with New Century or Avelo.
New Century and Avelo both proceeded to ignore the Borrowers' rescission and instead actively attempted to collect the mortgage payments. The Borrowers sent numerous letters to Avelo reaffirming their rescission of the mortgage contract. Rodney testified to pain and anguish and years of harassment at the hands of the lenders involved. He alleged that his credit score is ruined as a result of Avelo's reporting of outstanding debt.
Avelo sued in foreclosure. The Borrowers did not answer. Avelo requested entry of default. The Borrowers moved to vacate the default alleging that the attorney they retained failed to file an answer. Avelo opposed the Borrowers' motion. The judge vacated the default and provided the Borrowers three weeks to file an answer. The Borrowers answered and then moved for summary judgment and argued that they properly rescinded the loan within three days as required by the Truth in Lending Act (TILA),*fn1 specifically 15 U.S.C.A. § 1635. The judge granted the Borrowers' summary motion. The September 19, 2008 order provided that: the foreclosure complaint was dismissed with prejudice; Avelo's security interest was deemed void due to the failure to accept the Borrowers' rescission pursuant to TILA; Avelo was permitted to proceed on the note, with all defenses available to Borrowers; and stay pending appeal was denied.
Avelo appeals arguing that the judge "erred in failing to require [the Borrowers] to tender back the proceeds of the rescinded loan as a condition precedent to voiding its mortgage." We disagree. While the appeal was pending, Avelo moved for a stay and for a lis pendens to remain in place pending appeal. We granted the motion for a stay and to permit lis pendens to remain in place. Avelo Mortgage, LLC v. Jeffery, No. M-972-08 (App. Div. Nov. 14, 2008).
The governing authorities are clear. Three elements need to be established for a lender to prevail in a foreclosure action: (1) the validity of the loan documents (the note and mortgage); (2) the alleged default in payment; and (3) the right to foreclose. Great Falls Bank v. Pardo, 263 N.J. Super. 388, 394 (Ch. Div. 1993), aff'd, 273 N.J. Super. 542 (App. Div. 1994). Pursuant to TILA, "[w]hen an obligor exercises his right to rescind... any security interest given by the obligor, including any such interest arising by operation of law, becomes void upon such a rescission." 15 U.S.C.A. § 1635(b). Therefore, if the Borrowers had the right to rescind pursuant to TILA and properly exercised that right, their mortgage should be found invalid. This precludes the finding of a required element in Avelo's foreclosure action, namely valid loan documents.
TILA was enacted in 1968 in response to the widespread use of abusive lending practices. Cooper v. First Gov't Mortgage & Investors Corp., 238 F. Supp. 2d 50, 54 (D.D. Cir. 2002). One of TILA's goals was to provide for an informed use of credit through the "meaningful disclosure of credit terms so that consumers [would] not be misled as to the costs of financing." Ibid.; see also 15 U.S.C.A. § 1601(a). TILA is to be construed broadly in favor of consumers. In re Porter, 961 F.2d 1066, 1078 (3d Cir. 1992). A creditor who violates TILA in any respect is liable to the consumer under the statute regardless of the creditor's intent or the nature of the violation. Ibid. "Once the court finds a violation, no matter how technical, it has no discretion with respect to liability." Ibid.
In a credit transaction in which a security interest is retained or acquired on a consumer's principal dwelling, TILA requires that consumers "have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required...." 15 U.S.C.A. § 1635(a). "The purpose of the three-day waiting period under 15 U.S.C.A. § 1635(a) is to give the consumer the opportunity to reconsider any transaction which would have the serious consequence of encumbering title to his or her home." Assocs. Home Equity Servs., Inc. v. Troup, 343 N.J. Super. 254, 280 (App. Div. 2001).
The creditor is to conspicuously disclose to a consumer their rights pursuant to 15 U.S.C.A. § 1635(a). Regulation Z*fn2 provides that the notice of a right to rescind shall clearly and conspicuously disclose: (1) the retention or acquisition of a security interest in the consumer's principal dwelling; (2) the consumer's right to rescind the transaction; (3) how to exercise the right to rescind, with a form for that purpose, designating the address of the creditor's place of business; (4) the effects of rescission, as described in paragraph (d) of this section; and (5) the date the rescission period expires. 12 C.F.R. § 226.23. The creditor shall also provide appropriate forms for the consumer to exercise his right to rescind any transaction subject to this section. 15 U.S.C.A. § 1635(a).
A valid rescission voids the security interest, leaving the creditor unsecured, with no interest in the property. See Smith v. Fid. Consumer Disc. Co., 898 F.2d 896, 898 (3d Cir. 1990); 15 U.S.C.A. 1635(b). Rescission can be a defense to foreclosure. See In re Soto, 221 B.R. 343, 356 n.29 (Bankr. E.D. Pa. 1998). Moreover, a consumer may rescind against an assignee to the full extent it would be able to rescind against the original creditor. 15 U.S.C.A. § 1641(c).
There is discrepancy between the courts, however, as to what constitutes a valid rescission. The majority view is that unilateral notification of cancellation does not automatically void the loan contract. Am. Mortgage Network, Inc. v. Shelton, 486 F.3d 815, 821 (4th Cir. 2007); Yamamoto v. Bank of N.Y., 329 F.3d 1167, 1172 (9th Cir. 2003), cert. denied, 540 U.S. 1149, 124 S.Ct. 1146, 157 L.Ed. 2d 1042 (2004). However, New Jersey follows the minority view, as expressed by the Eleventh Circuit in Williams v. Homestake Mortgage Co., 968 F.2d 1137, 1141-42 (11th Cir. 1992). Thus, we have held that "[w]hen a consumer rescinds a credit transaction[,] the related security interest becomes void and the consumer will 'not be liable for any amount, including any finance charge.'" Summit Trust Co. v. Chichester, 233 N.J. Super. 417, 423 (App. Div. 1989) (quoting 12 C.F.R. 226.23(d)(1)). However, we went on to find that the "consumer must return to the creditor any monies received in connection with the credit transaction." Ibid.
TILA's statutory rescission procedures do not alter the equitable nature of the rescission remedy as established by a majority of the circuit courts. See In re Williams, 291 B.R. 636, 656 (Bankr. E.D. Pa. 2003). Avelo further notes that the equitable power of the court in fashioning a remedy in this regard has recently been upheld in two unpublished trial court decisions. Wells Fargo, N.A. v. Priester, No. F-428-06 (Ch. Div. Sept. 28, 2007); Tribeca Lending Corp. v. Gilbert, No. F-5589-06 (Ch. Div. Nov. 21, 2008).
The majority of circuit courts permit judicial modification of the statutory rescission process, relying on their equitable powers and as permitted by 15 U.S.C.A. § 1635(b) and 12 C.F.R. 226.23(d)(4). In re Williams, supra, 291 B.R. at 655-56; see also Am. Mortgage Network, supra, 486 F.3d at 820 (when a borrower is unable to tender the loan proceeds, the remedy of unconditional rescission is inappropriate); Williams, supra, 968 F.2d at 1140-42; Fed. Deposit Ins. Corp. v. Hughes Dev. Co., 938 F.2d 889, 890 (8th Cir. 1991); Brown v. Nat'l Permanent Savings and Loan Ass'n, 683 F.2d 444, 449 (D.C. Cir. 1982); Rudisell v. Fifth Third Bank, 622 F.2d 243, 254 (6th Cir. 1980); Powers v. Sims and Levin, 542 F.2d 1216, 1221-22 (4th Cir. 1976) (finding that in enacting 15 U.S.C.A. § 1635(b), "Congress did not intend to require a lender to relinquish its security interest" when there is a question of the borrower's ability to tender restitution); LaGrone v. Johnson, 534 F.2d 1360, 1362 (9th Cir. 1976).
The Third Circuit Court of Appeals has not addressed the subject of whether rescission should be conditioned upon the consumer's tender of the remaining principal due under the loan. However, the Bankruptcy Court has conditioned rescission on tender. See In re Apaydin, 201 B.R. 716, 723-24 (Bankr. E.D. Pa. 1996).
Section 1635(b) provides the procedures to be followed after the consumer has exercised his right to rescind under subsection (a):
[w]ithin 20 days after receipt of a notice of rescission, the creditor shall return to the [consumer] any money or property given as earnest money, down payment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction. If the creditor has delivered any property to the [consumer], the [consumer] may retain possession of it.
Upon the performance of the creditor's obligations under this section, the [consumer] shall tender the property to the creditor, except that if return of the property in kind would be impracticable or inequitable, the [consumer] shall tender its reasonable value. Tender shall be made at the location of the property or at the residence of the [consumer], at the option of the [consumer]. If the creditor does not take possession of the property within 20 days after tender by the [consumer], ownership of the property vests in the [consumer] without obligation on his part to pay for it. The procedures prescribed by this subsection shall apply except when otherwise ordered by a court.
[15 U.S.C.A. § 1635(b).]
Section 1635(b) therefore places certain requirements upon a creditor following a valid notice of a rescission: the creditor must, within twenty days, return all money paid by the consumer and must void the security interest. Should the creditor fail to take these steps within twenty days, then the creditor is generally found to be in violation of a "requirement" of 15 U.S.C.A. § 1635(b) and can be held liable for damages under 15 U.S.C.A. § 1640(a). See Belini v. Wash. Mut. Bank, FA, 412 F.3d 17, 25 (1st Cir. 2005). After the creditor has carried out its obligations, the consumer must at that time "tender the property to the creditor." 15 U.S.C.A. § 1635(b). Per the statute, the property vests in the consumer without any obligation to pay if the creditor fails to take possession of the property within twenty days of the consumer's tender. Ibid.
Here, the Borrowers defend against Avelo's foreclosure action by arguing that the failure of Avelo to comply with their notice of rescission entitles a dismissal of the foreclosure complaint because the security interest is rendered void pursuant to 15 U.S.C.A. § 1635. The judge agreed and dismissed the foreclosure complaint and voided Avelo's security interest in the property. However, the judge ruled that the lender could proceed on the note, with all defenses available to the Borrowers. We conclude that this was an inappropriate remedy.
The Borrowers imperfectly rescinded the mortgage proceeds. They did not return the balance they received nor directed the return of the payoffs of the obligation to Citicorp or other creditors. Consequently, rescission was not the equitable remedy that applied. Instead, the judge should have considered reformation of the New Century/Avelo mortgage. In short, the judge should have exercised the court's equitable powers and judicially modified the mortgage. Rodney admitted that he was unable to tender the loan proceeds back to Avelo. When a borrower is unable to tender the loan proceeds, a remedy of unconditional rescission is inappropriate. Am. Mortgage Network, supra, 486 F.3d at 820. In enacting 15 U.S.C.A. § 1635(b), it has been recognized that "Congress did not intend to require a lender to relinquish its security interest" when there is a question of the borrower's ability to tender restitution. Am. Mortgage Network, supra, 486 F.3d at 820.
Therefore, we reverse and remand and the trial court shall consider providing the equitable relief of rescission. In its discretion, the trial court may reopen discovery and conduct an evidentiary hearing on this issue. Thus, the judge should schedule an evidentiary hearing. If the Borrowers satisfy their burden of showing that they agreed to different loan terms, the judge should reform the mortgage and note to reflect the offer presented to the Borrowers and accepted by them. We note that "equity considers that as done which ought to have been done." Rusch v. Melosh, 133 N.J. Eq. 502, 505 (Ch. Div. 1943), aff'd, 134 N.J. Eq. 409 (E. & A. 1944). The mortgage and note should be modified or reformed with the equitable goal of restoring the parties to the status quo. Am. Mortgage Network, supra, 486 F.3d at 820. Any finance or other charges paid by the Borrowers should be returned. Moreover, Avelo should be required to erase all negative credit reporting related to this loan.
Reversed and remanded for a hearing consistent with this opinion. We do not retain jurisdiction.