Unhappy with the interest rate on your home mortgage? There may be a way for you to rescind that mortgage or refinance and take advantage of a lower interest rate, if your home is titled in a land trust and the land trust signed or co-signed the mortgage.
Let’s back up. An Illinois land trust is a unique creation of Illinois law. It is a form of real estate ownership where a named trustee – usually a bank – holds title to real estate for the benefit of the true owner(s) of the property. Over the years, land trusts have served as useful vehicles in real estate transactions for maintaining secrecy of ownership and allowing ease of transfer. Legally, the trustee owns bare legal and equitable title to the property but can only act on the written direction of the beneficiaries or someone whom they have designated. The trustee is responsible for maintaining the trust documents, receiving communications directed to the owner of the real estate, and notifying the beneficiaries of all notices received.
In September, 2015, the Illinois Supreme Court decided the case of Financial Freedom Acquisition LLC v. Standard Bank & Trust Co., 2015 IL 117950. In that case, a homeowner who had placed title to her home in a land trust had contracted with a lender for a reverse mortgage[1] on the residence. As part of the paperwork required at closing, the lender delivered to the homeowner the standard forms of disclosure statements (which nobody typically reads anyway) required under the federal Truth in Lending Act commonly called “TILA” (15 U.S.Code § 1601, et seq.). However, the lender never delivered any disclosure forms to the bank that was the land trustee. When the loan came due and was not repaid, the lender’s successor sued to foreclose the mortgage. The homeowner resisted, claiming that the loan should be rescinded because the land trustee – which was the legal owner of the residence – did not receive the disclosure documents required by TILA. The lender countered that since the land trustee owned only bare legal title and could not take any action except on the written direction of the homeowner, notice to the homeowner was sufficient to comply with TILA.
The homeowner also counterclaimed for statutory damages against the lender for violation of TILA. A lender which violates TILA will suffer not only the “rescission” (i.e., the nullification) of its mortgage, but also can be held liable for damages in specific amounts – including attorneys’ fees – specified by TILA. 15 U.S.Code § 1640. During the course of the proceedings, the home was sold and by agreement of the parties, a negotiated amount had been paid to and accepted by the lender in satisfaction of the mortgage debt. However, the homeowner retained her counterclaim for damages against the lender.
Both the trial court and the Illinois Appellate court agreed with the lender, but the Illinois Supreme Court disagreed. The Supreme Court held that the lender had breached TILA by failing to deliver disclosure notices to the land trustee and that there would have been cause to rescind. The Court also held that the lender was liable for statutory damages under TILA, and remanded the case back to the trial court for determination of the exact amount of damages.
So if you have owned your home in a land trust and have taken out a mortgage which you might want to avoid, you may be able to have that mortgage nullified, or use the threat of nullification to negotiate a new mortgage at a better rate. One caveat: Under TILA, you must give written notice to the lender within 3 years of the date the loan was consummated, that you are exercising your right to “rescind” the mortgage by reason of the suspected TILA violation.
[1] A “reverse mortgage” is a financing product popularly marketed to senior citizens who own their homes in order to create an income stream on which they can live. The lender agrees to pay to the homeowner a pre-determined amount of money per month. These payments are considered “loans” to the homeowner which come due on the death of the homeowner or on a sale of the residence.
© Howard C. Emmerman, Business Law Partner
2/4/2016
