A recent Illinois Supreme Court opinion may expose banks to a flood of TILA rescission claims by anyone who claims an ownership interest in mortgaged property.  The state supreme court ruled that the right to rescind includes “each consumer whose ownership interest is or will be subject to the security interest” or “is subject to the risk of loss.” Financial Freedom Acquisition v. Standard Bank & Trust Co. et al., 2015 IL 117950 (9/24/2015), rehearing denied, OneWest Bank N.A. v. Standard Bank & Trust Co., et al., (11/23/2015. 

The Financial Freedom decision permitted the trustee for a reverse mortgage to rescind the loan signed by the deceased borrower after a foreclosure action had been filed.  More recently, an appellate court relied upon the Financial Freedom decision to reverse the dismissal of a TILA claim by a co-mortgagor who did not sign the loan and remanded the case to the trial court. Lakeview Loan Servicing, LLC v. Pendleton, 2015 IL App (1st) 143114 (12/24/2015).  It may now be possible for an heir of a mortgagor to demand TILA rescission since the heir would have an ownership interest in the property.  Will this decision permit a creditor of a mortgagor, claiming an ownership interest in the property, to demand TILA rescission? 

There are decisions from other jurisdictions that limit TILA rescission to the obligor who signed the loan. See, e.g., In re Smith-Pena, 484 B.R. 512 , 528 (Bankr. D. Mass. 2013) (“To the extent [Regulation Z] grants a right of rescission to a person who incurred no obligations on the transaction, it is an irrational construction of [TILA] that does not bind this Court.”).  However, the Illinois supreme court rejected these cases (and the clear wording of the law) and relied upon the provisions of Regulation Z and commentary in the Code of Federal Regulations.