OPINION OF THE COURT
Claimant brought this proceeding to recover $500 allegedly due from defendants pursuant to the terms of a loan commitment. Defendants have answered and counterclaimed for a refund of $400 paid to plaintiff as part of their loan application. Both parties seek sanctions against one another based upon allegations of frivolous conduct. This case brings into issue the interpretation of defendants’ right of rescissiоn pursuant to Regulation Z (12 CFR part 226) promulgated under the Truth in Lending Act (TILA) (15 USC § 1601 et seq.).
Defendants applied for a mortgage loan on their home at 2 Little Mountain Road, North Salem, New York, on May 14, 1996. Plaintiff issued a firm commitment to lend defendants $40,000. Thе loan commitment, which was accepted by defendants, stated pursuant to paragraph A that defendants would be required to pay all costs and disbursements including the bank’s attorney fee. It further stated that accеptance of the commitment was authorization for the bank to incur the expense.
The closing was scheduled for July 12, 1996 and did not take place. It is undisputed that the defendants refused to close the loan as a result of their desire not to escrow real property taxes on the property with plaintiff bank. Defendants stated that they were verbally led to believe that the escrow requirement of the commitment letter would bе modified at closing in light of the fact that the loan was such a small amount compared to the value of the home. Plaintiff states that modification of the tax escrow requirements was never considered nor hinted аt. The parties could not come to terms and the loan never consummated. At the closing on July 12,
The bank is now arguing that the right to cancel under Regulation Z does not mature until the subject loan closes. Since the loan never clоsed, the purported exercise was improper. Without a proper rescission under Regulation Z, the requirement to pay attorney fees of the bank pursuant to the loan commitment would still be enforceаble.
Defendants argue that they exercised their right of rescission in a proper and timely fashion and as a result should not be responsible to pay attorney fees and should be reimbursed the $400 they previously paid toward costs on the loan.
The question of whether rescission under TILA can be exercised when a closing never took place appears to be one of first impression. Research has not disclosed the disсussion of this issue in either reported or unreported cases. In order to properly understand the legislation and regulations involved it is appropriate to examine the purposes and implementation оf TILA and its accompanying Regulation Z.
TILA was passed by Congress as a means for consumers to be protected from the inequities in their negotiating position with respect to credit and loan institutions (Equity Plus Consumer Fin. & Mtge. Co. v Howes,
The right of rescission arises in the case of "any consumer credit transaction * * * in which a security interest * * * is or will be retained or acquired in any property which is used as the principal dwelling of thе person to whom credit is extended” (15 USC § 1635 [a]). There are certain exceptions which are not relevant to the case at bar. The borrower is entitled to rescind the transaction "until midnight of the third business day following the сonsummation of the transaction or
The question raised in the case at bar is whether the right of rescission exists for consumers who did not close on the refinancing agreement. For the following reasons this court finds that the consumers did not lose their right to rescind by failing to close.
At the time that the consumers received the "firm commitment” from the bank, the bank was obligated under TILA to prоvide defendants with the required disclosures. In fact, the last page of the "firm commitment” is an acknowledgment signed by defendants that they received a completed truth-in-lending disclosure statement. Clearly, there is no question thаt the protections, afforded by TILA and its implementing Regulation Z were implicated. Thus, the next step is to examine the rescission requirements of TILA and Regulation Z.
TILA provides that in order to rescind, a consumer may exercise the right to rescind until midnight of the third business day following the latest of: (1) consummation of the transaction; (2) delivery of a proper notice of the right to rescind; or (3) delivery of all the material disclosures correctly made (15 USC § 1635 [a]; Regulаtion Z [12 CFR] § 226.15 [a] [3]; § 226.23 [a] [3]).
According to the plain language of the statute and regulation, there is no requirement that the transaction be consummated; the consummation merely provides a frame of reference from which the time for rescission may be calculated. In fact, the Official Staff Commentary even envisions a case where consummation occurs after the disclosures are received, and the start of the running of the three-day rescission period is delayed until the time of consummation (FRB Official Staff. Commentary to Regulation Z [12 CFR] § 226.23 [a]). There is no question that rescission is allowed in cases in which the delivery of material disclosures or the delivery of the required rescission notices never occurred (in fact, it extends the time to rescind to three years [see, e.g., In re Buckles, 189 Bankr 752 (1995); Kocsis v Pierce,
There is a case from the Court of Appeals of Michigan which, although factually very different from the case at bar,
At the aborted closing, in the case at bar, when defendants said that they would not close under the circumstances, plaintiff’s agents gave the rescission notice to dеfendants and told them to sign it. This, in effect, told the defendants that they could rescind without first consummating the transaction. Furthermore, the language of the notice of right to cancel itself would lead defendants to believe thаt they were properly exercising their right of rescission. The notice does not say that the transaction must be consummated, but that the borrowers have three days from the "date of the transaction, which is July 12, 1996” in which to rescind. The notice states clearly that not only could defendants cancel until midnight of July 17, 1996, but that within 20 calendar days after receiving the notice, plaintiff herein must return any money or property that was given to it or anyone else in connection with the transaction. It is undisputed that plaintiff received the signed notice from defendants canceling the transaction on July 12, 1996. It would not be tenable to maintain that plaintiff could successfully misuse the nоtice of right to cancel, which is intended to protect consumers, to deprive defendants of their rights under TILA. Further, rescission is an equitable doctrine. Nothing in TILA or Regulation Z limits a court of equity from preventing
Another issue that needs to be addressed is whether the "firm commitment” constitutes a "consummation” under New York law. There is a case which holds that under New York law the consumer’s acceptance of a lender’s commitment offer сonstitutes a binding contract, which constitutes a consummation under TILA (Murphy v Empire of Am., 746 F2d 931, 934 [2d Cir 1984]). That case relies upon an Appellate Division, Third Department case, which rejected a borrower’s claim that the transaction had not been consummated until the execution of the note and mortgage, and held that "[a] contractual relationship is created between creditor and customer when the former proffers credit and the latter аccepts irrespective of the time of performance of the contract itself’ (Gramatan Home Investors Corp. v Mack,
As a result of the foregoing, the complaint is dismissed and defendants are awarded judgment of $400 on the counterclaim plus costs. The cross applications for sanctions are denied as neither party’s position was frivolous or intended to waste time.