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Reliance on Reg. Z Model Forms May Be Misplaced

Lenders beware! A federal district court recently held that despite a lender’s use of a model form, the disclosure provided by the lender did not adequately notify the borrower of his rescission rights under the Truth in Lending Act (“TILA”) and Regulation Z.  In the case of Simmons v. CitiMortgage Inc. the United States District Court for the District of Utah the borrowers successfully sued the lender to enforce their rescission rights.

In Simmons, the borrowers were given a form, substantially similar to Model Form H-8, providing that the borrower had “3 business days” to rescind the agreement.  The loan closed on a Wednesday, and the borrowers attempted to rescind the contract the following Monday, believing that “business day” did not include Saturday.  The bank refused to rescind the contract because under Reg. Z, Saturday is included as a business day.

The court held that the notice provided did not “clearly and conspicuously” disclose the rescission date, as required by Reg. Z.   Instead, relying on a strikingly similar decision from the District of Connecticut, the court determined that the term “business day” could reasonably be interpreted to include or to exclude Saturday.  Thus, because the notice did not provide a definition of “business day,” the court ruled in favor of the borrowers, holding that the right of rescission was extended from three to days to three years from the closing date in accordance with TILA and Reg. Z.

Simmons provides an alarming wake-up call for lenders that simply relying on model forms may not always be sufficient.  This decision may place lenders in a difficult position, as Reg. Z essentially requires the use of the model forms or forms that are “substantially similar.”  Though generally model forms will protect lenders from liability, there may be unexpected exceptions.  Based on this holding, at a bare minimum, we recommend that your bank review its use of Model Form H-8.