Recent federal cases have raised Truth in Lending disclosure issues regarding lock-in agreements with non-refundable lock-in fees on loans subject to the consumer’s right of rescission under the Truth in Lending Act (15 U.S.C. §1635(b) and Regulation Z, §226.23(d)). The problem arises with the wording of the lock-in agreement and the circumstances stated by the lender under which the lock-in fee is non-refundable. As we all are aware, if a consumer properly rescinds a loan governed by the Truth in Lending Act, the consumer is entitled to a refund of any money given to anyone in connection with the transaction, including fees and other amounts paid to the creditor and all other settlement service providers. Two recently decided cases have indicated that if the lock-in agreement or the lender’s explanation of the non-refundable nature of the lock-in fee contradicts or obfuscates the right of the consumer to a refund of the fee upon rescission of the loan, then the lender has not clearly disclosed the consumer’s rescission rights and subjects the lender to damages for the breach and could result in an expanded rescission period (up to three years after consummation – Reg. Z, §226.23(a)). In Sampanetti v. E*Trade Mortgage Corp., No. 02C3513 (N.D.Ill., November 5, 2002), the consumers asserted that their lock-in agreement contradicted their rescission rights under the Truth in Lending Act because the agreement allowed the lender to keep the lock-in fee if the consumers rescinded the loan before closing (i.e. refused to close the loan). The court held this was not a violation of the consumers’ rescission rights because rescission rights under the Truth in Lending Act do not apply to pre-closing rescissions by the consumer. The court held that the lock-in agreement applied only to the rescission of the loan application before the loan closed and the notice of right to cancel given to the consumers applied only to a rescission after the loan closed. This holding implies that had the agreement been worded such that it applied or reasonably appeared to the consumer to apply after closing, the lender would have violated the rescission disclosure requirements of the Truth in Lending Act and Regulation Z.

Complete Memorandum