Financial Freedom, Land Trusts and the Supreme Court

It is not often that the Illinois Supreme Court decides a case involving the Truth-in-Lending Act, so when it does we ought to take notice.

The Supreme Court did just that last fall with the opinion in Financial Freedom v. Standard Federal Bank, 2015 IL 117950. In Financial Freedom, the Supreme Court ruled that a land trustee that executes a mortgage is entitled to receive the TILA disclosure just like the actual borrower does. And if a lender doesn’t give the land trustee the disclosure forms, the borrower (or his or her heirs in this case) can rescind the mortgage.

In Financial Freedom, Mary Jane Muriada obtained a reverse mortgage from a lender but did so thorough her land trust at Standard Bank. Standard Bank as land trustee signed the mortgage and note. At the time of the closing, the lender gave required notice of right to cancel to the Mary Jane but not to the land trustee. A year later, the Mary Jane passed away. The lender filed a foreclosure after the heirs failed to repay the loan. The heirs counterclaimed alleging that they properly served a recession notice but the lender failed to rescind the loan, i.e., release the lien and accept repayment of the principal less interest paid.

The Circuit Court of Cook County agreed with the borrower’s heirs and dismissed the foreclosure. The First District Appellate Court reversed. The Supreme Court accepted the case for review.

Under the Truth-in-Lending Act, consumers are entitled to certain disclosures which includes a “notice of right to cancel” or rescission notice on refinances. Regulation Z, 12 C.F.R. §226.2(a)(11), the regulation enacted pursuant to the Truth-in-Lending Act, defines a “consumer” as “a card holder or natural person to whom consumer credit is offered or extended. . . . [and] includes a natural person in the whose principal dwelling a security interest is or will be retained or acquired . . ..” A natural person means a human being.

Well, the rule makers weren’t thinking about our Illinois land trust when they come up with this definition so the Official Staff Commentary, which courts give deference to, provides that “[c]redit extended to land trusts . . . is considered to be extended to a natural person for the definition of consumer.” So even though a land trustee might not be a human being it will still be a consumer for TILA purposes.

Consequently, the Supreme Court found that “[c]redit extended to a land trust is credit extended to a natural person” even though obviously a bank is not a human being. So a land trustee must get TILA disclosures or the borrower and her or her heirs can rescind the mortgage for up to three years after the closing of the loan.

Lenders will need to be careful to include land trustees when serving the TRID disclosures.