Illinois Supreme Court holds that land trust is a consumer for purposes of TILA

The Illinois Supreme Court in Financial Freedom Acquisition, LLC v. Standard Bank & Trust Co., No. 117950 (Sept,. 24, 2015) reversed a decision of the appellate court holding that an Illinois land trust had no right to rescind a mortgage transaction under TILA. The trial and appellate courts held a land trustee was not an obligor under TILA and, therefore, was not entitled to rescind. Noting that neither TILA nor Regulation Z define obligor, the appellate court looked to the dictionary definition to find that an obligor is [o]ne who has undertaken an obligation; a promisor or debtor. The right to rescind may be exercised only by the obligor, i.e. the person to whom credit is extended and the note bore an exculpatory clause expressly disclaiming the land trust’s liability on the note. The Supreme Court found the appellate court’s TILA analysis too restrictive. Based on the corresponding provisions in Regulation Z and the commentary, it was evident that Congress did not intend to limit rescission rights to only obligors. Rather, those rights were given to each consumer whose ownership interest is or will be subject to the security interest (emphasis in original) or is subject to the risk of loss. The commentary to Regulation Z makes it evident that one need not be liable on the underlying credit transaction to possess the right to rescind. The Court further noted that Congress had recently moved authority from the Federal Reserve Board to the Consumer Finance Protection Bureau to oversee TILA. The Bureau has adopted a new Regulation Z which includes the identical definitions and commentary. Had Congress disagreed with Regulation Z or the Official Staff Commentary, it would have taken appropriate action to rectify the matter in conformity with its intent. Finally, it was important that this case involves a reverse mortgage. A reverse mortgage is a nonrecourse consumer credit transaction, secured by the consumer’s principal dwelling. In the case of reverse mortgages, there is no personal liability of any kind since the only recourse is against the property itself. As such, there is no obligor within the ordinary meaning of that term. In holding that a land trust maintains an ownership interest subject to the security interest such that it is entitled to TILA disclosures and may exercise the right to rescind, the Court pointed to the Commentary to § 226.2 (a), which reads [c]redit extended to land trusts is considered to be extended to a natural person for purposes of the definition of consumer and § 226.3(a) which states that credit extended for consumer purposes to a land trust is considered to be credit extended to a natural person rather than credit extended to an organization. Credit extended to a land trust is credit extended to a natural person.

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