Al and Betty Smith own their home, which is valued at $200,000, completely-they have 100 percent home equity. They lost most of their savings in the stock market during the Great Recession. Needing funds to start a new business, they decide to take out a home equity loan. They borrow $150,000 for ten years at an interest rate of 12 percent. On the date they take out the loan, a ten-year Treasury bond is yielding 3 percent. The Smiths pay a total of $10,000 in “points and fees” to Alpha Bank. The Smiths are not given any notices that they can lose their home if they do not meet their obligations under the loan. Two weeks after consummating the loan, the Smiths change their mind and want to rescind the loan.
A. Is the Smiths’ loan covered by the Truth-in-Lending Act as amended by the Home Ownership and Equity Protection Act? Why or Why Not?
B. Do the Smiths have a right to rescind the loan two weeks after the fact, or is it too late? Explain.
C. Assume now that Alpha Bank had given the Smiths all of the required notices before the loan was consummated. If all other facts remain the same, would the Smiths have a right to rescind? Why or Why Not?
D. Suppose now that the Smiths never rescind the loan and that they default four years later while still owing Alpha Bank $120,000. The bank forecloses and raises only $110,000 when the house is sold at auction. In the majority of states, what options does Alpha Bank have to recover the differences? Explain.
