Al and Betty Smith's home is valued at $200,000. They have paid off their mortgage and own the house outright-that is, they have 100 percent home equity. They lost most of their savings when the stock market declined during the Great Recession. Needing funds to start a new business, they decided to obtain a home equity loan. They borrowed $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 fees to Alpha Bank. The Smiths are not given any notice that they can lose their home if they do not meet their obligations under the loan. Two weeks after completing the loan, the Smiths change their minds and want to rescind the loan. Using the information presented in the chapter, answer the following questions.
1. 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?
2. Do the Smiths have a right to rescind the loan two weeks after the fact, or are they too late? Explain.
3. Assume now that Alpha Bank gave the Smiths all of the required notices before the loan was completed. If all other facts remain the same, do the Smiths have a right to rescind? Why or why not?
4. 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. If the majority of states, what options does Alpha Bank have to recover the difference? Explain.