By: Adam B. Brandon
The Truth in Lending Act (“TILA”) requires lenders to make certain disclosures to borrowers before the parties close on a residential mortgage. TILA also affords borrowers the right to rescind a mortgage for any reason for three day after the transaction. Furthermore, if a lender fails to make the disclosures that TILA requires, then the borrower may rescind the transaction within three years or until the sale of the secured property, whichever comes first.
On January 23, 2015, the U.S. Supreme Court issued a significant opinion that clarifies how a borrower may exercise the right to rescind. Previously, many federal courts required a borrower seeking rescission to file a declaratory judgment action. If the borrower failed to file suit within three years, the borrower lost the right to rescind forever. However, in Jesinoski v. Countrywide Home Loans, the Supreme Court ruled that the plain text of TILA only requires a borrower to provide timely written notice of rescission to the lender.
In this case, Larry and Cheryl Jesinoski refinanced the mortgage on their Minnesota home by borrowing $611,000.00 from Countrywide Home Loans, Inc. (now part of Bank of America). The couple then used the funds to pay off multiple consumer debts. Exactly three years later, the Jesinoskis sent “all interested parties” a letter stating that they never received the required TILA notices and were rescinding the mortgage. Denying that it failed to comply with TILA, Countrywide refused to recognize the validity of the Jesinoskis’ rescission notice. One year later, the couple sued Countrywide seeking a court-ordered declaration of rescission as well as monetary damages.
Since the Jesinoskis filed their lawsuit four years after the original transaction, Countrywide claimed the borrowers were outside of the three-year window to rescind the mortgage. Countrywide further argued that rescission was a judicial remedy that could only be obtained through a court order. In other words, the Jesinoskis could not unilaterally void their mortgage with a mere letter. Relying upon prior precedent, both the district court and the Eighth Circuit Court of Appeals sided with Countryside.
In a unanimous opinion, the Supreme Court reversed the Eighth Circuit. Justice Antonin Scalia noted that 15 U.S.C. § 1635(a) specifically provides that a borrower “shall have the right to rescind . . . by notifying the creditor . . . of his intention to do so.” Countrywide argued that § 1635(a) only applied to cases where both parties agreed that the lender failed to provide the truth-in-lending disclosures at closing. However, Justice Scalia countered that TILA does not distinguish between disputed and undisputed rescissions. The Court also noted that TILA eliminates the common-law rule that a borrower must tender the proceeds received in a transaction before rescission may occur. In other words, a mortgage is canceled the moment the borrower notifies the lender in writing of the rescission.
Some fear that the Jesinoski opinion permits borrowers to frivolously rescind mortgages. However, lenders may take some steps to protect their legal rights:
- Lenders should document their compliance with TILA and request that borrowers acknowledge in writing that they received the lender’s truth-in-lender disclosures at closing.
- Upon receipt of a written rescission notice, lenders must decide whether to contest the rescission. If the lender agrees that it failed to comply with TILA, then the borrower must return all payments and the lender must terminate its security interest. The Jesinsoki ruling, however, does not indicate what will happen if the borrower cannot return the principal. This is likely to be an area of future litigation.
- If the lender objects to the validity of a rescission notice, then the lender should send a letter to the borrower that details its compliance with TILA’s disclosure requirements. At that point, either the lender or the borrower may file a declaratory judgment action to determine the validity of the rescission. Alternatively, the lender may file a foreclosure action with the recognition that the borrower will likely raise rescission as an affirmative defense.
While many questions remain unanswered, Jesinoski makes clear that borrowers preserve their recession rights simply by providing writing notice to the lender. Even if a borrower submits a baseless rescission notice, a lender must take prompt action to preserve its legal rights.
