February 6, 2015
by T. Matthew Mashburn
Aldridge Connors, LLP – USFN Member (Georgia)
On January 13, 2015, in a unanimous opinion that will no doubt require some significant clarification, the U.S. Supreme Court held that where the lender fails to satisfy the Truth in Lending Act’s disclosure requirements, a consumer may rescind the loan within three years of the consummation of the loan by simple written notice, rather than filing a lawsuit and having a court declare the loan rescinded. Jesinoski v. Countrywide Home Loans, Inc., 574 U.S. __ (2015).
The potential confusion rests on the Supreme Court’s ruling that a loan can be rescinded without a pre-rescission tender of the loan payoff, but doesn’t mention that the result of the rescission is that the principal amount of the loan still has to be paid off.
By way of background, the Truth in Lending Act (TILA) gives the borrower (actually anyone who pledges a security interest in a principal place of residence for a non-exempt consumer loan) an absolute and unrestricted right to rescind the loan within three days of consummation by providing written notice to the lender. In addition, should the lender fail to provide certain disclosures required under TILA, the borrower has up to three years to rescind the loan.
At common law, rescission “traditionally required either that the rescinding party return what he received before a rescission could be effected (rescission at law), or else that a court affirmatively decree rescission (rescission in equity).” Id., citing 2 D. Dobbs, Law of Remedies § 9.3(3), pp. 585-586 (2d ed. 1993) [emphasis added].
The twist on the Jesinoski decision (and the part which could clog the courts with needless lawsuits until it is clarified) is that the Supreme Court failed to make it clear that the principal amount of the loan must still be repaid after the rescission. The rescission takes place by simple written notice based on Jesinoski, it is true; but, due to the rescission, the loan principal must be repaid after the rescission.
Indeed, courts have wrestled with the nature of the exact amount that must be paid back due to a rescission. This is especially true where the borrower finances the finance charges and lender fees, but no court has held that the entire principal balance is forgiven.
For example, in Moore v. Cycon Enterprises, Inc., 2007 WL 475202 (W.D. Mich., Feb. 9, 2007), the trial court ruled that a husband and wife, who rescinded a loan, were not required to repay lender fees and finance charges that were included in the principal. The lender contended that only finance charges were impacted by the borrower’s rescission. However, the court noted that TILA’s plain language states, “When an obligor exercises his right to rescind under subsection (a), he is not liable for any finance or other charge. …” 15 U.S.C. § 1635(b) [emphasis added]. The court ruled that the borrowers were not required to repay any of these fees and charges, which amounted to $25,237.85 out of the total $215,500 loan, but that the borrowers did have to repay the remainder of the principal balance.
Furthermore, prepayment penalties would seem to be at particular risk from the Jesinoski decision. Also, an imminent operational difficulty seems to be presented: how do lenders make sure that a responsible person or department actually receives the notice of rescission, so that the lender can call off a foreclosure, or other collection efforts, when warranted? Lenders will most likely have to include a notice in their billing (or other communications with borrowers), advising that any rescission has to be sent to a specific address. The lender will want to have a specific person or department assigned to receive and process rescissions, and make a determination as to whether the rescission was proper or not. Of course, any collection efforts will probably have to be suspended while the lender investigates whether there was a failure to satisfy TILA’s disclosure requirements.
Another dilemma will be in the case of assignments where the original lender has long since sold the loan and, thus, does not know (or cannot reasonably determine) whether there was a disclosure error in the first place.
The limitation on Jesinoski is that the Supreme Court’s holding only applies when the disclosures were defective at loan closing. Secondly, any loan that is over three years old is not impacted. However — and it’s a BIG however — it can be anticipated that every pro se with news of this judicial decision will attempt to rescind, regardless of having actual grounds to do so.
Accordingly, the immediate response of lenders to Jesinoski should be to make sure that a notice address is included in every communication to all persons with a right to rescind a loan, and to assign a specific person or department to respond to notices of rescission. The second step will be to set up a vetting system to determine whether or not the rescission is a legitimate one.
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