May 5, 2015
by Jessica L. Blanner
and Brian H. Liebo
Usset, Weingarden & Liebo, PLLP
USFN Member (Minnesota)
In 1968, Congress first enacted the Truth in Lending Act (TILA) to help consumers avoid uninformed use of consumer credit, and to require disclosures to protect consumers against unfair or hidden credit billing terms. [See, 15 U.S.C. § 1601.] To that effect, TILA grants borrowers the right to rescind a loan in certain circumstances. Borrowers have an unconditional right to rescind a loan within three days following the loan’s consummation. After the three days, borrowers may rescind only if the lender failed to satisfy TILA’s disclosure requirements [15 U.S.C. § 1635(a), (f)].
However, this conditional right to rescind expires “three years after the date of consummation of the transaction or upon sale of the property, whichever comes first.” § 1635(f). Subsequent to the events that transpired in the below-discussed case, Congress transferred the rule-making authority under TILA to the Consumer Finance Protection Bureau. [See, Dodd-Frank Wall Street Reform and Consumer Protection Act, §§ 1061(b)(1), 1100A(2), 1100H, 124 Stat. 2036, 2107, 2113.]
For many years, it has been the practice within the Eighth Circuit that when a mortgage company was notified by borrowers that they intended to rescind their mortgage, the borrowers had to not only notice their intent within three years of the loan closing, but actually had to commence a lawsuit within the three-year time frame. Failure to do both actions within three years was tantamount to a waiver of the right to rescind according to district court judges. A recent decision by the U.S. Supreme Court has definitively established the law for this issue for all jurisdictions across the nation.
Earlier this year, the Supreme Court reversed the judgment of the Eighth Circuit Court of Appeals, and held that borrowers exercising their right to rescind a mortgage transaction under TILA need only provide written notice to the lender within the three-year period, and need not commence an actual lawsuit within that three-year period. Jesinoski v. Countrywide Home Loans, Inc., 574 U.S. __ (2015).
This action originated in Minnesota, after the borrowers refinanced their home by borrowing $611,000 from Countrywide Home Loans, Inc. on February 23, 2007. Exactly three years later, on February 23, 2010, the borrowers mailed a letter of rescission to the lender, alleging TILA violations. The lender denied the rescission request, and the borrowers filed suit on February 24, 2011. The borrowers contended that their TILA claims were timely because they sent a notice of rescission on February 23, 2010. The U.S. District Court for the District of Minnesota rejected the borrowers’ arguments and granted the lender’s motion for judgment on the pleadings to dismiss the claims, holding that a suit for rescission filed more than three years after the loan’s consummation is time-barred (even if the borrowers mailed a notice of rescission within the three years). Jesinoski v. Countrywide Home Loans, Inc., 2012 U.S. Dist. LEXIS 54811 (D. Minn. Apr. 19, 2012). The Eighth Circuit Court of Appeals affirmed the district court’s judgment on the pleadings in favor of the lenders. Jesinoski v. Countrywide Home Loans, Inc., 729 F.3d 1092, 2013 U.S. App. LEXIS 18757 (8th Cir. 2013).
In a unanimous opinion written by Justice Scalia, the Supreme Court reasoned that while Section 1635(f) explains “when the right to rescind must be exercised, it says nothing about how that right is exercised.” Jesinoski v. Countrywide Home Loans, Inc., 574 U.S. __ (2015). The Court also explained that Section 1635(a) does not explicitly provide that a lawsuit is required for a rescission, and concluded that a borrower only needs to provide written notice to a lender in order to exercise the right to rescind within the three-year time frame.
The Supreme Court reversed the judgment of the Eighth Circuit and remanded the case for proceedings consistent with its opinion. Notably, the Supreme Court did not consider whether the lender had in fact satisfied TILA’s disclosure requirements. Instead, the Supreme Court reasoned that since the only thing that the borrowers must do (to exercise the right to rescind) is to provide written notice within three years, the lower courts erred in dismissing the borrowers’ complaint.
The decision settles a circuit split on this question. While the Supreme Court’s holding appears borrower-friendly, the ruling is narrow, in that it solely addresses a notice-timing issue. Mailing a notice of rescission within three years of consummating a loan is sufficient to exercise the right to rescind, and a party seeking to rescind is not required to actually file a lawsuit within that three-year time period to preserve a rescission claim.
As a practice pointer, mortgage servicers should carefully monitor all borrower correspondence for timely loan rescission claims and properly address those notices, even if the borrowers have not yet filed lawsuits to enforce mortgage rescission rights.
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