May 11, 2015
by T. Matthew Mashburn
Aldridge Connors LLP– USFN Member (Georgia)
In my previous USFN e-Update article (Feb. 2015 ed.) regarding the United States Supreme Court’s decision in Jesinoski v. Countrywide Home Loans, Inc., No 13-684, 574 U.S. __ (Jan. 13, 2015), some anticipated problems were identified that could arise from what was written in the Court’s opinion, and more importantly, what was NOT written in that opinion. In this article, possible options are presented that lenders might proactively take to handle an increase in notices of rescission, should the notices materialize as expected.
In the Jesinoski case, the Supreme Court of the United States (SCOTUS) was asked to answer a very straightforward and very narrow question: after the automatic three-day right of rescission expires, if a consumer has the right to rescind a loan because of some error in the disclosures, must the consumer file a lawsuit and have a court declare the rescission effective, or does TILA allow the consumer to rescind the loan by simple written notice to the lender?
In an opinion written by Justice Scalia, SCOTUS unanimously answered: a simple written notice is sufficient because TILA says nothing about a lawsuit being required for rescission. TILA gives the qualifying consumer an absolute right to rescind a qualifying loan within three days of consummation by providing a simple written notice to the lender. Upon rescission, the lender has to return any money the borrower has given the lender and cancel any security interest in the consumer’s property. Should the lender fail to provide proper disclosures at loan closing, the borrower has up to three years to rescind the loan (now accomplished by simple written notice according to Jesinoski).
After the three-day initial rescission period expires, the borrower is given the loan proceeds. Yet, TILA applies the exact same rescission procedure as it does before the borrower has received any loan proceeds. [One would think that 15 U.S.C. § 1635’s reference to “(b) Return of money or property following rescission” would be primarily concerned with the repayment of the loan proceeds by the borrower to the lender. It is not.] Thus, the lender still has to return any money that the borrower has given to the lender (borrower’s counsel has argued that this means ALL monthly payments that have been received by the lender prior to the rescission); the lender has to cancel any security interest in the consumer’s property (borrower’s counsel argues that this means the lender now has an unsecured loan, whether the borrower pays the debt or not). Then — and only then — must the borrower repay the loan proceeds. But what about the situation where the borrower is broke? The statute is silent. As long as a lawsuit was required to rescind, this serious defect in the statute was handled by the courts, which uniformly required that the loan principal be repaid in order for the collateral to be released. “… [W]e’ve not found a single case in the 45-year history of this Act where the borrower has gotten any kind of windfall. We’ve looked extremely hard at this.” [Statement of David C. Frederick, Proceedings in Case 13-684 (Official Transcript), p. 8.]
This gatekeeping role traditionally played by the courts was one of the main pillars presented by lender’s counsel at oral argument before the Supreme Court. [Statement of Seth P. Waxman, Official Transcript, p. 27.] Indeed, the absence of any direction from the Supreme Court on this defect in the law is surprising given that Justices Scalia, Alito, Kennedy, Sotomayor, and Ginsburg all asked questions at oral argument predicated on borrowers behaving badly.
Since Jesinoski, the borrower is able to rescind the loan with a simple written notice, and according to the plain language of the statute, the lender is required to cancel the security interest without regard to whether the borrower has returned the loan proceeds (or even can return the loan proceeds).
Unless — and until — this defect in the statute is corrected, every single case is predestined to end up in exactly the same place where SCOTUS decided it would not: in court. Rather than putting the onus on the borrower to take the case to court for clarification as to the parties’ respective rights and obligations, the burden is now squarely placed on the lender — whom, previously, did not have the initial burden.
This change is a desirable result according to the Consumer Finance Protection Bureau (CFPB), in its presentation at oral argument. [The CFPB appeared as amicus curiae on behalf of the consumers. The CFPB has jurisdiction to administer TILA.] “If I wanted to foreclose, for instance, on the property and I needed my security interest to be absolutely rock solid in order to do that, then I might bring a declaratory judgment action, or I might, in the context of the foreclosure, ask the court to declare that the rescission was invalid.” [Statement of Elaine J. Goldenberg, Official Transcript, p. 21.] Thus, the CFPB did not address nonjudicial foreclosures, except to suggest that the lender should seek a declaratory judgment (thus, defeating the entire concept of a nonjudicial foreclosure). The option to seek a declaratory judgment in all nonjudicial foreclosures where the lender does not want to risk suit is an unacceptable answer to lenders, who might choose not to offer products like home equity lines of credit, thus costing consumers a very valuable financing option.
This uncertainty was made even more troublesome by the comment from the CFPB attorney that the lenders would be forced into a position of guessing what to do, and would have to pay damages if the lender “guesses” wrong on the issue of whether there was a rescission and proceeds to collect on the loan anyway. “If the lender guesses wrong, then it may be that it will subsequently be held liable for damages for guessing incorrectly and for failing to follow the unwinding procedures under Section 1635(b) when it should have done so.” [Statement of Elaine J. Goldenberg, Official Transcript, p. 19.] However, lenders do not wish to be in a position of guessing. Lenders cannot properly price loans on the basis of guesswork. Again, rather than operate on the basis of guesswork, lenders might opt to not offer the product at all (and may look to trigger any “pay on demand” or “credit freeze” feature in the currently existing loans so that the problem does not become worse).
The question that the Supreme Court did not answer was, who will fill the gatekeeping role that courts (and the cost of litigation) had been playing in weeding out non-meritorious claims? Caught in all of this uncertainty, lenders have been struggling to bring some order to the post-Jesinoski environment. Lenders are searching for ideas and suggestions for dealing with, responding to, and otherwise processing a wave of rescission notices inspired by Jesinoski (the vast majority of which will be determined to be without merit after great cost, expense, and delay). [The first three reported cases, following Jesinoski, all involve plainly non-meritorious claims. In re Residential Capital, LLC, Case No. 12-12020 (Bankr. S.D. N.Y. Apr. 9, 2015); Taylor v. Wells Fargo Bank, N.A., Civil Action No. 14-617 (D.C. D.C. Mar. 25, 2015); Lagrant v. U.S. Bank National Association, Civil Action No. 3:14-cv-809-HEH (D.C. Va. Mar. 16, 2015).]
The Jesinoski decision did not acknowledge the critical gatekeeping function of the phrase “[t]he procedures prescribed by this subsection shall apply except when otherwise ordered by a court.” 15 U.S.C. § 1635(b) (emphasis supplied). Subsection (b) was added in the 1980 amendments for the express purpose of preventing the sort of abuse that will be unleashed by Jesinoski.
A straight reading of the plain terms of the statute reveals that “unwinding” the transaction after the loan proceeds have been distributed, according to the same system that is used before the loan proceeds have been distributed, yields a nonsensical result.
Scalia, J.: …[Y]ou are urging that the statute creates a system in which a creditor who has a secured interest, simply because somebody comes up almost 3 years later and says, “you didn’t give me two copies of this particular document, I got only one copy,” and even if that’s not true, immediately the secured interest is converted into an unsecured interest. That is a huge difference. And I find it difficult to believe that’s what Congress intended. Mr. Frederick: Well, the language of the statute actually makes that very clear, and so do the regulations. [Colloquy of Justice Scalia and Mr. Frederick, Official Transcript, pp. 5-6.]
Prior to Jesinoski, most courts either modified the statutory procedure, refused to follow the statutory procedure, or “expressly rejected the regulatory scheme and, substituting their own notions of equity, turned the statutory process around.” [Keest and Sarason, Truth in Lending, 2d Edition, National Consumer Law Center, § 188.8.131.52.1, p. 247.] Clearly, lenders cannot exercise equitable powers in the way of a court to modify, reject, or reverse the statutory scheme of “unwinding.” However, by taking the resolution of the issue of rescission out of the courts and placing it in the lender’s mailroom, the Supreme Court has created a vacuum where the guiding hand of the courts previously existed.
Possible Lender Responses
Should the lender do something or nothing in the face of this new uncertainty? There is some support for the argument that the proper response of a lender, to a notice under Jesinoski, is simply to do nothing. At oral argument, it was stated that the CFPB’s position was that “an invalid notice of rescission that’s not timely has no effect in the world.” [Note that this statement has two requirements. An “invalid” notice that is also “not timely.”] “… it puts no requirement on the lender to do anything and you can see that from the language of Section 1635(b).” [Statement of Ms. Goldenberg, Official Transcript, p. 18.]
Furthermore, during the Circuit Court of Appeals split in the run-up to Jesinoski, the Third Circuit Court of Appeals (which was on the side of the split that was ultimately adopted by SCOTUS) wrote, in deciding Sherzer v. Homestar Mortgage Services, 707 F.3d 255 (3rd Cir. 2013), that “[b]y sending a notice of rescission, the obligor becomes obliged to tender any property he has received from the lender ‘[u]pon the performance of the creditor's obligations.’ 15 U.S.C. § 1635(b). Thus, a notice of rescission is not effective if the obligor lacks either the intention or the ability to perform, i.e., repay the loan” (emphasis supplied). [Statement of Ms. Goldenberg, Official Transcript, p. 18.] Had the Supreme Court included either one of these concepts in its opinion in Jesinoski, the incentive for borrowers to send bogus notices of rescission might have been tempered.
While a blanket policy of doing nothing has operational efficiency and has some arguable support from the CFPB and the courts, it also runs the risk of inflaming a jury or a judge in the rare case where the notice was actually legitimate and timely. (We can easily visualize the operations manager of a lender on the witness stand in front of a jury in a wrongful foreclosure suit: Question by Borrower’s Counsel: Upon receipt of the borrower’s notice declaring that you had failed to comply with TILA, and thus were obligated to unwind the transaction under this critically important consumer protection statute, what did you do? Response from Lender’s Representative: It is our policy to ignore notices of rescission.
Accordingly, while doing nothing might arguably be permitted, doing something is usually the preferred course of action, if for no other reason than demonstrating that the lender takes this important piece of consumer protection legislation seriously.
Assuming the lender does something, what should it do? The notices of rescission prompted by Jesinoski will fall into one of four possible categories: (1) untimely letters that have no merit; (2) untimely letters that would have had merit had they been sent at the proper time; (3) timely letters that have no merit; and (4) timely letters with merit. The great failing of Jesinoski is that there is no downside to the borrower sending a notice of rescission in bad faith. Rather than the “price of admission” to assert a rescission as being the cost to hire a lawyer (and the time and trouble to litigate the case), Jesinoski reduces the “price of admission” to the cost of a postage stamp. Indeed, there might be great benefit to the unscrupulous borrower in sending a meritless notice of rescission because the lender will be delayed while it processes the letter. [Sotomayor, Justice: “… the bank, as soon as it receives the notice of rescission – one of the benefits for people who don’t want to pay a mortgage is that it suspends the mortgage payments; correct? Mr. Frederick: That’s correct.” Official Transcript, p. 10.]
• The Big Sort — Since the Supreme Court’s opinion acknowledged that the three-year statute of limitations, which was established sixteen years ago in Beach v. Ocwen Federal Bank, 523 U.S. 410, 411-13, 118 S. Ct. 1408, 140 L.Ed.2d 566 (1998), was still in effect, the initial sorting will be between timely and untimely rescission letters. This can be referred to as the “Big Sort” because (1) it will take the least amount of time to analyze, and (2) if the arguments that have been put forward in actual existing cases since the time of the Jesinoski opinion are any indication, this will be the largest number of letters. This “Big Sort” might be possible to accomplish with “one touch” (the person opening the letter might be trained to spot the statute of limitations and determine whether the closing pre-dates the letter by more than three years). In such a case, the letters can be filed under “without merit” or generate a standard rejection letter. As referenced above, a standard rejection would probably be preferred over no response at all. A standard rejection response would also place the onus back on the borrower to seek redress in the courts. Further, filing the notice and the rejection in the loan file will help with due diligence in the sale of the notes or in the event of foreclosure.
• The Little Sort — With all untimely letters thus eliminated from the notice pool, the lender will now turn to timely letters. This pool will contain (1) timely letters without merit, and (2) timely letters with merit. Most letters will be without merit because currently there is no penalty to the consumer for asserting a meritless claim, and a potential reward for doing so. In order to determine whether the letter has merit or is meritless, the lender should create categories for claims, with some categories warranting more attention than others.
The current range of meritless claims is the “one copy” allegation. In this claim, the consumer denies receiving two copies of the notice of rescission at the closing (even despite having signed an acknowledgment at closing that he or she did receive two copies). Unfortunately, this claim was given support by counsel for the consumers at the oral argument in Jesinoski. “There is confusion here on this particular form because the – what this says – what is [sic] says is, ‘The undersigned each acknowledge receipt of two copies.’ It doesn’t say, ‘The undersigned each acknowledge each receiving two copies.’” [Statement of Mr. Frederick, Official Transcript, p. 51. Of course, lenders might consider changing their right of rescission forms to head off this argument.]
Timely notices, without merit: These will receive a standard rejection as well. This rejection should be drafted by counsel with experience in consumer lending and, specifically, with experience in dealing with right of rescission issues. Claims that are not part of nationwide or internet trends can be forwarded to counsel for further evaluation and, ultimately, rejection.
Responding to notices of rescission that have merit: Once the letters have been sorted and a timely notice with potential merit has been identified, the unwinding process of 15 U.S.C. § 1635(b) is finally triggered. Here, the CFPB clearly anticipates that there will be an exchange between the borrower and the lender. “In that circumstance, I would certainly start by going to the borrower and trying to work it out privately, which is, I think, what Congress primarily intended when it set up the scheme.” [Statement of Ms. Goldenberg, Official Transcript, p. 21.] If this exchange is successful in resolving the issue, the matter is concluded. If the exchange is not successful in bringing about a resolution, then the parties will be back in court.
Until the Courts, the Congress, or the CFPB clarify the confusion created by the Jesinoski decision, lenders should create a “triage” for identifying and processing notices of rescission, and developing policies for (1) either rejecting or ignoring untimely notices; (2) identifying and rejecting non-meritorious letters; and (3) identifying meritorious letters, which will then be responded to in a timely and appropriate fashion.
If the lender and the consumer cannot resolve the issue, then litigation will inevitably ensue. For the time being, the response to timely, seemingly meritorious notices will necessarily include a request that a court modify the terms of the statute and require repayment of the loan as a condition for rescission. Ironically, this is the exact position that nearly all cases were in before the Supreme Court issued its opinion in Jesinoski.
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