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Supreme Court Provides TILA Home Loan Rescission Guidance
March 13, 2015
In a recent unanimous decision, the United States Supreme Court held that a borrower exercising her right to rescind a mortgage loan under the Truth in Lending Act (“TILA”) merely had to provide written notice of rescission within three years after the loan was originated. The Supreme Court held there is no requirement that a lawsuit be filed within three years of origination in order for rescission to be effective. Rather, the Court found that written notice, and not judicial action, effectuated rescission under TILA. Jesinoski v. Countrywide Home Loans, Inc., No. 13-684 (U.S. S. Ct., Jan. 13, 2015). The Supreme Court’s opinion is remarkably short, and it essentially resolves the entire case based on a straightforward, plain reading of the statute.
Under TILA, a home loan borrower has the right to rescind a loan within three days of closing the transaction for any reason. The borrower’s unconditional right to rescind expires in three days, after which the borrower may rescind only if the lender failed to make the required TILA disclosures at origination. The extended right of rescission expires three years after the closing or upon sale of the property, whichever comes first, regardless of whether the lender did or did not make the proper TILA disclosures at origination. 15 U.S.C. § 1635(f). 
In Jesinoski, the borrowers sent a letter to Bank of America (successor to Countrywide) exactly three years after the closing, giving notice of rescission of their loan transaction. One year and one day later, the borrowers filed a lawsuit in federal court seeking a declaration of rescission and damages. Bank of America argued that written notice was not sufficient. Rather, it argued the borrowers had to file a lawsuit for rescission within three years of closing. Because the borrowers did not file their lawsuit until four years and one day after the closing, Bank of America argued the lawsuit was time-barred. The District Court and the United States Court of Appeals for the Eighth Circuit agreed.
On appeal, the Supreme Court disagreed with the District Court and the Eighth Circuit. It held that the plain language of the statute leaves “no doubt” that rescission is effected when the borrower notifies the creditor of his intention to rescind. The statute does not require the filing of a lawsuit. 
Bank of America made several arguments to support its challenge to the statutory text. 
First, it argued that written notice suffices in the initial three-day period if the parties agree that the lender failed to make the required disclosures. However, Bank of America asserted, if the parties dispute the “adequacy of the disclosures – and thus the continued availability of the right to rescind – then written notice does not suffice.” (p. 5.) The Supreme Court dismissed this argument, noting that § 1635 “nowhere suggests a distinction between disputed and undisputed rescissions, much less that a lawsuit should be required for the latter.” Bank of America invoked a neighboring section of TILA in support of its position, claiming that the language of § 1635(g) – which states that the Court may “award relief” – necessarily required a lawsuit in order to “award relief.” The Supreme Court disagreed with this argument also, dismissing the notion that § 1635(g) itself requires a lawsuit and dismissing the claim that this provision has any bearing on how borrower-rescission under § 1635(a) may occur.
Second, Bank of America challenged the statutory text by invoking a common law analysis. Traditionally, rescission took one of two forms:
  1. Rescission-at-law, which requires the rescinding party to return what he received before rescission can be effected; or
  2. Rescission-in-equity, which requires a court to affirmatively decree rescission of a sale.
Bank of America argued that TILA disclaims the condition precedent that would be required by rescission-at-law, i.e., that the borrower return the proceeds from the transaction before rescission is effected. Accordingly, the Bank asserted, TILA “codifies” rescission-in-equity, which requires a judicial decree to effect rescission. But the Supreme Court was not swayed, holding that “[n]othing in our jurisprudence, and no tool of statutory interpretation, requires that a congressional Act must be construed as implementing its closest common-law analogue.” (Id.)
Ultimately, the Supreme Court disagreed with Bank of America’s arguments in favor of the statutory text: the borrower “shall have the right to rescind . . . by notifying the creditor, in accordance with regulations of the Board, of his intention to do so.” 15 U.S.C. § 1635(a) (emphasis added). The Supreme Court observed that “so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely.” The Court did not discuss Regulation Z, which addresses the specific manner for providing notice or rescission. See 12 C.F.R. 1026.23(a)(1). Based on a plain reading of TILA, which requires only that the borrower give notice of his intention to rescind within three years of the loan’s consummation, the Supreme Court reversed the lower court’s finding that the borrower had to file a lawsuit to rescind. 
Many lenders and services already have in place procedures for handling notices of rescission, whether it is a written notice or in response to a lawsuit. For those who might have previously considered a writing to not be valid notice for rescission, the Jesinoski decision confirms that rescission procedures must also apply to written notice. From a practical perspective, the more problematic issue is what to do when the borrower gives written notice and tenders nothing. Even if the borrower has a right to rescind, she cannot take advantage of that right unless she can tender the loan proceeds within a reasonable period of time. Yet, the Jesinoski opinion stated that TILA’s language “leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind.” (p. 3, emphasis added.) By stating that rescission is “effected” and not simply “exercised,” the Supreme Court left untouched the more thorny issue of how to respond to a written notice without tender. Lenders and servicers may want to respond by addressing the borrower’s requirement to repay the loan proceeds, less any payments on the loan, with the borrower’s response to dictate the appropriate next steps. That may be a rescission “closing” or the filing of a lawsuit to determine the validity of the rescission.  

Should you have questions about the impact of this decision on your institution’s processes and procedures, please contact our Banking & Finance team. 

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