Click here for pdf
One of the favorite ways for a borrower to throw sand in the gears of a mortgage foreclosure is to claim that he or she did not receive disclosures required by the Truth in Lending Act (TILA) at the time a loan was originated. Typically a borrower will claim that he or she is entitled to rescind the mortgage transaction pursuant to 15 U.S.C. § 1635, often on the basis that the creditor failed to deliver two copies of a notice of right to cancel at the closing.
How and when a mortgage has actually been rescinded is the subject of considerable dispute. Rescission, unlike most other remedies, is a two way street. It is intended to place both borrower and lender in the positions they held prior to engaging in the transaction. That requires the lender to terminate its security interest and return any payments the borrower made in relation to the loan, but it also requires the borrower to return the money borrowed. Often a borrower is unable to return the money borrowed, which understandably makes the lender nervous about releasing the security for the repayment of that money. Hotly contested litigation often results.
TILA provides that a borrower exercises his right to rescind “by notifying the creditor . . . of his intention to do so.” Providing such a notice, however, is not rescission – it is notice of one’s intent to rescind. A borrower ordinarily has three days after closing to rescind. In the event of a material disclosure violation, however, TILA provides that a borrower’s “right of rescission shall expire three years after the date of consummation of the transaction. . . .”
On April 28, 2014, the U.S. Supreme Court granted certiorari in Jesinoski v. Countrywide Home Loans, Inc. to resolve a split among the circuits regarding whether a borrower must file a lawsuit seeking to compel rescission within the three year period provided in TILA, or whether simply “notifying the creditor” within that period is sufficient. The Third, Fourth, and Eleventh Circuits have all held that merely notifying the creditor within the three year period is sufficient. The First, Sixth, Eighth, Ninth and Tenth Circuits have all held that a borrower must file a lawsuit within three years in order to preserve the ability to rescind pursuant to TILA.
The Jesinoski case presented the prototypical fact pattern. The borrowers refinanced their mortgage on February 23, 2007. They later contended that they did not receive two copies of a notice of their right to rescind. Exactly three years later, on February 23, 2010, they notified the lender that they were exercising their right to rescind the mortgage. Although not apparent from the record, it is unlikely that they tendered the amount they borrowed, less credits for the closing costs and any payments they had made. In other words, while they had notified the creditor of their intent to rescind, they had not yet rescinded.
One year later, on February 24, 2011 – four years and a day after the consummation of their loan transaction, the Jesinoskis filed a lawsuit in federal court seeking rescission based on Countrywide’s alleged violations of TILA. The district court granted Countrywide’s motion to dismiss, ruling that “a suit for rescission filed more than three years after consummation of an eligible transaction is barred by [TILA’s] statute of repose.” Following precedent established in a case decided earlier in 2013 (Keiran v. Home Capital, Inc.), the Eighth Circuit affirmed.
With its decisions in Keiran and Jesinoski, the Eighth Circuit joined the First, Sixth, Ninth and Tenth Circuits in holding that a borrower seeking TILA rescission must file a lawsuit seeking to compel a recalcitrant creditor to terminate its security interest and for a declaration that the loan transaction has been rescinded within three years of the consummation of the loan. Merely sending a notice of intent to rescind at some point in the future is not sufficient in those circuits, which are squarely in conflict with decisions in the Third, Fourth, and Eleventh Circuits. Those Circuits have held that a borrower need not actually file a lawsuit within the three year period. In those Circuits, merely sending the notice of intent to rescind is sufficient.
The Jesinoski case will likely result in clarification of when a loan is “rescinded.” The reasoning of the courts in the Third, Fourth and Eleventh Circuits is that once the borrower sends a notice of rescission a loan is automatically rescinded. That is, no lawsuit need be filed to accomplish rescission, and therefore so long as the notice is sent within three years, the loan is rescinded. But that is inconsistent with the language of TILA as well as the concept of rescission. TILA speaks to providing a creditor with notice of a borrower’s “intention” to rescind. On the day the borrower provides notice of that intent to the creditor, neither party enjoys the position he held prior to the transaction. Both must take some action to achieve that status. Moreover, a borrower is not automatically entitled to void a transaction on his or her say so. A lender must have the ability to contest the borrower’s claim that he or she is entitled to rescind. TILA contemplates that no court action will be required – that a borrower will provide notice of intent to rescind, the creditor will agree, the security interest is automatically void, the secured party takes action to terminate the security interest within 20 days, and the borrower returns the money. But if a creditor contests a borrower’s entitlement to rescind a loan, the parties will need to resort to the courts to resolve that dispute and determine whether or not the borrower has the right to rescind, and if so, how rescission will be accomplished. Any such lawsuit by a borrower should be filed within the three year period provided for in the statute. The “right of rescission shall expire three years after the date of consummation of the transaction. . . .”
Regardless of how the Court ultimately rules, its ruling will provide mortgage lenders, servicers and their counsel valuable guidance in dealing with TILA rescission claims, and will hopefully bring clarity to the distinction between providing notice of intent to rescind and actually rescinding a loan transaction.
For more information on the matters discussed in this Locke Lord QuickStudy, please contact the author.