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Tuesday, September 2, 2014

TILA versus TILA: Rescission by Notice or Lawsuit

Commentary and Analysis
Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Here’s something to ponder on:

“Whether the Truth in Lending Act entitles homeowners to rescind their mortgage commitment by notifying the lender in writing within the period specified by the statute, or whether the homeowner must file a lawsuit to make the rescission effective.”[1]

The foregoing ponderable – ably condensed into a single contemplation by the American Civil Liberties Union in announcing its amicus brief – is expected to be adjudicated by the US Supreme Court in its next term. The ACLU’s amicus brief is in favor of written notification.

Before we get started, it should be noted that the ACLU is hardly alone in offering an amicus brief favoring written notification: Attorney General of New York, Eric T. Schneiderman, has announced that he is leading a coalition of more than 25 states in filing an amicus brief urging the U.S. Supreme Court “to uphold consumer rescission rights under the federal Truth in Lending Act (TILA).”[2]

Indeed, in addition to the private litigants, the United States as well as several organizations have filed an amicus brief in favor of written notification, such as the American Association of Retired Persons, National Consumer Law Center, National Association of Consumer Advocates, and the Center for Responsible Lending.

Given the immense legal implications, especially with respect to the loan flow process from point of sale through portfolio and securitization, I would urge a familiarity with the positions taken by both parties to the litigation.

Would you like to venture a guess on the outcome?

For the time being, while we explore this case, please put on hold whatever you know, thought you knew, or assumed regarding rescission. You might find your view challenged by the contours of this lawsuit.

So, let’s ponder this issue that is flaring up from the Truth in Lending Act (“TILA” or “Act")!

Throughout this article, I will refer to the subject case as “Jesinoski v. Countrywide” or just “Jesinoski.”[3]

The Big Question

Jesinoski v. Countrywide cites Section 1635 of TILA to present the foundation upon which the deliberations are to proceed.[4] In that section, it states that a borrower “shall have the right to rescind the transaction until midnight of the third business day following … the delivery of the information and rescission forms required under this section … by notifying the creditor
… of his intention to do so.”[5] (My emphasis.) With regards to the timeframe available to the borrower, the well-known three year time frame is cited, to wit, a time limit “for [the] exercise of [this] right,” providing that the borrower’s “right of rescission shall expire three years after the date of consummation of the transaction” even if the “disclosures required … have not been delivered.”[6]

Now comes the question that logically follows from the phrase emphasized above – “notifying the creditor” – insofar as, by operation of law, what shall constitute acceptable notification. As posed in Jesinoski:

“Does a borrower exercise his right to rescind a transaction in satisfaction of the requirements of Section 1635 by “notifying the creditor” in writing within three years of the consummation of the transaction, as the Third, Fourth, and Eleventh Circuits have held, or must a borrower file a lawsuit within three years of the consummation of the transaction, as the First, Sixth, Eighth, Ninth, and Tenth Circuits have held?”[7]

In other words, within three years of consummation of the loan transaction, is “notification” met where the borrower has provided written notification to the creditor, thereby exercising the right of rescission, or only where the borrower brings a lawsuit against the creditor?

Please note that several Circuit Courts have considered the question in related litigation, with differing decisions, such cases brought by plaintiff’s with certain claims somewhat similar to Jesinoski, as the litigation has steadily moved up the chain of command until it has arrived at the US Supreme Court.[8] [9]

Staking Out the Position

This battle goes all the back to 2007, when the Jesinoskis claimed that they did not receive complete disclosures on the home they had refinanced. They refinanced their home mortgage with Countrywide Home Loans, Inc., but, it is claimed, Countrywide failed to furnish them all the information and disclosures required by the Act. TILA creates a “right to rescind” the loan transaction within “three business days” of the delivery of all the required disclosures, and a borrower exercises that right simply “by notifying the creditor.”[10]

Furthermore, the Act provides that the rescission right “shall expire three years” after the closing of the transaction, even if all the required disclosures have not been delivered.[11] 

But when the Jesinoskis sought to exercise their rescission right by sending their creditors a written notice, within the three year timeframe, the creditors refused to honor their right to rescind.

Thus followed the lawsuit, as the Jesinoskis brought an individual suit to enforce the rescission. Their suit was in line with similar suits filed by other parties. The First, Sixth, Eighth, Ninth, and Tenth Circuit Courts refused to recognize that these plaintiffs had validly rescinded their mortgage. Regarding the Jesinoskis, the court held that the Act required the Jesinoskis to file a lawsuit to rescind. But, in such similar cases, the Third, Fourth, and Eleventh Circuits held that written notification is all that was required. Battle lines drawn, the case moved to its perch at the US Supreme Court.

The Three Year Gauntlet

Stepping through the rescission timeframe toward the three year mark, this is a brief outline of how TILA[12] sets forth the obligations of borrower and creditor:

1.     A borrower who secures the loan with a principal dwelling “shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section … whichever is later” by notifying the creditor of the intention to do so.[13]

This means that the borrower has an unconditional right to rescind for business three days after the consummation of the transaction and, as a remedy for a creditor’s violation of the Act’s disclosure requirements, extends that right to rescind until three days following the ultimate delivery of the required disclosures.

2.     A borrower’s exercise of the right to rescind “sets in motion a series of automatic steps to unwind the transaction,”[14] imposing obligations on both the creditor and the borrower. When a borrower “exercises his right to rescind, he is not liable for any finance or other charge, and any security interest given by the borrower becomes void upon such a rescission.”[15]

3.     Following the borrower giving notice to rescind, and within 20 days after receipt of a notice of rescission, the creditor must return to the borrower any money or property given as … down payment … and “shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction.”[16]

4.     The borrower’s time limit for exercising the right of rescission is three years from the transaction’s consummation,[17] even if a creditor never delivers the disclosures required by the Act.[18] [19] [20]

What Constitutes a Written Notice?

Regulation Z specifically states the procedural features of a written notice with respect to the borrower’s notification requirement for exercising a right of rescission, and I quote:
“To exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram or other means of written communication. Notice is considered given when mailed, when filed for telegraphic transmission or, if sent by other means, when delivered to the creditor's designated place of business.”[21]
Pretty clear, yes? What is there to dispute about the foregoing words? Not so fast!