A few weeks ago I notified you about the denouement of the Supreme
Court’s granting of certiorari on April 28, 2014 to decide whether, as held by
the Eight Circuit, a borrower must file a lawsuit to exercise and preserve the
TILA rescission right within three years of consummating the loan, or whether
simply providing written notice of rescission is sufficient to do so. I have
followed this litigation virtually from its inception, given the considerable
implications for creditors.* [736 F.3d 1134 (8th Cir. 2013)]
My White Paper on this matter can be found
HERE and
HERE. It was published
on September 2, 2014 and entitled, “TILA versus TILA: Rescission by Notice or
Lawsuit.” My analysis of the Supreme Court’s ruling, issued on January 13,
2015, was published on the same date as the ruling. You can read it
HERE and
HERE. In a unanimous
opinion, the Supreme Court held that providing a notice of rescission within
the three-year period is timely and sufficient to trigger rescission within the
meaning of 15 USC § 1635(f), the operative statute.
The notion that the borrower would have to sue in order to
effectuate rescission simply had no traction because, as the court noted, nothing
in the applicable section of TILA requires the borrower to sue in order to
exercise the right of rescission, and nothing in Section 1635(f) changed this
conclusion, because that section tells borrowers “when the right to rescind must be exercised, [but] says nothing
about how that right is exercised”. (Emphasis
in Original)
Personally, I thought the defendant, Countrywide, had a
non-argument, when it allowed for only requiring written notice of rescission
within the first three days after the loan closing, pursuant to Section 1635(a), accepting that the written notice was sufficient to rescind a loan
within three years after the closing, but, and this is a big BUT, only if the
parties agreed that the lender failed to make the required disclosures. Thus, Countrywide
argued that if the parties disputed the adequacy of the lender’s disclosures,
the written notice would not suffice and a lawsuit was required. I thought this
was some pretty fancy footwork on the part of defendant’s counsel, and the
Supreme Court certainly rejected this puffed out stretch of an argument. To quote the
ruling: “Section 1635(a) nowhere suggests a distinction between disputed and
undisputed rescissions, much less that a lawsuit would be required for the
latter.”
Since the ruling, I have been asked several questions
regarding certain aspects of the Supreme Court’s findings and its impact on creditors.
In this essay, I consolidate my thinking on this subject, with a view to
considering the actual and potential issues arising from the ruling.
I think there are a few outcomes of the decision.
But first permit me to offer a thumbnail overview of the issue itself.
Creditors must notify borrowers in writing that borrowers
have three business days to rescind the credit transaction by providing written
notice of their intent to do so to the creditor. [§ 1635(a)] This right of rescission procedure is well known. Indeed, given any consumer credit transaction
that results in the creditor retaining or acquiring a security interest in the
borrower’s principal dwelling, the right of rescission is mandatory. By ‘consumer
credit transaction’, I mean to include subordinate mortgage loans and refinance
mortgage loans wherein borrowers receive additional credit.
If a creditor fails to provide the written disclosure, or
provide inadequate written disclosure, the borrower’s rescission rights are
extended to three years after the loan was originated. [§ 1635(f)]
The Supreme Court was asked to decide whether borrowers are
required to provide a notice of intent to rescind, or affirmatively sue the
creditor to effectuate the rescission rights within the three year limitation
period. [Jesinoski, 135 S. Ct. 790, 790 (2015)]
The decision reached by the Supreme Court was that the plain language of the
statute (supra) requires only the
former, stating that “[t]he language of the statute leaves no doubt that rescission
is effected when the borrower notifies the creditor of his intention to
rescind.” [Idem at 792]
The defendant’s gambit was to use the equitable principle in
common law for rescission. Under common law, the equitable principle is that
borrowers must be able show that they can tender the property received at
origination back to the creditor before being permitted to rescind the loan. Specifically, rescission traditionally
requires either that the rescinding party return what was received before a
rescission could be effectuated (rescission at law) or else that a court must affirmatively
decree rescission (rescission in equity). The Supreme Court’s position,
however, was that this principle cannot be applied to interpret the TILA
rescission regime. [Idem at 793]
Countrywide’s argument fell flat when it argued that
Congress could not have intended to eliminate both of these long-standing
common law requirements and allow a borrower to rescind a loan simply by
writing to its lender. Furthermore, the defendant advanced a counterfactual conundrum which hypothesized that allowing rescission in this manner would simply encourage frivolous claims
from borrowers. But the Supreme Court had the last word: “The clear import of
§1635(a) is that a borrower need only provide written notice to a lender in
order to exercise his right to rescind. To the extent §1635(b) alters the
traditional process for unwinding such a unilaterally rescinded transaction,
this is simply a case in which statutory law modifies common-law practice.”
Now, as I see it, there are several outcomes of this
decision.
- Borrowers
preserve their TILA rescission claims by merely notifying their creditors in
writing of their intent to rescind within the applicable three-year time
period.
Outcome: Creditors could see some increase of rescission notices and will continue to see
distressed borrowers allege TILA rescission claims, in some instances
commencing such claims many years after rescission notices are received.
- If
a creditor disputes a borrower’s rescission notice, it is an open question as
to when the borrower must file suit to enforce the right of rescission.
Outcome A: It is possible that the
limitations period could be indefinite, as long as the borrower timely provides
the rescission notice.
Outcome B: As the CFPB posited in
Sherzer v. Homestar Mortgage Services, the general TILA one-year statute of
limitations [in 15 USC § 1640(e)] may begin to run from the date the borrower
sent the rescission notice. [707 F.3d 255, 266 n. 8 (3rd Cir. 2013)]
- Creditors
will need to reevaluate their responses to borrower rescission notices that
they intend to dispute.
Outcome: Creditors must consider the cost of
disputing the rescission attempt against the potentially added cost
and complexity of rescinding a loan many years after origination, since the
procedures of rescission generally require creditors to return all funds
received from the borrower and to terminate security interests - even if
borrowers are unable to return any funds they received at origination. In other
words, the costs to creditors will be far higher over time as rescission takes
place from the date of the loan. [12 USC 1635(b)]
- A lender has twenty days to determine whether the rescission notice is valid or whether it is going to seek a declaratory judgment in court that would block the rescission based on the theory that it provided sufficient disclosures.
Outcome A: Creditors may consider retaining a security interest in the mortgage or give up its rights to get repaid. This means going through records from mortgages from commencement of origination.
Outcome B: Creditors may consider having a blanket policy of challenging all such rescission notifications in order to protect their interests, by seeking a declaratory judgment that there was no disclosure violation.
- Repayment of principal is going to be a contested area in the future. The Supreme Court did not address the question of what happens when the borrower does not return the principal. In a rescission a lender is supposed to return any points and fees that a borrower paid on a mortgage, release its senior secured lien, and be repaid the principal amount of the loan.
Outcome: A reading of the decision is that, due to recsission, a creditor may be left without a return of the principal and without any claim against the borrower. It is relatively easy to predict that future litigation will center on who owes whom what - and when whatever it is that must be repaid will be repaid!
After Jesinoski, lenders face questions of how to handle rescission notices received more than three days after the close of a transaction. For instance, what if the lender disagrees with the borrower’s assertion that the lender failed to provide the requisite disclosures, and thus rescission should not be available? Does the lender still have to release the mortgage? Can (or must) a lender file suit within twenty days of receipt of such a letter to protect its interest? What internal policies and procedures will the Consumer Financial Protection Bureau be looking for lenders to establish? Presumably, lower courts will answer these questions. In the meantime, creditors should revisit their right of rescission policies and procedures, with a view of ascertaining that they reflect the Jesinoski ruling.
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* Jonathan Foxx, President & Managing Director
