Right of Rescission after Jesinoski v Countrywide

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. 
________________________________
* Jonathan Foxx, President & Managing Director

TILA versus TILA: Resolved in Favor of Consumers

On September 2, 2014, I published an article, entitled “TILA versus TILA: Rescission by Notice or Lawsuit.” To read the website article, please visit HERE. If you want the PDF version, please visit HERE or HERE. The US Supreme Court has just ruled today in favor of the consumer![1]

The litigation I discussed, specifically, was Jesinoski v. Countrywide Home Loans, Inc. Jesinoski v. Countrywide cited Section 1635 of the Truth in Lending Act ("Act") to present the foundation upon which the deliberations were to proceed. My article took up a review of the central question that was on its way to the US Supreme Court for adjudication in this case:

“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.”

At issue in the subject case was the question of notification by the borrower to the lender regarding rescission within a required time frame itself; to wit, 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?

It may seem that the answer is pretty much clear, based on the actual verbiage of the applicable provision in the Act. But, as the saying goes, that’s what courts are for!

Several Circuit Courts had considered the question in tangentially related litigation brought by other plaintiffs, with differing decisions, such cases brought by plaintiff’s with certain claims somewhat similar to Jesinoski. The Jesinoski litigation has steadily moved up the chain of command until it recently arrived at the U. S. Supreme Court. The First, Sixth, Eighth, Ninth, and Tenth Circuit Courts refused to recognize that all these plaintiffs had validly rescinded their mortgage. Regarding the Jesinoskis, the Eight Circuit 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. The case moved to the US Supreme Court.

Here was my tally in September 2014:

• The Third, Fourth, and Eleventh Circuits held that notifying a creditor in writing within three years of the consummation of the transaction is sufficient to exercise the right to rescind.
• The First, Sixth, Eighth, Ninth, and Tenth Circuits held that a borrower must file a lawsuit within three years of the consummation of the transaction to exercise the right to rescind.

The major difference between the Third, Fourth, and Eleventh Circuits and the First, Sixth, Eighth, Ninth, and Tenth Circuits was that the latter group departed from the former group’s straightforward interpretation of the statutory text and its implementing regulation, instead requiring that a borrower must file a lawsuit within three years to exercise the right to rescind.

This litigation harkens 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 was claimed, Countrywide failed to furnish them all the information and disclosures required by the Act. On February 23, 2007, petitioners Larry and Cheryle Jesinoski refinanced the mortgage on their home by borrowing $611,000 from respondent Countrywide Home Loans, Inc. Exactly three years later, on February 23, 2010, the Jesinoskis mailed respondents a letter purporting to rescind the loan. Respondent Bank of America Home Loans replied on March 12, 2010, refusing to acknowledge the validity of the rescission. On February 24, 2011, the Jesinoskis filed a lawsuit in Federal District Court seeking a declaration of rescission and damages.

The Jesinoski’s position can be briefly stated thus:

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.” 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.

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 the Jesinoski’s right to rescind.

The respondent’s view, which was affirmed by the Eight Circuit, was that a borrower can exercise the rescission right pursuant to the Act[2] only by filing a lawsuit within three years of the date the loan was consummated. Therefore, the Jesinoskis’ complaint, filed four years and one day after the loan’s consummation, was ineffective.

The respondents claimed that in loan transactions where the lender disputes the existence of the borrower’s right to rescind, a borrower cannot unilaterally rescind the mortgage simply by notifying the lender of the intent to do so. Instead, the borrower must file suit within the three-year statute of repose. According to the respondents, there is a common law question in these cases that is “narrower than the question presented in each of the petitions.” For the respondents, the question was not whether a borrower in all circumstances is required to file suit within the three-year statute of repose prescribed by 15 USC § 1635(f) in order to rescind a mortgage loan. Instead, the question presented should really be:

“Whether, when a borrower seeks to rescind his mortgage loan after TILA’s three-day unconditional rescission period and the lender disputes the existence of the condition precedent to the borrower’s right to rescind – specifically, a failure to provide the required disclosures – the borrower must sue for rescission before any right to rescind ‘expire[s]?’” (My emphasis.)

Where did the Consumer Financial Protection Bureau (“Bureau”) come down on this issue? The Bureau’s position was unequivocally in favor of written notice to effectuate rescission, as stated in an amicus brief in other litigation.[3] The Bureau has reiterated in numerous amicus briefs before appellate courts its view that a borrower need only notify a creditor to exercise the right to rescind. The Bureau had confirmed that it interprets Section 1635 to require only notice to the creditor in order for the borrower to exercise the right to rescind and that “consumers are not required also to sue their lender within the three-year period provided under [Section] 1635(f ).”

My own analysis led to the conclusion that a reasonable interpretation of Section 1635, is that the notice to a creditor triggers rescission, and the default procedures of Section 1635(b) follow automatically in due course from that notice, without requiring the initiation of a court proceeding. And I quipped that if ever there were a way to flood the courts with thousands and thousands of unnecessary lawsuits, this would surely be the way to do it!

Now the Supreme Court has weighed in and dispelled the fog of this long-winding litigation. Justice Scalia delivered the opinion for a unanimous Court.

The Court ruled that:

“a borrower exercising his right to rescind under the Act need only provide written notice to his lender within the 3-year period, not file suit within that period. Section 1635(a)’s unequivocal terms - a borrower “shall have the right to rescind . . . by notifying the creditor . . . of his intention to do so” (emphasis added in the original) - leave no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind.”

Furthermore, this conclusion is not altered by § 1635(f), which states:

“when the right to rescind must be exercised, but says nothing about how that right is exercised."

Nor does § 1635(g) support respondents’ view that rescission is necessarily a consequence of judicial action, which states that:

“in addition to rescission the court may award relief . . . not relating to the right to rescind” And the fact that the Act modified the common-law condition precedent to rescission at law, see § 1635(b), hardly implies that the Act thereby codified rescission in equity.”

So, what about the respondent’s interpretations of the applicable statute and law, as set forth in the litigation?

The Supreme Court found that the Eight Circuit's holding, which supported the respondent’s position, was an “error”, because it relied on a misreading of Section 1635(a). According to the Court’s interpretation of the applicable statute, borrowers have an "unconditional right" to rescind for three days, after which they may rescind only if the lender failed to satisfy the Act’s disclosure requirements. But this right to rescind does not last forever. Even if a lender never makes the required disclosures, the “right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever comes first.” The Eighth Circuit’s affirmance in the present case rested upon its holding in Keiran v. Home Capital, Inc.[4] That case held that, unless a borrower has filed a suit for rescission within three years of the transaction’s consummation, § 1635(f) extinguishes the right to rescind and bars relief.

RESPA/TILA Integration - Part I: Overview and Loan Estimate (Includes Loan Estimate Table)

RESPA/TILA Integration – Part I: Overview and Loan Estimate

   Jonathan Foxx [*]

 WHITE PAPER

This first of a four-part series will introduce the RESPA/TILA Integration and treat the numerous features of the Loan Estimate. In the second part of the series, I will detail the features of the Closing Disclosure. The third part will be a detailed analysis of the Loan Estimate. The fourth part will provide an in depth scrutiny of the Closing Disclosure.

Accompanying this article is a Loan Estimate Table that may be used for certain itemized categories and action requirements. The table outlines the types of areas of interest in many of the routine requirements of the Loan Estimate process. In reviewing the table, notice how many of these categories in some respects reflect the pre-August 2015 disclosure process. Rather than a before-and-after, comparative analysis, the Loan Estimate Table provides the requirements of the post-August 2015 Rule itself.

Two Download Locations

 White Paper and Loan Estimate Table. (One Download, Two Documents.)

White Paper and Loan Estimate Table. (Two Downloads, Two Documents.)

In the other articles of this four-part series, I will provide charts, tables, form specimens, and annotations for applicable categories and action requirements relating to the RESPA-TILA Integration. The full series, and accompanying charts, tables, and form specimens, will also appear in National Mortgage Professional Magazine, commencing October 2014. 

Discussion

Let’s admit at the outset that having to explain to loan applicants the fees and boxes and pages of the Good Faith Estimate (GFE) is not for the faint of heart. The Truth in Lending Disclosure (TIL) remains a conundrum without peer: difficult to explain to a consumer in just a few words; inscrutable even to loan officers; and, blisteringly enigmatic often even to lenders. Both disclosures are somewhat archaic, examples of good intentions gone to the shadowy realm of Unintended Consequences.

Notwithstanding the foregoing debacle, there is the infamous HUD-1 Settlement Statement (HUD-1), infamous for its myriad codes, infamous for codes that should correlate or sometimes seem not to correlate to the GFE itself, infamous for mapping challenges to the loan origination system, and infamous for irksome consternation about where, what, and how to show certain fees!

A consumer’s distrust of the lender seems to increase with the duration of the explanation provided by the mortgage loan originator. If it takes more than a sentence or two to explain a disclosure’s contents, many consumers are already hesitating, wondering if there’s something they’re not being told! So, is there a way to provide a new kind of consumer disclosure that replaces the overly-encrusted, superannuated, periodically reconditioned, creaky, decades’ old twosome and settlement documents that have dominated the origination of residential mortgage loans for an entire generation of mortgage loan originators?

Into this maelstrom of implacable confusion steps the Consumer Financial Protection Bureau (“CFPB” or “Bureau”). The debate as to whether we need to replace the GFE, TIL, and settlement disclosures, into an overall, encompassing disclosure, is over and done. Behind us now are the many analyses, heat maps, comment periods, public outreach, focus groups, committee reviews, Interagency evaluations, extensive consumer and industry research, association position papers, quantitative studies, speeches, public relations, announcements, and presentations. Before us unfolds on August 1, 2015 a brand new set of disclosures – a combined set, as in new disclosure at the commencement of the loan origination and new disclosure at its closing – the former to be called Loan Estimate and the latter to be called Closing Disclosure.[i]

The new set has been dubbed “RESPA-TILA Integration,” since the consolidation requirements reflect the mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which directed the Bureau to integrate the mortgage loan disclosures under TILA and RESPA Sections 4 and 5.[ii] For the balance of this article, I will refer to these provisions as the “RESPA-TILA Rule” or (“Rule”). Additionally, I will refer to the consolidated disclosures as “Integrated Disclosures.”

The Rule applies to most closed-end consumer mortgages. It does not apply to home equity lines of credit (HELOCs), reverse mortgages, or chattel-dwelling loans, such as mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land). The provisions also do not apply to loans made by persons who are not considered “creditors,” where such persons make five or fewer mortgages in a year. However, certain types of loans that are currently subject to TILA but not RESPA are subject to the Rule’s Integrated Disclosure requirements, including construction-only loans, loans secured by vacant land or by 25 or more acres, and credit extended to certain trusts for tax or estate planning purposes. So, creditors originating these types of mortgages must continue to use, as applicable, the GFE, TIL, and HUD-1 disclosures required under current law.

There is also a partial exemption for certain transactions associated with housing assistance loan programs for low- and moderate-income consumers. These creditors are exempt from the requirement to provide the RESPA settlement cost booklet, GFE, HUD-1, and application servicing disclosure statement requirements, and, thus, exempt from the requirements to provide a Loan Estimate, Closing Disclosure, and Special Information Booklet for these loans.

The RESPA/TILA Rule

I am sure that the question will be asked whether creditors may use the Integrated Disclosure on loans not covered by the Rule but subject to RESPA and TILA. The short answer is that using the Integrated Disclosures for such purposes is not prohibited on loans that are not covered by RESPA and TILA (i.e., mortgages associated with housing assistance loan programs for low- and moderate-income consumers). A creditor cannot use the new Integrated Disclosure forms instead of the GFE, TIL and HUD-1 forms for transactions that are covered by RESPA and TILA that require those disclosures (i.e., reverse mortgages).

With its usual flair for brevity, the Bureau’s proposal in July 2012 is a mere 1,099 pages.[iii] In November 2013, the final rule was issued, reaching the gargantuan proportions of 1,888 pages.[iv] Some of the seemingly boundless verbiage has thankfully been distilled to a 91 page guide, entitled TILA-RESPA Integrated Disclosure Rule, Small Entity Compliance Guide (“Guide”).[v] The most recent update to the Guide was issued in September 2014. The Guide touches on many features of the Rule and the implementation of the new disclosures; however, a thorough reading of the final rule is needed in order to comprehend the scope, application, and breadth of the Rule in effectuating its provisions. [vi] [vii] [viii]

Much of the Rule can be encapsulated in a single sentence, leaving aside all the details, as set forth by the Bureau:

The TILA-RESPA rule consolidates four existing disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms: a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application, and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation.[ix] (Emphases in original)

As in all consumer disclosure regulations, the compliance effective date and the operational recognition of that date are critical timing points. The new Integrated Disclosures must be provided by a creditor or mortgage broker that receives an application from a consumer for a closed-end credit transaction secured by real property on or after August 1, 2015. But creditors will still be required to use the GFE, TIL, and HUD-1 forms for applications received prior to August 1, 2015.

Operationally speaking, as the applications received prior to August 1, 2015 are consummated, withdrawn, or cancelled, the use of the GFE, TIL, and HUD-1 forms will no longer be used for most mortgage loans.[x]

But from a process perspective, this timing can get complicated quickly. Various restrictions take effect on the calendar date August 1, 2015, regardless of whether an application has been received on that date. For instance, take note of these restrictions:

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!