Background of Notice versus Lawsuit Issue
The Truth in Lending Act (“TILA”), as implemented by Regulation Z, provides borrowers with a powerful tool: the right to rescind certain mortgage loan transactions. This rescission may occur under two circumstances. First, borrowers have an unqualified right of rescission until midnight of the third business day following consummation of the transaction if the creditor complied with the TILA disclosure requirements. If a creditor fails to provide the required rescission notice or material disclosures, the right of rescission extends for three years after the consummation of the transaction or upon transfer or sale of the property, whichever occurs first. Borrowers may elect to rescind their loan at any point during these time frames, as applicable, “by notifying the creditor...of his intention to do so.” The term “notify” is not defined under TILA or Regulation Z.
Over the past several years, the United States Courts of Appeals, as well as numerous federal district courts, have offered conflicting interpretations of this notification requirement. The Third, Fourth, and Eleventh Circuit Courts of Appeals hold that borrowers have satisfied the notification requirement if they inform the lender in writing of their desire and intent to rescind the transaction within the three-year time frame. The First, Sixth, Eighth, Ninth, and Tenth Circuit Courts of Appeals, however, require borrowers to file a lawsuit within that three-year period to properly rescind.
No Lawsuit Required
On January 13, 2015, the United States Supreme Court resolved this long-standing circuit split and clarified the necessary actions borrowers must take to assert their rescission rights. In Jesinoski v. Countrywide Home Loans, Inc., the petitioners, Larry and Cheryle Jesinoski, refinanced the mortgage loan on their home in Minnesota by borrowing $611,000 from Countrywide Home Loans, Inc., d/b/a America’s Wholesale Lender, a predecessor-in-interest of Bank of America, N.A. (“Bank of America”) on February 23, 2007. The Jesinoskis did not exercise their three-day right to rescind at that time and received their loan funds. Exactly three years later to the date of consummation (February 23, 2010), the Jesinoskis mailed a written notification purporting to rescind the transaction to “all known parties in interest,” including Bank of America. The Jesinoskis alleged that they received an insufficient number of copies of the TILA notice and disclosure, and thus, had a right to rescind the loan. Bank of America replied on March 12, 2010, denying that borrowers were entitled to rescission. Rather, Bank of America asserted that the Jesinoskis signed the TILA disclosure and Notice of Right to Cancel at the loan closing, and acknowledged the “receipt of two copies of NOTICE OF RIGHT TO CANCEL and one copy of the Federal Truth in Lending Disclosure Statement.” Bank of America claimed that because the parties disputed the adequacy of the disclosures and thus, the continued availability of the right to rescind, written notice alone was insufficient. The Jesinoskis then filed a lawsuit in federal court on February 24, 2011, four years after their loan transaction. The district court granted judgment on the pleadings in favor of Bank of America, holding that TILA requires a borrower to file a lawsuit within three years of the credit transaction’s consummation. The Eighth Circuit Court of Appeals affirmed, further explaining that the written notification sent by the Jesinoskis did not preserve their right to rescind.
In reversing these judgments and resolving the circuit split, the Supreme Court relied on the statutory language of TILA, which states that consumers must “notify” the creditor of their intention to rescind. According to the Court, this language “leaves no doubt” that rescission is effected when borrowers provide any written notification to the creditor of their intent to rescind. The statute does not expressly require that a lawsuit also be initiated within the three-year time frame. Because the Jesinoskis mailed Bank of America a written notice of their intent to rescind within the statutorily prescribed time period, their rescission rights under TILA were properly exercised and preserved. This was the position advocated by the Consumer Financial Protection Bureau, AARP, National Consumer Law Center, American Civil Liberties Union, National Association of Consumer Advocates, and Center for Responsible Lending as amici curiae. The counter-position was argued in amici briefs by American Bankers Association, American Financial Services Association, Consumer Bankers Association, Consumer Mortgage Coalition, Independent Community Bankers of America, Mortgage Bankers Association, and Structured Finance Industry Group, Inc.
Impact on Business Operations
The relaxation of TILA’s notification provision may produce unintended consequences for the banking industry. Mortgage servicers and others should review and revise their existing rescission procedures to ensure that they comply with this newly relaxed notification requirement. Any mortgage servicer receiving a written notice of rescission will now be forced to respond within twenty days and litigate the matter in court to prove compliance with TILA disclosure requirements. Additionally, the written notice standard currently does not include an express or textual prohibition against frivolous lawsuits, and lending institutions may see an influx of meritless rescission claims by borrowers motivated to avoid foreclosure in response to nonpayment. While this decision does not relieve borrowers of their contractual obligation to pay their mortgage or otherwise return the funds, it nonetheless forces mortgage servicers to litigate any written claims of rescission. The Supreme Court’s decision, however, left unresolved the time frame in which a borrower must file a lawsuit following the written notice of rescission. Thus, the threat of litigation could hang over servicers for years.