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From Banking and Finance Law Daily, November 4, 2014

Justices tackle timeliness issues for mortgage rescission rights

By Andrew A. Turner, J.D.

The U.S. Supreme Court oral argument on a case raising the question of whether borrowers are required to file a lawsuit to exercise their right to rescind under the Truth in Lending Act saw lively debate over application of various statutory provisions. Counsel for the petitioners, David C. Frederick, said that the mechanism of rescission set forth in 15 U.S.C. §1635(a) is for the borrower to provide notification to the creditor. Seth P. Waxman, counsel for the respondents, countered that if the lender says that the notice is invalid, the borrower’s recourse under Section 1635(g) is a suit for an award of rescission (Jesinoski v. Countrywide Home Loans, Inc., November 4, 2014).

In this case, consumers attempted to rescind a mortgage loan refinancing transaction based on a claim that the lender failed properly to make required disclosures. According to the U.S. Court of Appeals for the Eighth Circuit, the consumers’ right to rescind expired when they failed to file suit to enforce their rescission demand within three years of the loan closing (Jesinoski v. Countrywide Home Loans).

Rescission process. In response to questions from the Justices about the lender’s recourse if a rescission claim is baseless, Frederick said that first the lender notifies the borrower that it doesn’t agree with its position about the rescission. In a judicial foreclosure state, the validity of the rescission notice would be the first issue that would be decided by the court in determining whether or not the foreclosure was proper. In a nonjudicial foreclosure state, Frederick said, a bank would provide the notices that it was going to sell a house and the burden would then shift to the borrower to obtain a declaratory judgment that he or she had properly rescinded the loan.

Justice Department views. Elaine J. Goldenberg, Assistant to the Solicitor General, agreed with the petitioners, arguing that if the lender fails to provide the required disclosures and forms to the borrower, the three-day window for exercising the right to rescind provided by Section 1635(a) marches forward in time up to the three-year mark. “What Section 1635(f) does is put a backstop on how far that three-day window can proceed and an endpoint on the exercise of the right rescission through a written notice,” Goldenberg said, pointing out that the statutory provision says nothing about bringing an action in court.

Time limit. On the other hand, Waxman argued that if a lender says that a notice is either untimely or invalid for another reason, the borrower has three years to take some action to obtain an award of rescission, the remedy specified in Section 1635(g). Chief Justice Roberts questioned putting “an awful lot of weight on a tiny, one-sentence provision in (g),” that is called “additional relief.” Justice Kagan observed that the requirement in paragraph (g) which says that the court can award not only rescission but damages was “hardly a requirement the borrower bring suit subject” to the paragraph (f) clause of three years.

Justice Scalia commented that counsel for the respondents was drawing a distinction between exercising the right to rescind and obtaining rescission—that the notice is simply an exercise of the right to rescind, but rescission does not occur until the exchange. Because the lawsuit is about whether the court should “award rescission,” Waxman noted, the borrower needs a live right of rescission at the time the lawsuit is filed.

The case is No. 13-684.

Attorneys: David C. Frederick (Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLC) for the Larry D. Jesinoski. Seth P. Waxman (Wilmer Cutler Pickering Hale and Dorr LLP) for Countrywide Home Loans, Inc.

Companies: Countrywide Home Loans, Inc.

MainStory: TopStory ConsumerCredit Loans Mortgages TruthInLending

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