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From Banking and Finance Law Daily, January 13, 2015

Mortgage loan rescission effective on written demand, no suit needed

By Richard A. Roth, J.D.

Consumers who want to rescind a mortgage loan transaction within the extended three-year period need only give the creditor a timely written notice, according to the U.S. Supreme Court. They do not need to file suit within that three-year term to force a reluctant creditor to carry out the rescission, the unanimous Court said in in its consumer-friendly interpretation of the Truth in Lending Act (Jesinoski v. Countrywide Home Loans, Inc., Jan. 13, 2015, Scalia, A).

TILA gives many mortgage loan borrowers, including those who are refinancing existing mortgages, an unconditional right to rescind the transaction unilaterally within three days of the loan closing. If the lender does not comply with TILA’s disclosure requirements, that three-day term expands to three years (15 U.S.C. §1635).

Timing of demand. According to the Court’s opinion, the consumers mailed their rescission demand precisely three years after their loan closing, claiming that disclosure deficiencies permitted them to invoke the longer time limit. Bank of America, which had acquired the loan when it acquired original lender Countrywide Home Loans, refused to agree to the rescission. As a result, four years and one day after the loan closing, the consumers sued for rescission and damages.

Both the federal district court and the U.S. Court of Appeals for the Eighth Circuit decided that the consumers’ suit had come too late. According to the lower courts, TILA’s three-year rescission term creates a three-year statute of limitations. If a creditor refuses to rescind a loan transaction, the consumers must sue within three years of the loan closing to enforce their rescission demand. The consumers’ suit, filed more than four years after the closing, was tardy (see the Eighth Circuit opinion in Jesinoski v. Countrywide Home Loans, Inc.).

The consumers, however, asserted that all they needed to do was invoke their rescission right by giving a written notice within the three-year term. They asked the Supreme Court to decide the issue.

No suit necessary. The Supreme Court opinion presented the issuer in simple terms: does a consumer exercise the right to rescind simply through a written notice or must a suit be filed within the three-year term? No suit is needed, the Court said in reversing the lower court decisions.

TILA says the right to rescind expires three years after the date a loan is consummated, the Court explained. However, it also says that a consumer exercises the right “by notifying the creditor, in accordance with the regulations of the Board, of his intention to do so …” That language says nothing about filing suit, the Court pointed out. “It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely,” the opinion said.

When vs. how. That part of TILA specifying when the rescission right can be exercised says nothing about how it must be exercised, the Court then said.

Bank of America conceded that written notice alone sufficed if it was given within three days after the closing, or if a creditor agreed to the rescission. However, the bank claimed that written notice was not sufficient outside of the three-day period if the creditor did not agree to rescind.

TILA neither requires the consumer to take different steps nor imposes different deadlines depending on whether the creditor agrees to the rescission, the Court decided.

Common law rescission. Rescission is a remedy available under the common law, the Court observed. However, there was no indication that, in passing TILA, Congress intended to codify the common law. For example, TILA made clear that the common law requirement that a borrower return what had been borrowed before rescission occurred no longer applied. The act’s language made clear that Congress intended to change what the common law previously required, according to the Court.

Previous decisions. The decision should put an end to a disagreement among the U.S. appellate courts over rescission time limits. While several circuits had decided that there was no requirement that suit be filed within three years of closing, four circuits—the First, Sixth, Ninth, and Tenth—were in agreement with the Eighth Circuit that the right to rescind ended after three years if suit was not filed. Examples of these decisions include the Ninth Circuit opinion in McOmie-Gray v. Bank of America Home Loans and the Tenth Circuit opinion in Rosenfield v. HSBC Bank USA.

These courts tended to rely on two arguments when deciding that suit was needed. First, they cited practical difficulties creditors could face if a consumer could preserve a right to rescind indefinitely simply by sending a letter. Indeed, the Jesinoski ruling may put the burden on creditors to take judicial action whenever they receive rescission demands within the three-year term in order to ensure that land titles, and collateral rights, are clear.

These courts also said that the justification for rescission is “remedial economy,” which would not be furthered by allowing a rescission claim to live on after unwinding a transaction becomes difficult.

Second, the courts that have required a suit be filed pointed to the Supreme Court’s previous decision in Beach v. Ocwen Federal Bank, which said that consumers attempting to block a foreclosure could not raise the rescission right for the first time outside the three-year term. In Jesinoski, the Supreme Court rejected the idea that Beach applied to attempts to rescind within the three-year term.

Petitions for appeal that raise the same issue in two other Eighth Circuit cases, Keiran v. Home Capital, Inc., and Bank of America, N.A. v. Peterson, remain pending before the Court. It is likely that the Jesinoski ruling will dispose of both appeals.

The case is Dkt. No. 13-684.

Supreme Court docket. For details about this and other petitions and cases pending before the Supreme Court, please consult this list of selected banking and finance law cases awaiting decision in the 2014 term.

Attorneys: David C. Frederick (Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C.) for Larry D. Jesinoski. Seth P. Waxman (Wilmer Cutler Pickering Hale and Dorr LLP) for Countrywide Home Loans, Inc., et al. Donald B. Verrilli Jr., Solicitor General for the United States. Jean Constantine-Davis for AARP Foundation, amicus curiae. Frank A. Hirsch (Alston & Bird, LLP) for Structured Finance Industry Group, Inc., amicus curiae. William M. Jay (Goodwin Procter LLP) for Professor Richard R.W. Brooks, amicus curiae. Kirk D. Jensen (BuckleySandler, LLP) for American Bankers Association, et al, amicus curiae. Barbara D. Underwood, Solicitor General for the State of New York.

Companies: America’s Wholesale Lender; BAC Home Loans Servicing, LP; Bank of America, N.A.; Countrywide Home Loans, Inc.; Countrywide Home Loans Servicing, L.P.; Mortgage Electronic Registration Systems, Inc.

MainStory: TopStory ConsumerCredit Loans Mortgages TruthInLending

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