On January 13, 2015, in Jesinoski v. Countrywide Home Loans, Inc., Case No. 13–684, 574 U. S. ____ (2015), the U.S. Supreme Court held that if a borrower elects to rescind a transaction under the Truth in Lending Act, 15 U.S.C. § 1635 (TILA) because he or she did not receive all of the required disclosures, the borrower may have up to four years – not three – to file suit. In doing so, the Supreme Court broadly read TILA’s rescission rights and will force lenders to make difficult decisions on requests to rescind a loan made years after it was funded.
Under TILA, a borrower may rescind certain loans that grant a security interest in his or her residence. The normal time for rescission is three days; however, if the original creditor fails to make all required disclosures, the time for rescission may be extended to three years.
Violations of TILA are normally subject to a one-year limitations period. The interaction between the limitations period and the time for rescission was unclear, and lower courts had split. Some held that to rescind within three years, the borrower must file suit within three years. Others held that the borrower had three years to give notice of rescission, and then an additional year to file suit if the (current) lender refused to honor it.
The Supreme Court resolved this split by literally reading TILA. Justice Scalia noted that 15 U.S.C. § 1635(f)’s plain language “leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind.” Jesinoski at Slip Op. 3. “It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely. The statute does not also require him to sue within three years.”
What lenders may find troubling in Jesinoski is Justice Scalia’s method of analysis. Under common law, rescission was not effective unless the borrower tendered what he or she received in the transaction, i.e., a borrower could not rescind without returning the principal amount borrowed. In contrast, TILA provides a three-step rescission process:
- The borrower sends the notice
- The lender releases the mortgage
- The borrower returns what he or she received
“Within 20 days after receipt of a notice of rescission, the creditor shall return to the obligor any money or property given as earnest money, downpayment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction.” § 1635(b).
In foreclosure actions, courts had invoked their equitable powers and reversed steps 2 and 3, requiring a borrower to tender (or show an ability to tender) what he or she had received before they would require a lender to release the mortgage. SeeYamamoto v. Bank of New York, 329 F.3d 1167, 1171 (9th Cir. 2003) (holding that rescission under TILA “should be conditioned on repayment of the amounts advanced by the lender” and explaining that, because rescission is a remedy that restores the status quo ante, a borrower seeking rescission is required to tender the loan proceeds). If the borrowers could not tender, courts would not permit rescission. Some courts had gone so far as to require a borrower to plead in the complaint the ability to tender, and dismissed TILA complaints for rescission without such allegations.
The viability of these cases may be in doubt. Justice Scalia noted that while it was “true that rescission traditionally required either that the rescinding party return what he received before a rescission could be effected (rescission at law), or else that a court affirmatively decree rescission (rescission in equity), [TILA] disclaims the common-law condition precedent to rescission at law that the borrower tender the proceeds received under the transaction. 15 U. S. C. §1635(b).” Justice Scalia also reasoned that “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.”
In light of the Jesinoski decision, lenders now face difficult questions of how to handle rescission notices received more than three days after the close of a transaction. 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 20 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? After Jesinoski, there are no easy answers. Until the lower courts clarify these questions, lenders and their counsel should develop and articulate clear policies that are consistent with the borrower’s right to rescind, as upheld by the Court, and that protect the lender’s right to the return of the loan principal.