The U.S. Supreme Court recently held that a home mortgage loan borrower need only provide written notice to the lender in order to exercise the right to rescind under the federal Truth in Lending Act (TILA) within the 3-year rescission period. The January 13 decision reversed a judgment of the Eighth Circuit Court of Appeals, which had held that TILA requires a borrower to file a lawsuit within the 3-year rescission period to exercise the right to rescind. The case involved a refinancing transaction in which the co-borrowers delivered a letter purporting to rescind the home mortgage loan within three years after the closing date. The lender responded by refusing to acknowledge the rescission's validity. The co-borrowers filed a lawsuit in federal court seeking a declaration of rescission and damages, but the lawsuit was filed more than three years after the closing date of the refinancing transaction. The federal district court granted the lender's motion to dismiss the case because the co-borrowers had not filed a lawsuit seeking rescission within three years of the closing date of the loan. The Eighth Circuit upheld the decision on appeal, following its holding in a 2013 case in which the court concluded that failure to file a suit for rescission within three years of the closing date extinguishes the right to rescind under TILA. The Supreme Court disagreed, deciding that a rescission is effected under TILA when the borrower notifies the lender of his intention to rescind.
Nutter Notes: The Court noted that TILA, at 15 U.S.C. § 1635(a), describes how the right to rescind is to be exercised. Section 1635(a) provides that a borrower "shall have the right to rescind . . . by notifying the creditor, in accordance with regulations of the Board, of his intention to do so." The Court said that this provision leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind. TILA grants borrowers an unconditional right to rescind for three days, after which they may rescind only if the lender has failed to satisfy TILA's disclosure requirements. In this case, the lender did not dispute that a borrower may rescind by delivering notice to the lender during the 3-day period immediately after the loan closing. However, the lender argued that 15 U.S.C. § 1635(f), which provides that 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," requires a borrower to file a lawsuit within three years seeking rescission if the parties dispute the adequacy of the disclosures provided by the lender under TILA. The Court's ruling means that a rescission notice delivered within three years after the closing will be effective to rescind the loan if it is determined that the lender has failed to satisfy TILA's disclosure requirements.