Until today, courts were split over what steps borrowers must take to rescind a home loan. Some courts had ruled that a borrower simply had to send a rescission notice to his creditor within three years after taking out a loan. Others said the notice alone does not suffice; a lawsuit must be filed within three years after the transaction is consummated to obtain a judicial determination of the notice’s effect. This morning, in a unanimous decision, the country’s highest court held that the Truth in Lending Act (TILA) only requires borrowers to send a notice of rescission within three years to cancel a transaction.
In February 2007, the Jesinoskis refinanced the $611,000 mortgage on their Minnesota home. Exactly three years later, the Jesinoskis mailed a letter to their creditor rescinding the loan on the grounds they had not received two copies of a required disclosure document. Their creditor, Countrywide Home Loans (now part of Bank of America), denied the rescission as baseless because the Jesinoskis had acknowledged receipt of two copies of the required disclosures. The Jesinoskis sued, but the Minnesota District Court dismissed the case on limitations grounds. It held TILA required the Jesinoskis to sue within three years after the transaction was consummated. Because they did not, their claim was barred. The Eighth Circuit Court of Appeals agreed.
The Supreme Court reversed the lower courts. It noted that borrowers have three years to rescind mortgage refinance transactions if the creditor fails to make the required disclosures. Rescission is accomplished “notifying the creditor, in accordance with regulations of the [Bureau of Consumer Financial Protection], of his intention to do so.” Borrowers in different parts of the country faced different interpretations of “notify.” In the Eighth Circuit (where the Jesinoski case arose), as well as the First, Sixth, Ninth, and Tenth circuits, a borrower was required to file a lawsuit against the creditor before the three-year deadline. In the Third, Fourth, and Eleventh circuits, the debtor only needed to notify the creditor of the intention to rescind within this time. Today the Supreme Court held that the latter view was the correct one, and overturned the dismissal of the Jesinoskis’ complaint.
Justice Scalia, speaking for a unanimous court, stated that “the language [of TILA] leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind.” Nothing in the statute suggests that the borrower need also file a lawsuit within that three year period. The Jesinoskis satisfied the requirements of TILA by mailing a notice of their intent to rescind within three years of obtaining their loan. The Court’s also noted that TILA eliminated the common-law rule that a borrower must tender the proceeds received in a transaction for rescission to occur.
So what does all this mean? We think this: A borrower’s letter notifying a lender of an intent to rescind is itself the rescission. The loan is cancelled at the moment notice is given. In other words, rescission is not effected by a court, it is accomplished with a letter.
The lender’s choices upon receiving a rescission notice will be either to accept the rescission or dispute it. If accepted the lender must return all payments and terminate its security interest. The borrower then must tender the loan proceeds to the lender. Should the lender wish to contest the rescission notice, it should send a letter so stating to the borrower. Then either the lender or the borrower may file a declaratory judgment action to determine whether the notice was valid. Also, if the borrower defaults, the lender might file a foreclosure action or initiate nonjudicial foreclosure proceedings as appropriate. The borrower would then assert rescission as an affirmative defense to foreclosure or in a declaratory judgment action to halt a nonjudicial sale.
Remember, courts have the discretion to not only determine whether there is a proper basis for a rescission notice but also to reorder the creditor’s and debtor’s obligations in the event rescission was proper. Even if the rescission notice is well founded, a court can still require the borrower to show an ability to tender before forcing the lender to return funds and void a security interest. How all that works will be judge dependent but based on the language of this case fewer courts will require plaintiff to tender loan proceeds before the lender must satisfy its duties.
One thing is certain: The three years to file limitations defense is gone.