Supreme Court Clarifies Rescission Right Under the Truth in Lending Act

On January 13, 2015, the U.S. Supreme Court issued its decision in Jesinoski et us. V. Countrywide Home Loans, Inc., et al. (No. 13-684) addressing a split in the appeals courts regarding what a borrower must do to rescind a home mortgage by the three-year deadline provided under the Truth in Lending Act (“TILA”).

Under TILA, the lender on certain home mortgage refinancings or home equity lines of credit must provide certain disclosures to the borrower. The borrower then has three days after receiving these disclosures to rescind the loan, and then give the money back.  However, if the lender fails to provide the required disclosures or the disclosures are found to be inaccurate, the borrower has up to three years to notify the lender that he or she wants to rescind the mortgage.

The issue has been what is borrowers must do to exercise their rescission right. Some courts have held that a written notice is all that is required within the three year deadline, while other courts have held that a lawsuit seeking rescission must be filed within the three years.

The U. S. Supreme Court unanimously held in its ruling that the statute states the borrower can rescind the mortgage simply by notifying the lender, and there is no requirement in the law that a lawsuit has to be filed within that time frame. This decision is a blow to lenders who are seeking ways to stem the bleeding from foreclosures that drag out for years.

The purpose of a rescission right under consumer protection laws is to provide protection for homeowners from deceptive or abusive lending practices. If a homeowner closes on a mortgage loan that is subject to the act only to learn that critical information on the fees or interest charged  as not communicated correctly, if at all, in violation of federal disclosure requirements, then that homeowner would have the right to seek rescission of the mortgage and return the money.

In practice, things are a little murkier. A rescission cannot be completed unless the borrower gives the money back.  However, it is not uncommon for borrowers that do not have the means to repay, to use the rescission process as a stall tactic because it allows them to remain in the home without making payments during this process. Also, a lot of gamesmanship comes into play, as the rescission notice is often filed on the last possible day before the three year deadline expires.  Lenders believe that requiring borrowers to file a lawsuit seeking rescission by the three year deadline would help weed out those who know their claims are frivolous and are using the process merely as a stall tactic.

In 2010, the Federal Reserve Board proposed new rules that would provide clarifications to rescission claims in court proceedings as well as other changes to rules under TILA. However, the proposed changes were never implemented and jurisdiction over TILA regulations has been transferred to the Consumer Financial Protection Bureau.

While lenders have legitimate concerns, it is not up to the courts to rewrite TILA or the TILA regulations. Maybe it is time for Congress to step in and bring some reason into the process.

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