On January 13, 2015, the U.S. Supreme Court decided the case of Jesinoski v. Countrywide Home Loans, Inc. which settled once and for all a set of split decisions between the various U.S. District Courts of Appeal regarding the exercise of the right of rescission when that right has been extended due to a creditor's failure to give notice of the right of rescission or to make the necessary material disclosures required by the Truth In Lending Act and Regulation Z. Before getting into the details of that case, a brief refresher on rights of rescission is in order.
Everyone is familiar with the basic right to rescind. That provision of the Truth In Lending Act and Regulation Z requires delivery of a notice and certain required disclosures to all persons entitled to rescind when a security interest is taken in a consumer's principal dwelling. The consumer then has until midnight of the third business day following the closing of the loan, the delivery of the notice or delivery of the required disclosures, whichever occurs last. If the required notice and/or material disclosures are not delivered in correct form and content, then the right of rescission is extended until three years after closing.
The "notice", of course, is the actual notice of the right to rescind. The "material disclosures" that must accompany the notice are the TILA-required disclosures of the annual percentage rate, the finance charge, the amount financed, the total of payments, the payment schedule, as well as the disclosures required for High-Cost mortgages (HOEPA loans) by Section 1026.32(c) and the limitations imposed on those loans by Section 1026.32(d) (balloon payments, negative amortization, prepayment penalties, etc.) and, finally, the prepayment penalty limitations on those loans subject to the ability to repay requirements of Section 1026.43(g).
Now to the Jesinoski case. In this case, Mr. and Mrs. Jesinoski took out a loan that was subject to the right of rescission. The case does not discuss either the failure to provide the necessary rescission notice or the necessary material disclosures. Instead, it focuses on the act of rescission itself and what rescission requires.
The Jesinoskis mailed a letter rescinding their loan exactly 3 years after loan closing. Shortly thereafter, their lender, Bank of America Home Loans, replied, refusing to acknowledge their rescission. One year later the Jesinoskis filed suit seeking a declaration of rescission and damages. The lower court agreed with the lender that TILA requires a borrower seeking rescission to file suit within 3 years of loan closing.
The U.S. Supreme Court had no trouble overturning that ruling. In a unanimous decision, the Supreme Court found that the clear language of TILA leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind. The statute does not require him to file suit within 3 years.
This decision resolved what had previously been an unsettled question. Some circuits had ruled that the borrower needed to file suit within the 3 year period in order to exercise the right to rescind.
Practice Pointer: As a result of the Supreme Court's decision, a lender that receives a notice of rescission in the extended 3 year rescission period should promptly file suit against the borrower to review the validity of the rescission itself and, if the rescission is valid, to seek a return of loan principal as a condition of the loan's rescission.
When rescission occurs, the loan transaction unwinds. The lender must reimburse the borrower for all interest paid, and ultimately the borrower must repay the outstanding balance. However, the Jesinoski decision makes it clear that borrowers are entitled to litigate their case for rescission prior to reaching a determination that the borrower has the ability to pay off the principal balance. That fact may lead to more frivolous claims of rescission, especially in foreclosure situations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
