By: Tracy M. Evans, Esq., Associate, Saxon, Gilmore, Carraway & Gibbons, P.A.
On January 13, 2015, the Supreme Court of the United States issued its opinion in the case of Jesinoski v. Countrywide Home Loans, Inc. The unanimous decision settles a circuit court split on what precise action is necessary for a borrower to rescind a transaction under the Federal Truth in Lending Act, 15 U.S.C. 1601 et. seq. (“TILA”), and may have some negative implications in the creditors’ rights arena.
Under TILA, borrowers have the right to rescind certain loan transactions. Normally, a borrower’s right to rescind a transaction expires at midnight on the third business day following the consummation of the transaction or the delivery of the required TILA disclosures, whichever is later. However, in instances where the creditor fails to provide the borrower with the required TILA disclosures, the time period to rescind the transaction is extended to three years from the date of the transaction.
Prior to the Supreme Court’s decision in Jesinoski, there was a circuit court split as to whether a borrower’s unilateral rescission notice to the creditor within the three year window was a timely exercise of a borrower’s right to rescind under TILA. The majority rule, adopted by the First, Sixth, Eighth, Ninth and Tenth Circuits, was that a borrower cannot unilaterally rescind his mortgage simply by notifying the creditor of his intention to do so within the three year window. Rather, in order to exercise his right of rescission, the borrower must file suit within three years from the consummation of the transaction.
The minority view, adopted by the Third, Fourth, and Eleventh Circuits, only required the borrower to provide notice of rescission within the three years, and permitted the borrower to file suit to enforce the rescission any time thereafter. Under this view, the borrower’s rescission notice to the creditor within the three year period is effective rescission of the loan, and the borrower is under no time constraint to bring an action to enforce the rescission if the creditor refuses to give effect to the notice.
In Jesinoski, the Supreme Court sided with the minority view, holding that a borrower is only required to notify the creditor of his intention to rescind the transaction within the three year period in order for the rescission to be timely. In reaching this holding, the Supreme Court looked at TILA’s plain language, finding that the unequivocal language of §1635(a) sets forth how the right to rescind is to be exercised, providing that a borrower “shall have the right to rescind…by notifying the creditor…of his intention to do so,” thus leaving no doubt that notice within the three year statute of limitations is all that is required for a borrower to effectively rescind the transaction.
The Jesinoski creditor did not dispute that §1635(a) requires only written notice of rescission within the three year period where it is undisputed that the required disclosures were not provided. However, where the creditor disputes the borrower’s contention that he was not provided adequate TILA disclosures, thus entitling the borrower to the extended three year rescission period, the Jesinoski creditor argued that the borrower is required to file suit to resolve the dispute within the three year period to effectively exercise his right to rescind.
The Supreme Court did not find any written distinction in TILA between disputed and undisputed rescission, and refused to read this requirement into the law. The Court also addressed the concern that TILA changes the common law requirement that the party seeking to rescind must return what he received from the transaction to effectuate the rescission. The Court, however, held that the TILA procedure that allows a borrower to unilaterally rescind a transaction with mere notice to the creditor, without having to first tender the money or property received in the transaction, is an instance where statutory law has modified common law.
Now, more than ever, creditors should review their practices and procedures to confirm that adequate measures are in place to ensure that borrowers in every loan transaction are provided with the appropriate TILA disclosures, including the required number of copies of the disclosures for each borrower. Creditors should also pay close attention to correspondence received from their borrowers, and take prompt action when a rescission notice is received from a borrower. Under TILA, a creditor is required to return the borrower’s money or property received from the transaction, and take any necessary steps to terminate the security interest within 20 days from receipt of the rescission notice. The decision in Jesinoski does not address what occurs if a lender disputes the rescission. This area of the law remains unsettled. Therefore, if for any reason the creditor believes the borrower is not entitled to rescind the transaction, the creditor should immediately contact an attorney upon the receipt of the rescission notice to determine the necessary course of action and to avoid any negative consequences of failing to act within the 20 day limit.
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