Oral Arguments Forebode Poorly for Lenders in Jesinoski v. Countrywide Home Loans, Inc.
How do borrowers rescind their mortgage loans under the Truth in Lending Act, 15 U.S.C. § 1635 (“TILA”)? By sending notice to the lender within three years of the transaction. That seems to be the majority of the Justices’ views based on oral arguments on November 4, 2014, in Jesinoski v. Countrywide Home Loans, Inc. According to Justice Breyer, getting out of that interpretation would take “Houdini.”
Under TILA, a borrower has the right to rescind the transaction “by notifying the creditor . . . of his intention to do so.” The borrower’s right of rescission, however, “shall expire three years after the date of consummation of the transaction.”
The issue is whether a borrower exercises her right to rescind a transaction under TILA by simply “notifying the creditor” in writing or must instead file a lawsuit within three years of the consummation of the transaction. The Third, Fourth, and Eleventh Circuit Court of Appeals have held the former. The First, Sixth, Eighth, Ninth, and Tenth Circuits have held the latter. Because of the split between circuit courts, the U.S. Supreme Court granted certiorari and will decide the issue.
The facts in Jesinoski were fairly straightforward. Exactly three years after consummating their $611,000 home loan and facing foreclosure, the Jesinoskis mailed notices to their lenders attempting to rescind the loan because of alleged violations of TILA, which requires certain disclosures. According to the Jesinoskis, they received the required disclosures but an insufficient number of copies of them to comply with TILA. The lenders denied their request to rescind but otherwise took no action. Almost exactly one year after mailing the letters to rescind, now more than four years after the loan, the Jesinoskis sued the lenders to rescind. The U.S. District Court for the District of Minnesota granted judgment to the lenders on the pleadings, finding TILA requires borrowers to bring a lawsuit within three years of the loan transaction. The U.S. Court of Appeals for the Eighth Circuit affirmed.
Lenders should take heart. Justices Scalia and Alito seemed to scoff at the idea that borrowers could exercise the right to rescission so long after the loan if they could not return the borrowed funds. The Justices also seemed to favor the interpretation of the U.S. government more than the interpretation of the Jesinoskis. The Jesinoskis’ counsel argued that the written notice automatically effects a rescission, whereas an assistant Solicitor General argued that borrowers can effect rescission only if their claim has merit, i.e., the borrowers did not in fact receive the required disclosures.
Although the Court has not yet issued its decision, oral arguments left Supreme Court observers believing that the Jesinoskis will prevail. Lenders should be aware, therefore, that the Court will likely give borrowers the ability to rescind their mortgage loans by sending lenders written notice. It will then be up to the lenders to take legal action to avoid rescission.