SCOTUS Ruling Makes it Easier for Borrowers to Rescind Home Loan Under Truth in Lending Act
On January 13, 2015, the U.S. Supreme Court unanimously ruled that borrowers may reserve and effect their right to rescission by simply notifying creditors of their intent to rescind a loan within three years after receiving it. Notably, the decision only applies in instances where lenders do not fully disclose a borrowers' three-day right to rescind when using their home as security for a loan. The Court's holding in Jesinoski et al. v. Countrywide Home Loans Inc. not only reverses a September 2013 ruling from the Eighth Circuit, but also resolves a larger circuit split within the U.S. Courts of Appeal. The Court's holding embraced the approach followed by the Third, Fourth, and Eleventh Circuits, and overturned First, Sixth, Eighth, Ninth, and Tenth Circuit precedent which required borrowers seeking such rescission to bring a lawsuit against lenders within three years in order to effect rescission, rather than simply notifying the creditor of their intention to do so.
In its decision, the Court focused on Congress' underlying intent in passing the Truth in Lending Act to help consumers "avoid the uninformed use of credit and to protect consumers against inaccurate and unfair billing." 15 U.S.C. § 1601(a). The Act provides two different rescission rights to borrowers that take out loans in which the borrower's principal dwelling is used as a security interest (e.g. home-equity loans, home-equity lines of credit, and refinances of existing home mortgages). First, the Act gives borrowers the unequivocal right to rescission within three days after the transaction. Second, if the lender fails to provide federally-mandated disclosures notifying the borrower of the initial three-day right to rescission, it provides borrowers a right to rescission that may be exercised within three years after the transaction by notifying the creditor of their intention to rescind.
Larry and Cheryle Jesinoski brought suit against Bank of America after Countrywide Home Loans, Inc. (a subsidiary of Bank of America) refused to rescind a loan the Jesinoskis borrowed in order to refinance their home mortgage. The Jesinoskis sent their notice letter to rescind exactly three years after issuance of the loan. Countrywide refused to acknowledge the validity of a letter as a basis to rescind the transaction. One year after Countrywide’s refusal, the Jesinoskis filed suit. They did not prevail at either the district court or court of appeals because both courts held that the Act requires borrowers to bring suit within three years of the loan being issued in order to preserve the right to rescission.
The precise question before the Supreme Court was whether simple notification to lenders within three years is sufficient to preserve borrowers' right to rescission, or whether, as dictated by five appellate courts, borrowers must bring a lawsuit during that three year period in order to preserve that right. In the Court's opinion, Justice Scalia said that nothing in the Act requires a borrower to bring suit, and that, according to the language of the statute, the right to rescission is preserved when the borrower simply notifies the creditor of his intention to rescind within three years after the transaction.
The Consumer Financial Protection Bureau (CFPB), one of the federal agencies authorized to prescribe regulations to carry out the purposes underlying the Act, submitted an amicus brief in the case. The CFPB argued that borrowers' rescission rights, as expressed in the Act, strike a reasonable balance between the rights of lenders and borrowers by giving borrowers the right to rescind by simply sending notice, while limiting that right to a term of three years after the transaction occurs. The Court's ruling may provide some relief for borrowers that have taken on large amounts of debt without the long-term ability to discharge it. However, it is a cautionary ruling for residential lenders. Now, a borrower who is using their home as security for a loan has up to three years to rescind that loan if the lender does not disclose the borrowers' initial three-day right to rescind.
Jesinoski et al. v. Countrywide Home Loans Inc., No. 13-648 (S.Ct.)