Thanks for the free house! Supreme Court to decide whether TILA permits rescission by letter
Posted on 11/19/2014 at 01:30 PM by John Lande
On November 4, 2014, the United States Supreme Court heard argument in Jesinoski v. Countrywide Home Loans. The case centers on disclosures required by the Truth in Lending Act, and borrowers' remedies if the bank fails to provide the necessary disclosures at the time the loan is consummated. TILA grants borrowers the right to rescind the entire loan transaction within three days after receipt of the TILA disclosures, but in no event more than three years from the date of the loan. A notice of rescission sets in motion a series of automatic steps. Most important, from a bank's point of view, is the requirement that the bank take possession of the home or loan funds within 20 days of the rescission notice. Failure to do so results in the bank forfeiting the property to the borrower. In practice, borrowers often use rescission notices as a defense to a foreclosure and many banks do not take the necessary steps under TILA to recover the property. The case's facts are all too common after 2007-2009. The borrowers obtained a loan and mortgage from a bank, and within three years defaulted on the loan. Facing the prospect of foreclosure, the borrowers sent the bank a notice that they did not receive the required TILA disclosure at the time they executed the loan and mortgage documents, and therefore were rescinding the loan transaction. The bank took no action after receiving the rescission notice. The borrowers then waited until after the three year period prescribed by TILA expired to file their lawsuit seeking an order that the bank's mortgage was invalid. The Eighth Circuit Court of Appeals dismissed the borrower's argument that they effectively rescinded the loan because the borrowers did not file their lawsuit within three years of the date of the loan. The Eighth Circuit reasoned that although TILA grants a right of rescission within three years of the date of the loan if TILA disclosures are not provided, the right may only be exercised via a lawsuit. At oral argument before the United States Supreme Court, the borrowers pressed the argument that TILA merely requires borrowers to send banks a written notice within three years of the loan transaction. After that, according to the borrowers, the bank must either file a lawsuit to clarify title and the effectiveness of the mortgage or live with a cloud over the real estate title. Countrywide, the defendant in the case, argued that TILA should not be read to permit borrowers to send a mere notice, and instead the proper interpretation is that Congress intended for borrowers to institute a lawsuit to rescind the loan transaction. The United States Supreme Court, at oral argument, was skeptical of Countrywide's argument and seemed to focus on the fact that Congress has chosen clear language for the TILA disclosure statute. While the Court still has to issue a written decision, the oral argument left Court observers with a feeling that the borrower's argument will ultimately prevail. This blog will continue to monitor the progress of the case, but banks should be aware that the Court will likely issue a decision that gives borrowers the ability to send a letter rescinding their loan transactions. At that point, the burden will be on banks to take appropriate legal action.
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