Supreme Court Issues Significant Decision Interpreting Truth In Lending Act

January 27, 2015 at 8:58 am Leave a comment

Written by: Evan Berquist

In a unanimous decision issued on January 13 of this year, the Supreme Court held that a borrower exercises its right to rescind a loan under Section 1635 of the Truth In Lending Act (“TILA”), simply by notifying its creditor of its intent to rescind within TILA’s three-year limitation period.   See Jesinoski v. Countrywide Home Loans, Inc., No. 13-684, 574 U. S. ___, ___, (2015) (slip op., at 3). The Court reversed a decision by the Eighth Circuit, which held that a borrower could exercise its rights only if it filed a lawsuit within the three-year period. Before Jesinoski, courts were divided about what was required to exercise a borrower’s rights under the statute: five circuits held that a borrower must file a lawsuit, while only three circuit courts held that mere notice was sufficient. Jesinoski thus resolved an important circuit split decisively in favor of the borrowers.

Truth In Lending Act (“TILA”), 15 U. S. C. §§ 1601 et seq.

Congress first passed TILA in 1968, in order to help consumers “avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing.” 15 U. S. C. § 1601(a). Among other things, the Act and its implementing regulations require lenders to provide certain mandatory disclosures to consumers in mortgage loan transactions. TILA also grants borrowers the right to rescind loan transactions within given time periods. For up to three days following the closing of a loan transaction, borrowers can rescind the loan for any reason. If the lender failed to make the disclosures required by TILA, however, the borrower has three years to rescind the loan. See 15 U.S.C. § 1635(f). The question presented in this case was what the borrower has to do to exercise its rights of rescission within the 3-year period.

Factual Background

In 2007, the Jesinoskis closed a loan transaction with Countrywide Financial Services, Inc. (“Countrywide”). Exactly three years after closing the transaction, the borrowers mailed notice to Countrywide of their intention to rescind the loan. One year and one day after that—or four years and a day after the loan closing—the Jesinoskis filed suit against Countrywide, seeking to rescind the loan.

Proceedings Below

In federal district court, Countrywide moved for summary judgment, arguing that the borrowers had failed to satisfy the Act’s limitation period. The district court agreed, citing binding precedent in the Eighth Circuit that “a suit for rescission filed more than three years after consummation of an eligible transaction is barred by TILA’s statute of repose.” The Eighth Circuit affirmed.

The Supreme Court’s Opinion

In a unanimous opinion authored by Justice Scalia, the Supreme Court reversed. The Court resolved the case as a matter of simple statutory construction. In particular, the Court relied on 15 U.S.C. § 1635(a), which provides that a borrower “shall have the right to rescind . . . by notifying the creditor, in accordance with regulations of the Board, of his intention to do so.”*  This language, the Court held, “leaves no doubt that rescission is effected when the borrower notifies the creditor of its intention to rescind.” The entire opinion went on for less than six pages, one of the shortest to be issued this Term.

In its opinion, the Court quickly rejected Countrywide’s arguments that rescission could result only from a lawsuit or judicial action. As Countrywide pointed out, under the common law doctrine of rescission, the borrower had to either tender the amount it had received to the lender (rescission at law) or receive a judicial decree of rescission (rescission at equity). The Court held that nothing in the Act, or in the Court’s jurisprudence, modifies “the clear import of 1635(a) . . . that a borrower need only provide written notice to a lender in order to exercise its right to rescind.”

Advocates for the financial services industry warn that the decision will harm consumers in the long run, by adding to clouds on title, incentivizing needless litigation, and injecting uncertainty into the mortgage market. As Countrywide argued in its brief, the circumstances presented in the Jesinowskis’ case—where a borrower sends notice of its intent to rescind but fails to bring a lawsuit within that time—already represented a “narrow, though frequently reprised, set of circumstances.” Following the Supreme Court’s decision, those circumstances are likely to become significantly more common. From now on, any bank that receives notice of a borrower’s intent to rescind a loan within three years of a loan closing should at least be prepared for the possibility of litigation.

* Following the events of this case, in 2010 Congress transferred rulemaking authority under the Act from the “Board” (Federal Reserve Board) to the Consumer Financial Protection Bureau. See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, as amended.

Entry filed under: CFPB, Client Alerts, Financial Institutions, Regulatory Guidance. Tags: , , , , .

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