The U.S. Supreme Court recently held in Jesinoski v. Countrywide Home Loans, Inc. that borrowers exercising their right to rescind mortgages under the Truth in Lending Act (“TILA”) only need to provide written notice to creditors within three years of the loan being issued, instead of bringing a lawsuit within that period. The high court concluded that TILA only states “when the right to rescind must be exercised, but says nothing about how that right is exercised.”
TILA vests borrowers with the right to rescind certain loans up to three years after the loans were issued, where borrowers do not receive mandated disclosures. Specifically, the Act’s unequivocal terms provide that a borrower “shall have the right to rescind … by notifying the creditor … of his intention to do so.” However, since homeowners’ rights were expanded under TILA in 1980, courts have interpreted the statute differently and confusion has resulted in determining how borrowers must procedurally “notify the creditor” of their intention to rescind loans.
In the unanimous decision authored by Justice Antonin Scalia, the Supreme Court held that the key provision requiring that borrowers “notify the creditor” in order to exercise their right to rescind mortgages under TILA “leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind. It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely. The statue does not also require him to sue within three years.”
The Supreme Court’s decision in Jesinoski reverses a September 2013 Eighth Circuit ruling and resolves a split among lower courts regarding whether TILA requires borrowers to file a lawsuit or merely provide notice to creditors in order to rescind a mortgage within three years of the home loan’s origination. Five appellate circuits had found that borrowers were required to file a formal lawsuit in order to exercise their right to rescind, whereas three circuits ruled that borrowers merely had to notify their creditor of their intent to rescind.
Jesinoski’s Impact on Lenders and Borrowers
The Jesinoski ruling has significant consequences for both lenders and borrowers. Not surprisingly, Countrywide has warned of the risk that frivolous claims of rescission will rise. While arguably the Supreme Court’s holding does not expand homeowners’ substantive rights under TILA, it certainly relaxes the procedural requirements in order for borrowers to exercise their right to rescind mortgages, ultimately making it easier for borrowers to abandon underwater properties. As a result, the decision highlights the need for lenders to strictly comply with the disclosure requirements of TILA and ensure that proper internal protocols are set in place.