Why it matters

In a victory for consumers, the U.S. Supreme Court unanimously ruled that the Truth in Lending Act (TILA) does not require borrowers to file suit to rescind a mortgage loan transaction within the statute’s three-year period. Instead, written notice within the time limit will suffice, the justices concluded. The dispute arose after a married couple mailed a letter rescinding the loan within the three-year statutory period but filed a lawsuit four years and one day after the loan’s consummation. The bank argued the suit was time-barred. Both a federal court judge and the Eighth U.S. Circuit Court of Appeals agreed, dismissing the suit as untimely. But in a terse opinion authored by Justice Antonin Scalia, the Court reversed. All that TILA requires is timely written notice, he wrote, as the statute itself says nothing about filing suit. The opinion resolves a split among lower courts regarding the interaction between the one-year limitations period for TILA violations and the three-year rescission period, although it leaves lenders with some practical concerns where notices are received more than three days after the loan is consummated. Lenders may be forced to file suit upon receipt of written notice past the first three days in order to clarify the status of the loan, namely, to determine whether the lender failed to provide the requisite disclosures and therefore whether it must then release the mortgage.

Detailed discussion

On February 23, 2007, Larry and Cheryle Jesinoski refinanced the mortgage on their home by borrowing $611,000 from Countrywide Home Loans. Exactly three years later, the Jesinoskis mailed Bank of America (following its acquisition of Countrywide) a letter purporting to rescind the loan.

The bank replied with a letter refusing to acknowledge the validity of the rescission.

Four years and one day after closing, the Jesinoskis filed suit in federal court seeking a declaration of rescission and damages pursuant to TILA. The statute provides an unconditional right to rescind the transaction unilaterally within three days of the loan closing. If the lender fails to comply with TILA’s disclosure requirements, the statute extends the time period for rescission for “three years after the date of consummation of the transaction or upon the sale of the property, whichever comes first.” 15 U.S.C. Section 1635(f).

Section 1635(a) of the statute explains how the right to rescind is to be exercised, granting a borrower “the right to rescind . . . by notifying the creditor, in accordance with regulations of the Board, of his intention to do so.”

The Court held that the statutory language is unequivocal.

“The language leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind,” Justice Scalia wrote. “It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely. The statute does not also require him to sue within three years.”

The Court rejected the bank’s interpretation of Section 1635(f) that written notice does not suffice if the parties dispute the adequacy of the disclosures and thus the continued availability of the right to rescind.

“Although Section 1635(f) tells us when the right to rescind must be exercised, it says nothing about how that right is exercised,” the justices explained. “Section 1635(f) nowhere suggests a distinction between disputed and undisputed rescissions, much less that a lawsuit would be required for the latter.”

Language in Section 1635(g) allowing courts to “award relief” “in addition to rescission” simply makes clear that a court has options when fashioning remedies for borrowers, Justice Scalia said, and has “no bearing” on whether and how rescission under Section 1635(a) may occur.

Invoking common law, the bank also argued that rescission traditionally required that the rescinding party return what he received before a rescission could be effected or that a court affirmatively decree rescission. Although TILA disclaimed the former, “the negation of rescission-at-law’s tender requirement hardly implies that the Act codifies rescission in equity,” the Court said.

“The clear import of Section 1635(a) is that a borrower need only provide written notice to a lender in order to exercise his right to rescind,” the justices concluded. “To the extent Section 1635(b) alters the traditional process for unwinding such a unilaterally rescinded transaction, this is simply a case in which statutory law modifies common-law practice.”

To read the opinion in Jesinoski v. Countrywide Home Loans, Inc., click here.