May a borrower simply provide written notice to a creditor to exercise a statutory right to rescind a home-secured loan under the Truth In Lending Act, or must the borrower file a lawsuit to exercise that right?
This case presents the Supreme Court with an opportunity to determine the procedural requirements for exercising the right to rescission under the Truth In Lending Act (“TILA”). The Jesinoskis argue that if a creditor fails to strictly comply with TILA’s terms, then borrowers only need to provide written notice in order to rescind a loan any time within a three-year period. Meanwhile, Countrywide maintains that any rescission occurring after the first three days of the loan requires a lawsuit if the rescission is contested by the creditor. This case ultimately will determine who bears the cost of litigation in rescinding home-secured loans, and also determines the scope of TILA’s protection for borrowers.
Questions as Framed for the Court by the Parties
The Truth in Lending Act provides that a borrower “shall have the right to rescind the transaction until midnight of the third business day following . . . the delivery of the information and rescission forms required under this section ... by notifying the creditor ... of his intention to do so.” 15 U.S.C. § 1635(a). The Act further creates a “[t]ime limit for [the] exercise of [this] right,” providing that the borrower’s “right of rescission shall expire three years after the date of consummation of the transaction” even if the “disclosures required ... have not been delivered.” Id. § 1635(f).
The question presented is:
Does a borrower exercise his right to rescind a transaction in satisfaction of the requirements of Section 1635 by “notifying the creditor” in writing within three years of the consummation of the transaction, as the Third, Fourth, and Eleventh Circuits have held, or must a borrower file a lawsuit within three years of the consummation of the transaction, as the First, Sixth, Eighth, Ninth, and Tenth Circuits have held?
On February 23, 2007, Larry and Cheryle Jesinoski refinanced their home for a $611,000 loan from Countrywide Home Loans. At the closing of their loan, Countrywide provided the Jesinoskis with a Truth In Lending Act (“TILA”) disclosure and two copies of a notice that informed the Jesinoskis that they had the right to rescind their loan agreement within three days of the closing. As part of the closing, the Jesinoskis signed an acknowledgment of their receipt of the TILA disclosure and two copies of the notice of the right to cancel. The Jesinoskis did not rescind their agreement within the three-day period, and Countrywide issued their loan.
Exactly three years after the date of their loan closing, the Jesinoskis sent a letter to Countrywide and all other interested parties (collectively “Countrywide”) that they were rescinding their loan agreement. The Jesinoskis cited a TILA provision that permitted rescission within three years of the closing date if the creditor failed to comply with TILA. Specifically, the Jesinoskis alleged that Countrywide failed to provide them with the required number of TILA disclosure copies. Countrywide refused to permit the loan rescission, leading the Jesinoskis to file a lawsuit on February 24, 2011 in the United States District Court for the District of Minnesota to void the loan agreement.
At the District Court, Countrywide moved for a judgment on the pleadings, which is functionally similar to arguing that the Jesinoskis’ did not have a valid claim. The District Judge, Donovan Frank, issued an opinion on April 19, 2012, granting Countrywide’s motion. In granting Countrywide’s motion, Judge Frank noted that TILA imposes a three-year statute of repose for rescission claims. Judge Frank concluded that, “a plaintiff’s suit for rescission is barred . . . if the suit is not filed within the statutory three-year period.” Because the Jesinoskis filed their suit one year and one day after the three-year limit, the suit was barred.
The Jesinoskis filed an appeal with the United States Court of Appeals for the Eighth Circuit. The Eighth Circuit affirmed the District Court’s judgment, writing that, “[t]his Court recently weighed in on the circuit split regarding this precise issue and held that a party seeking to rescind a loan transaction must file suit within three years of consummating the loan.”
The parties in this case disagree over the method by which a borrower exercises his or her right to rescind a transaction under TILA. The Jesinoskis argue that if a creditor has violated TILA, a borrower exercises this right by informing the creditor of his or her intention to do so within three years of the closing. However, Countrywide argues that if the creditor disputes the borrower’s right to rescind, the borrower must file a suit within three years in order to rescind the transaction.
THE PLAIN LANGUAGE AND STRUCTURE OF TILA
The Jesinoskis argue that the plain text of TILA’s section 1635(a) establishes that a borrower exercises the right to rescind the transaction by informing the creditor of his or her intention to do so. The Jesinoskis assert for TILA, that Congress intended the ordinary meaning of the word "notify." They refer to the definition of the verb “to notify,” pulled from dictionaries and legal dictionaries contemporaneous to the enactment of the Act, to support the assertion that the ordinary meaning of “notify” is “to inform,” or “to make known.” Therefore, the Jesinoskis conclude, the plain language of the statute indicates that a borrower has exercised his right to rescind by simply notifying the creditor. The Jesinoskis argue that the word “notify” is used in other sections of the statute to refer to providing information, which further supports that Congress intended its ordinary meaning in section 1635(a). Additionally, the Jesinoskis assert that interpreting section 1635(a) to require a borrower to file a lawsuit is inconsistent with section 1635(b), which establishes a series of procedures governing rescissions. For example, the Jesinoskis note that section 1635(b) establishes that the creditor must return the borrower’s money within twenty days after receiving notice of the borrower’s intention to rescind the transaction. The Jesinoskis maintain that such a time limit would not exist if the borrower had to file a suit, given the extended period of time that a lawsuit would take.
Countrywide counters that section 1635(a) establishes how a borrower notifies a creditor of the borrower’s intention to exercise the right to rescission, but it does not specify how the borrower actually exercises that right. Countrywide contends that the procedures established by section 1635(b), which are used when the borrower expresses an intent to rescind the transaction in the first three days after closing, may also be used if the rescission is not contested. However, Countrywide argues, section 1635(g) becomes relevant when the creditor disputes that there has been a violation of TILA. Countrywide notes that section 1635(g) speaks of a court awarding rescission as a remedy. Countrywide asserts that by including this section, Congress recognized that a creditor may deny violating TILA, thus disputing whether a borrower has a right of rescission, and that in those cases, a borrower would need a court to determine that he or she has the right, through a lawsuit, before the borrower could exercise it.
The Jesinoskis also contend that section 1635(f), which establishes the "three-year time limit on the right to rescind," is not worded as a statute of limitations, which would limit when a person could file a suit, but instead refers to the expiration of the right. Section 1635(f), the Jesinoskis argue, says nothing about how a borrower must exercise the right to rescind, but rather specifies a time limit by which the right must be exercised. According to the Jesinoskis, this indicates that a suit brought after the time limit ended is timely, as long as the right to rescind was exercised by informing the creditor of the intent to do so before three years has elapsed.
In opposition, Countrywide argues that section 1635(f) establishes that a borrower must bring such a suit within three years from the date of the closing of the transaction. Countrywide notes that section 1635(f) states that the right of rescission expires three years after the closing of the transaction and that it is not enforceable once that time limit has expired.
COMMON LAW RESCISSION
The Jesinoskis argue that Congress intended, through TILA, to codify the law that already existed in judicial decisions, the common law principles of rescission, which dictated that a plaintiff exercises the right to rescission by notifying the defendant that the plaintiff intends to rescind the transaction if the plaintiff also tenders restoration. The Jesinoskis argue that according to common law principles, if the non-rescinding party disputes the rescission, the plaintiff will need to bring a suit to obtain restitution, but that the rescission still occurs when the plaintiff notifies the non-rescinding party. Therefore, according to the Jesinoskis, the plaintiff rescinds and the court later awards a judgment for restitution if needed. Similarly, here, the Jesinoskis conclude, they accomplished rescission when they informed Countrywide of their intention to rescind.
On the other hand, Countrywide argues that the procedure for rescission under TILA more closely resembles rescission in equity, a separate set of procedures and remedies. Countrywide notes that in past judicial decisions, a borrower accomplished rescission upon both notice of intention to rescind and return of the benefit received from the loan. By separating notice and return of benefit, Countrywide argues, Congress intended to create a scheme more similar to equitable rescission, which would require a suit to accomplish the rescission. Countrywide also refers to section 1635(g), which states that a court may “award” rescission, to support this contention.
REGULATION Z AND DEFERENCE TO AGENCY INTERPRETATION
The Jesinoskis assert that the Federal Reserve Board (“Board”), in Regulation Z, interpreted TILA and established that a borrower exercises the right to rescind a loan by notifying the creditor by written communication. They further claim that the Court should give deference to this agency’s interpretation, because Congress intended for the Board to enact rules to implement TILA and because the Court has afforded deference to the Board’s interpretation of TILA before. Further, the Jesinoskis note, Congress created the Consumer Financial Protection Bureau (“Bureau”) in 2010, and the Bureau did not change Regulation Z. he Jesinoskis argue that because the Bureau’s interpretation is a reasonable one it should be accepted by the courts.
Countrywide, however, argues that the Court should not give deference to Regulation Z because in TILA, Congress unambiguously expressed its intent that borrowers will need to file a lawsuit to exercise the right of rescission when the rescission is contested. Countrywide further argues that even if the Court determines that TILA is ambiguous, Regulation Z does not provide clarity on the issue of how a borrower rescinds a transaction because it only lists one requirement of several that a borrower must meet in order to rescind a transaction. Moreover, Countrywide asserts that the Bureau did not base its view on how a borrower accomplishes rescission on any relevant expertise and has not provided any evidence that its reading of the statute conforms to Congress’ intent. Rather, according to Countrywide, the view expressed by the Bureau disregards vital features of both TILA’s text and Congress’ intent.
This case presents the Supreme Court with the opportunity to resolve a conflict between borrower and creditor protection within the Truth In Lending Act (“TILA”). The Jesinoskis and amici argue that TILA is an unqualified borrower protection statute that enables individuals to escape from predatory loans within a three-year period. Meanwhile, Countrywide and amici argue that Congress’ 1974 TILA amendments purposefully limited borrowers’ rescission rights to three years because of the original TILA’s potential for widespread borrower abuse. This case will ultimately affect the level of federal protection for borrowers, as well as clarify whether creditors or borrowers bear the burden of initiating litigation when a loan is contested.
CREDITOR VERSUS BORROWER FRAUD
The Jesinoskis and amici argue that TILA permits borrowers to unilaterally rescind certain loan agreements simply by providing written notice. The United States, writing as an amicus, contends that the purpose of providing borrowers with a straightforward rescission right was to combat the prevalence of predatory home-secured loans. The Jesinoskis and amici argue that Congress never intended to require borrowers to bring suit to exercise their TILA rights in order to make the rescission right straightforward. Indeed, they argue that a plain-text reading of TILA confirms this position.
Further, twenty-six states and the District of Columbia, as amici, argue that maintaining the borrower’s unilateral rescission right would “incentivize due diligence on the part of lenders” to comply with TILA. Furthermore, the States argue, rescission serves as a deterrent against bad lending practices, forcing lenders to give adequate disclosures to consumers; however, requiring a lawsuit for rescission would weaken this deterrent because it would be more difficult for consumers to exercise rescission. The States also caution that requiring borrowers to do more than provide written notice of rescission would lead creditors to stall in responding to a borrower’s rescission notices due to the chance that the borrower will fail to initiate a lawsuit in time.
In contrast, Countrywide argues that Congress intended to strike a balance between borrower and creditor protection in TILA following its amendment in 1974. Countrywide and amici argue that rescission claims often arise when a borrower nears default and attempts to exercise a TILA rescission by falsely claiming a TILA violation in order to escape foreclosure. To mitigate some of the open-endedness available to borrowers, they claim, Congress purposefully placed a time limit of three years on rescission in order to prevent the possibility of indefinite rescission rights.
Even without the temporal limit, Countrywide argues, Congress never intended for borrowers to have a unilateral, indefinite rescission right. Instead, Countrywide argues, TILA was intended to permit notice for unconditional rescission only before the creditor disbursed the loans to the borrower. Countrywide notes that typically a creditor may contest a rescission claim by a borrower after the loans were disbursed, which requires a lawsuit for judicial intervention. Creditors, amicus American Bankers Association (“ABA”) argues, may contest rescission by proving that there was no TILA violation, and therefore maintain the validity of the credit agreement.
BEARING THE BURDEN OF INITIATING LITIGATION
The Jesinoskis urge that borrowers should not be responsible for initiating lawsuits to exercise their right to rescission. First, the Jesinoskis contend that a TILA rescission should be “completed privately and without litigation.” Further, some states as amici express concern that there is a real shortage of attorneys available to represent borrowers subject to foreclosure actions. Therefore, they assert that creditors are in a better position to pursue litigation than borrowers.
Meanwhile, Countrywide argues that borrowers should initiate rescission litigation, rather than the creditor. Countrywide argues that requiring borrowers to file lawsuits for rescission would ensure frivolous claims are not filed in court. Moreover, the ABA, writing as an amicus, argues that requiring creditors to bear the burden of initiating numerous lawsuits over TILA rescission claims would end up costing borrowers more than if an individual borrower initiated a lawsuit. Specifically, the ABA argues that most frivolous rescission claims are brought by borrowers who are unable to pay their mortgages, and thus are unable to pay their legal costs. The ABA maintains that these costs will ultimately be passed on to non-defaulting borrowers through increased borrowing costs.
The Court, in this case, will likely determine the procedural requirements for exercising TILA’s right to rescission. The Jesinoskis argue that if a creditor fails to strictly comply with TILA’s terms, then a borrower only needs to provide written notice in order to rescind a loan any time within a three-year period. On the other hand, Countrywide maintains that any rescission occurring after the first three days of the loan requires a lawsuit if the rescission is contested by the creditor. This case will likely determine who bears the cost of litigation in rescinding home-secured loans and the scope of TILA’s protection for borrowers.
The authors would like to thank Professor Cynthia Farina for her guidance.
- Laurence Hurley: U.S. justices agree to hear homeowner case against bank, Reuters (Apr. 28, 2014).
- Brent Kendal: Supreme Court to Consider Case on Rescinding Mortgage Loans, The Wall Street Journal (Apr. 28, 2014).