Clarifying TILA's Extended Right of Rescission: Jesinoski v. Countrywide

In the recent case of Jesinoski v. Countrywide Home Loans, Inc., the Supreme Court of the United States ruled that a borrower seeking to rescind a loan pursuant to Section 1635(f) of the Truth in Lending Act ("TILA") need only submit written notice to the lender within three years of the loan's consummation to exercise the right to rescind the loan transaction rather than having to file suit seeking rescission within that period.

Section 1635(a) of TILA requires lenders to provide a notice and disclosure to borrowers in certain consumer credit transactions that contains various terms of the loan, such as annual percentage rate, amount the financing will cost and the amount loaned.[1] The purpose of the notice and disclosure is to "avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing."[2] For example, Congress believes such notice and disclosure will allow the borrower the opportunity to make informed choices when borrowing money and will educate the borrower in a simple and concise way about the terms of the loan. With this information, the borrower can better understand the consequences of the loan and his or her ability to pay it back and also is in a better position to make an "apples to apples" comparison to loans from other lenders.

Since the borrower frequently receives this notice and disclosure at or after the time of the execution of the loan documents, TILA affords the borrower a period of time to undo or rescind the loan. If a lender provides a correct and accurate TILA notice and disclosure, Section 1635(a) of TILA grants a borrower the unconditional right to rescind the loan until midnight of the third business day following the consummation of the transaction or the delivery of the disclosure, whichever is later, by providing written notice of the rescission to the lender. After the expiration of this three day period, the loan may not be rescinded under Section 1635(a).

If, however, the lender does not provide a correct and accurate TILA notice and disclosure to the borrower, Section 1635(f) of TILA gives the borrower the right to rescind the loan for a period of three years from the date of consummation of the transaction or the sale of the property, whichever comes first. It is this three year "extended" right of rescission that was addressed in the Jesinoski opinion. Prior to Jesinoski, there was inconsistency in the various federal circuits concerning the statute of limitations and the time period for filing a lawsuit seeking to rescind a loan based on the failure to provide a correct and accurate TILA notice and disclosure. Some circuits interpreted Section 1635(f) as requiring the actual lawsuit to be filed within three years; others required that only the written demand for rescission be sent within the three year period and the lawsuit could be filed within one year after the written rescission demand was denied by the lender.[3]

In Jesinoski, the borrowers refinanced their home mortgage on February 23, 2007. The borrowers later concluded that they did not believe the lender complied with TILA by failing to provide the borrowers with a sufficient number of copies of the TILA notice and disclosure. Based on this, the borrowers alleged that the three year rule under Section 1635(f) was applicable, rather than the three business day rule of Section 1635(a). Accordingly, on February 23, 2010 (exactly three years after the consummation of the loan), the borrowers provided written notice to the lender of their intent to rescind the loan under TILA. The lender replied and refused to acknowledge the right to rescind the loan. Almost one year later, the borrowers filed a lawsuit against the lender asking the court to rescind the loan and for damages.

The trial court concluded that the borrowers' action was not timely filed because it was not filed within three years of the consummation of the loan and the Court of Appeals for the Eighth Circuit confirmed the trial court's decision. The borrowers appealed to the United States Supreme Court and the Supreme Court reversed the Eighth Circuit decision and held that by mailing the lender a "written notice of their intention to rescind within three years of their loan's consummation . . . [they did] all that a borrower must do in order to exercise his right to rescind under [TILA]."[4] Accordingly, the one year statute of limitations under Section 1640(e) of TILA began to run from the date the bank rejected the borrowers' demand for rescission.

The Jesinoski opinion does not extend or change the period during which a borrower may notify the lender of the borrower's intention to rescind a loan under TILA. It does, however, clarify that a borrower does not need to file a lawsuit seeking enforcement of the borrower's right to rescind a loan within three years of consummation of the loan in order to timely file a claim under TILA for rescission. The Jesinoski opinion supports the Fourth Circuit's finding in Gilbert v. Residential Funding LLC, which held that the borrower has one year from the date of rejection of a rescission demand by the lender to file suit to compel rescission of the loan.[5] The Jesinoski opinion further emphasizes the importance for lenders to ensure that a proper TILA notice and disclosure is provided to the borrower at the consummation of the loan so that the extended right of rescission under Section 1635(f) may be avoided.

This article presents only a broad overview of a borrower's rights of rescission under TILA and should not be considered legal advice. Any questions concerning the Jesinoski opinion, compliance with TILA or the borrower's right of rescission should be referred to lender's counsel.

[1] This article does not address the specific requirements of a proper TILA notice and disclosure statement. Any questions concerning the compliance with TILA or other consumer protection statutes should be referred to counsel.

[2] 15 U.S.C. § 1601(a).

[3] Obviously the filing of the lawsuit is only required if the lender does not consent to the borrower's rescission demand. This article does not address or discuss the procedural steps in connection with the actual rescission of a loan under TILA.

[4] 135 S. Ct. 790, 790 (2015).

[5] 678 F.3d 271, 278-79 (4th Cir. 2012).