Violation of the Truth in Lending Act Only Requires Written Notice by the Borrower

January 2015

This week the United State Supreme Court unanimously held that a mortgage borrower may rescind a mortgage agreement based upon a lender’s violation of the federal Truth in Lending Act (TILA) by sending written notice to the lender within three years of close of escrow. This decision reverses a prior Eighth District Court of Appeals ruling that a borrower must file a lawsuit, not merely provide written notice, within the applicable three year period. [Jesinoski et ux. v. Countrywide Home Loans, Inc., et al., January 13, 2015]

On February 23, 2007, petitioners Larry and Cheryle Jesinoski refinanced a $611,000 mortgage with lender Countrywide Home Loans. Exactly three years later, on February 23, 2010, the borrowers mailed a letter to Countrywide, seeking to rescind the loan. The lender (now Bank of America, following its purchase of Countrywide), refused to rescind the mortgage, prompting the borrowers to file suit.

The district (trial) court granted a motion for judgment on the pleadings on behalf of the lender, ruling that the borrowers need to file suit (instead of just providing written notice), within three years of the loan’s inception. The district court determined that whenever a borrower (called a mortgagee) seeks to rescind a loan for violation of the federal TILA, a lawsuit must be filed within the three year statute of limitations period. The Eighth Circuit Court of Appeals affirmed the district court’s decision, but the United States Supreme Court reversed.

Interpreting the TILA, the Supreme Court held that when a borrower seeks to rescind a loan based upon claims that there were inadequate disclosures under the Truth in Lending Act, there was no requirement that a lawsuit be filed within three years. The court held that written notice of the intention to rescind within the three year limitations period would be sufficient.

The federal Truth in Lending Act (TILA) requires specific disclosures to be provided to any person who takes out a residential mortgage. TILA has been used in recent years by homeowners who are “upside down” in their mortgages to effectively wipe out their mortgage agreements with lenders based on the lenders’ alleged failure to provide the required disclosures. These disclosures can be quite detailed and during the last real estate boom, many institutional lenders were remiss (most often negligently, but sometimes intentionally) in meeting the requirements under TILA.

This recent Supreme Court decision provides a further weapon in the arsenal of homeowners who are seeking to rescind their mortgages when their home equity was upset by the Great Recession beginning in 2008. For risk management and evaluation purposes, mortgage lenders need to exercise great care to assess whether mortgage agreements comply with the TILA’s requirements. Moreover, a simple written letter (or perhaps even an email) is now sufficient notice under TILA to exercise the right and potential remedy of rescission of the mortgage agreement.