Jesinoski Update: TILA Rescission in a Post-Jesinoski World

Introduction

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A little over one year ago, the U.S. Supreme Court issued its ruling in Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790 (2015), which resolved a circuit court spit regarding how a mortgage borrower may exercise the right of rescission under the Truth-in-Lending-Act (“TILA”).

The right of rescission provided by TILA (15 U.S.C. § 1635) gives borrowers an extended right to rescind within three years if the lender has failed to provide to the borrower either the notice of rescission or accurate material disclosures.

Prior to Jesinoski, there was a circuit court split regarding whether, in order to exercise the extended right of rescission, borrowers only had to provide written notice of rescission or file a lawsuit within the three-year deadline.

The Supreme Court in Jesinoski found that Section 1635 “le[ft] no doubt that rescission is effected when the borrower notifies the lender of his intention to rescind,” and that “so long as [a] borrower notifies [the lender] within three years after the transaction is consummated,” the rescission is timely. The Supreme Court noted that “[n]othing in [TILA] suggests that a borrower need also file a lawsuit within th[e] three year period” and rejected the argument that written notice of rescission does not suffice if the lender disputes the availability of the rescission remedy, finding Section 1635 of TILA draws no distinction “between disputed and undisputed rescissions.”

While conclusively determining that rescission may be affected upon written notice, Jesinoski left open a number of issues regarding how rescission operates in practice after notice of rescission is provided.  Subsequent cases have provided some clarity with respect to this.

Timing of Rescission Process

Among the issues left open by Jesinoski is how the timing of the rescission process works.  Section 1026.23(d) of Regulation Z, which implements TILA, provides that upon rescission: (1) the security interest giving rise to the right of rescission becomes void and the borrower has no liability for any amount, including any finance charge; (2) within 20 calendar days after receipt of a notice of rescission, the creditor must return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest; and (3) when the creditor has complied with the requirements outlined in (2), the borrower must tender the money or property to the creditor (or, where the latter would be impracticable or inequitable, tender its reasonable value).  It also provides that the procedures outlined in (2) and (3) “may be modified by court order.”

Prior to Jesinoski, courts in many jurisdictions had exercised discretion in determining whether to require a rescinding borrower to repay the loan proceeds (i.e., to “tender”) before the lender is required to release its mortgage.   Cases decided subsequent to Jesinoski have continued to find that a court may require borrowers to produce evidence of an ability to tender as a condition to enforcing rescission.

For example, in Deutsche Bank Nat’l Trust Co. v. Gardner, 125 A. 3d 1221 (Pa. 2015), the court noted that while the default procedure upon notice of rescission is ordinarily for the lender to take steps necessary to reflect termination of the security interest and to return any property or money given by the borrower before the borrower must tender, Section 1026.23(d) “empowers the court to alter or reorder the procedure of the rescission.”  The court held that rescission may be conditioned on tender by the borrower because “a debtor’s inability to tender the funds delivered by the lender” would render termination of the security interest inappropriate.

Other courts have held, as some did before Jesinoski, that borrowers can state a claim for rescission without pleading that they have tendered or that they have the ability to tender.  See, e.g., Obeng-Amponsah v. Chase Home Finance, LLC, 624 Fed. Appx. 459 (9th Cir. 2015).

Rescission in the Bankruptcy Context

Jesinoski also raised concerns for lenders in the bankruptcy context, given the possibility of a bankruptcy court affirming the validity of a rescission without requiring a borrower to tender, and invalidating a lender’s mortgage lien as a result (which would in turn benefit unsecured lenders).  Subsequent decisions may ameliorate such concerns.

In In re Brown, 538 B.R. 714 (Bankr. E.D. Virginia 2015), the court noted that “there is a difference between giving notice of rescission and determining whether the loan is properly rescinded” and that “[g]iving notice of rescission does not . . . mean that the transaction must be unwound,” nor does it automatically void the loan “or cause the lender to ipso facto forfeit its loan.”  The court stated that a transaction will not be unwound “[i]f a borrower cannot tender [a] rescission payment within a reasonable time,” finding that it would be inequitable to allow a debtor to “achieve rescission without meeting his tender obligation” and thereby reduce the lender “to an unsecured creditor.”

Another bankruptcy court decision, In re Kelley, 2016 WL 281467 (Bankr. N.D. Cal. Jan. 21, 2016), similarly found that “courts can modify the sequence of events in th[e] rescission process” provided by Section 1635 and can refuse to enforce rescission when a borrower lacks capacity to tender.

Defenses to Rescission: Creditor’s Burden

Jesinoski also left open issues regarding the ability of creditors to assert defenses to rescission claims and their burden with respect to asserting such defenses.  One case that touched upon the issue of a creditor’s defense to rescission claims was Middleton v. Guaranteed Rate, Inc., 2015 WL 3934934 (D. Nev. June 25, 2015).  The court in this case rejected the argument that a creditor waves any defense to a TILA claim or lacks standing to defend against one if the creditor fails to file its own lawsuit for declaratory judgment as to the ineffectiveness of the rescission, finding the plaintiffs “cite[d] no authority for the proposition that one may waive a defense by electing not to affirmatively seek a declaratory judgment affirming the defense.”

Regarding the effect of the TILA statute of limitations on rescission claims and defenses to those claims, Jesinoski did not address whether a borrower must bring an action to remove a recorded lien within TILA’s general one-year statute of limitations or whether a lender must comply with any TILA time limitations to return funds paid by a rescinding borrower regardless of whether the borrower brings a lawsuit.  At least one post-Jesinoski court decision has provided support for the former.  In Jackson v. Bank of America, N.A., 2015 WL 5684121 (M.D. Ga. Sep. 28, 2015), the court found that TILA’s “one year statute of limitations for violations of rescission under [Section 1635] . . . runs from twenty days after a [borrower] provides notice of rescission,” and where a borrower does not file a lawsuit to enforce rescission within this time, the borrower cannot state a viable claim for rescission.

Another post-Jesinoski decision, however, indicates that even when a borrower fails to bring a lawsuit within the TILA statute of limitations, rescission may be effective as a matter of law if the creditor also fails to take action.  In Paatalo v. JPMorgan Chase Bank, 2015 WL 7015317 (D. Or. Nov. 12, 2015) the court noted that Jesinoski does not amount to a holding that “the process of unwinding a loan is automatic and complete upon a borrower’s written notice of rescission.”  However, the court found that under Section 1635, once notice of rescission has been provided, the creditor must either begin the unwinding process by returning the borrower’s money and taking action to reflect the termination of the security interest, or filing a lawsuit to dispute the plaintiff’s right to rescind.  If neither occurs within the TILA statute of limitations, the court concluded that “the rescission and voiding of the security interest are effective as a matter of law as of the date of the notice.”  Thus, according to this decision, the burden of filing suit is upon creditors if they believe a borrower’s rescission is improper or invalid.

Conclusion

Thus far, Jesinoski appears to have had limited impact in modifying preexisting case law regarding issues such as the timeline for rescission, whether borrowers can be required to tender as a prerequisite for enforcing rescission, and a creditor’s burden with respect to disputing the validity of rescission.  Decisions subsequent to Jesinoski have addressed such issues, though none appear to have reversed pre-Jesinoski precedent as of yet.  Nonetheless, the Jesinoski decision may still have some future impact in changing prior law regarding the rescission process and a creditor’s burden in disputing rescission.  Though the ultimate ramifications of the Jesinoski decision remain unclear, future decisions will likely continue to provide some clarity regarding how TILA rescission works in the post-Jesinoski world.

David Scheffel

David has extensive experience in consumer financial services litigation and co-chairs Dorsey’s Consumer Financial Services practice. He defends financial institutions against individual and class action claims alleging discrimination, predatory lending, violations of the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Fair Housing Act, the Equal Credit Opportunity Act, and disputes between lenders and securitization trusts.

Brent Ylvisaker

As an associate in Dorsey’s Finance & Restructuring Group, the types of areas in which he works include: banking regulations (e.g., affiliate transaction rules), consumer financial protection laws, Bank Secrecy Act and anti-money laundering regulations, financial data privacy and protection, state financial laws (including lending license requirements and usury laws) and e-commerce (e.g., E-SIGN and virtual currency).

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