The Beukes Decision: A Helpful Clarification Regarding the Right of Rescission
Earlier this year, in Jesinoski v. Countrywide, the Supreme Court answered an important question regarding the procedure for rescinding a residential mortgage refinance loan under the Truth in Lending Act (“TILA”). Under TILA, if the disclosures provided by the lender to the borrower in connection with the consummation of the loan transaction are materially inaccurate, the borrower potentially can rescind the loan within three years of the closing. The question in Jesinoski was what specific steps the borrower needs to take in order to exercise that right and meet that three-year deadline. In particular, does the borrower need to sue the lender in court, or is it sufficient to mail a notice of rescission to the lender?
In Jesinoski, the Court held that it is sufficient for the borrower to mail a notice of rescission. However, that holding raised a new issue, namely: What are a lender’s options if the lender receives such a notice of rescission but disagrees with the borrower’s underlying position that the lender’s disclosures were materially inaccurate?
The Supreme Court did not address that issue, and thus for the time being it falls to lower courts to do so. The Eight Circuit Court of Appeals has led the way with its recent decision in Beukes v. GMAC Mortgage, LLC, 786 F. 3d 649 (8th Cir. 2015). As detailed below, the Eighth Circuit clarified certain important points concerning this issue.
In Beukes, within three years of closing on a residential mortgage refinance transaction, the plaintiffs sent a notice of rescission to GMAC Mortgage, LLC (“GMAC”), purporting to rescind based on the alleged inaccurate disclosure of the applicable finance charge. GMAC refused to rescind, and the plaintiffs sued. The lawsuit came more than three years after the closing. The threshold issue in the case was whether the plaintiffs’ failure to sue within three years was a fatal defect, and the Eighth Circuit accordingly stayed the case pending the Supreme Court’s decision in Jesinoski. Following Jesinoski, that issue fell away, and the Court had to face head-on the question of whether GMAC had responded to the rescission notice appropriately.
The Court found that GMAC’s response was appropriate, and concluded that the plaintiff’s case was without merit, because the disclosed finance charge was accurate within a reasonable degree of tolerance. The Court noted that, generally, for purposes of determining a borrower’s right to rescind under TILA, a disclosed finance charge is considered accurate if it “does not vary from the actual finance charge by more than an amount equal to one-half of one percent of the total amount of credit extended.” See 15 U.S.C. § 1605(f)(2)(A). However, if a borrower seeks to rescind “after the initiation of any judicial or nonjudicial foreclosure process,” a different rule applies: namely, the disclosure is accurate if it “does not vary from the actual finance charge by more than $35,” or, alternatively, is “greater than the amount required to be disclosed.” See 15 U.S.C. § 1635(i)(2) (“Rescission rights in foreclosure.”)
In Beukes, the disclosure allegedly was accurate under the first rule but not the second. To determine which rule applied, the Court focused on the chronological sequence of events regarding the plaintiffs’ notice of rescission vis-à-vis the commencement of foreclosure proceedings. The Court found that the notice preceded the foreclosure, and thus concluded that the first rule applied, the disclosure was accurate, and the purported rescission “was properly rejected by the lender.” Beukes, 786 F.3d at 653.
The Beukes decision suggests two key take-away lessons regarding a lender’s options if the lender disputes the borrower’s right to rescind.
First, according to Beukes, if the lender is correct that the underlying disclosures were accurate, and the borrower is wrong, then it is acceptable for the lender to reject the rescission, refuse to rescind, and carry on with business-as-usual in regard to billing the customer or prosecuting a foreclosure action. It is not necessary for the lender to affirmatively seek a determination in court to the effect that the purported rescission is void.
Second, where a borrower purports to rescind a loan prior to the commencement of a foreclosure action based on an allegedly inaccurate disclosure of a finance charge, the lender can use the more favorable “one-half of one percent” tolerance rule to determine whether the borrower is correct that the finance charge was disclosed inaccurately.
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