U.S. Supreme Court Holds TILA Does Not Require Borrower to File Suit to Rescind Transaction

The United States Supreme Court recently held in Jesinoski v. Countrywide Home Loans, Inc., et al., 574 U.S. -- (2015), that the Truth in Lending Act's ("TILA") rescission provision, 15 U.S.C. § 1635, does not require a borrower to file a lawsuit within the three-year time period under 15 U.S.C. § 1635(f) in order to rescind. The Jesinoski borrowers had refinanced their mortgage in 2007. Exactly three years later, the borrowers sent their lender and loan servicer a letter purporting to rescind the transaction. The lender and loan servicer refused to acknowledge the rescission. One year and one day after sending their rescission letter, the borrowers filed suit in federal district court against the lender and loan servicer, seeking a declaratory judgment and damages. The defendants moved for judgment on the pleadings, arguing that TILA required the borrowers to file a lawsuit in order to rescind. The parties' dispute concerned section 1635 of TILA, which governs the means by which a borrower may rescind and the time period during which a borrower may do so. As to the means, section 1635(a) simply provides that a borrower may rescind "by notifying the creditor, in accordance with regulations of the Bureau, of his intention to do so.As to timing, section 1635(a) allows a borrower to rescind within the later of two periods: (1) until midnight of the third business day following the consummation of the transaction; or (2) after the lender provides the disclosures required by TILA. However, section 1635(f) places an outer limit on the right to rescind, providing that the "right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first." The district court granted the defendants' motion for judgment on the pleadings, holding that section 1635(a) requires a borrower to file suit in order to exercise his right of rescission. The Eighth Circuit Court of Appeals affirmed, holding that section 1635(f) extinguishes the right to rescission if the borrower does not file suit within three years. Reversing the lower courts, the U.S. Supreme Court held that TILA's plain language only requires a borrower to notify the lender of its intention to rescind within the requisite time period. The Court noted that, although section 1635(f) puts an outer limit on when the right to rescind may be exercised, it says nothing about how the right must be exercised. The defendants conceded that written notice would be adequate for a rescission being exercised within three business days following consummation of the transaction. The defendants further conceded that written notice would suffice if the creditor conceded that it provided inadequate disclosures. However, the defendants argued that written notice does not suffice where, as in Jesinoski, the creditor disputed the inadequacy of the disclosures. Rejecting this argument, the Court noted that nothing in section 1635(a) distinguishes between undisputed and disputed rescissions, let alone makes a lawsuit a requirement for the latter. In further support of their position, the defendants pointed to section 1635(g), which provides: "In any action in which it is determined that a creditor has violated this section, in addition to rescission the court may award relief under section 1640 of this title for violations of this subchapter not relating to the right to rescind." The defendants argued that, because 1635(g) allows courts to rescind a transaction, rescission therefore must be obtained through the courts. Rejecting this argument, the Court held that while 1635(g) allows a court to award rescission, it has no bearing on whether and how borrower-initiated rescission under section 1635(a) may occur. The Court also rejected defendants' attempt to invoke common-law rescission principles. While acknowledging that common law generally requires a contracting party to obtain a judgment in order to effectuate a rescission, the Court held that section 1635 of TILA "is simply a case in which statutory law modifies common-law practice."

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