TILA versus TILA: Rescission by Notice or Lawsuit


Commentary and Analysis

Regulation Z
Section 1635









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Here's something to ponder on:


"Whether the Truth in Lending Act entitles homeowners to rescind their mortgage commitment by notifying the lender in writing within the period specified by the statute, or whether the homeowner must file a lawsuit to make the rescission effective."


The foregoing ponderable - ably condensed into a single contemplation by the American Civil Liberties Union in announcing its amicus brief - is expected to be adjudicated by the US Supreme Court in its next term. The ACLU's amicus brief is in favor of written notification.


Before we get started, it should be noted that the ACLU is hardly alone in offering an amicus brief favoring written notification: Attorney General of New York, Eric T. Schneiderman, has announced that he is leading a coalition of more than 25 states in filing an amicus brief urging the U.S. Supreme Court "to uphold consumer rescission rights under the federal Truth in Lending Act (TILA).


Indeed, in addition to the private litigants, the United States as well as several organizations have filed an amicus brief in favor of written notification, such as the American Association of Retired Persons, National Consumer Law Center, National Association of Consumer Advocates, and the Center for Responsible Lending.


Given the immense legal implications, especially with respect to the loan flow process from point of sale through portfolio and securitization, I would urge a familiarity with the positions taken by both parties to the litigation, Jesinoski v. Countrywide.


Would you like to venture a guess on the outcome?


For the time being, while we explore this case, please put on hold whatever you know, thought you knew, or assumed regarding rescission. You might find your view challenged by the contours of this lawsuit.


So, let's ponder this issue that is flaring up from the Truth in Lending Act ("TILA" or "Act")!

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Regulation Z specifically states the procedural features of a written notice with respect to the borrower's notification requirement for exercising a right of rescission, and I quote:


"To exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram or other means of written communication. Notice is considered given when mailed, when filed for telegraphic transmission or, if sent by other means, when delivered to the creditor's designated place of business."


Pretty clear, yes? What is there to dispute about the foregoing words? Not so fast!
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Jesinoski v. Countrywide cites Section 1635 of TILA to present the foundation upon which the deliberations are to proceed. In that section, it states that a borrower "shall have the right to rescind the transaction until midnight of the third business day following ... the delivery of the information and rescission forms required under this section ... by notifying the creditor ... of his intention to do so." (My emphasis.)


With regards to the timeframe available to the borrower, the well-known three year time frame is cited, to wit, a time limit "for [the] exercise of [this] right," providing that the borrower's "right of rescission shall expire three years after the date of consummation of the transaction" even if the "disclosures required ... have not been delivered."


Now comes the question that logically follows from the phrase emphasized above - "notifying the creditor" - insofar as, by operation of law, what shall constitute acceptable notification. As posed in Jesinoski:


"Does a borrower exercise his right to rescind a transaction in satisfaction of the requirements of Section 1635 by "notifying the creditor" in writing within three years of the consummation of the transaction, as the Third, Fourth, and Eleventh Circuits have held, or must a borrower file a lawsuit within three years of the consummation of the transaction, as the First, Sixth, Eighth, Ninth, and Tenth Circuits have held?"


In other words, within three years of consummation of the loan transaction, is "notification" met where the borrower has provided written notification to the creditor, thereby exercising the right of rescission, or only where the borrower brings a lawsuit against the creditor?
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