I want to share a recent Supreme Court Case ruling with you. The United States Supreme Court recently ruled on a case that turned on how broadly the borrower is entitled to interpret the right of cancellation of a residential mortgage loan under the Truth In Lending Act (“TILA”).
Plaintiffs Larry Jesinoski and Cheryle Jesinoski (“the Plaintiffs”) closed on a $611,000.00 residential mortgage refinance transaction on February 23, 2007. Exactly three years later, they mailed Bank of America Home Loans (successor to Countrywide Home Loans, Inc.) (collectively, “the Defendant”) notice of cancellation of the 2007 transaction, based on their argument that they had not received valid disclosures at their closing.
Defendant disputed the validity of Plaintiffs’ notice and refused to cancel the loan. Thereafter, on February 24, 2011, Plaintiffs filed suit against Defendant in Federal District Court seeking a declaratory judgment on the issue of the rescission, and also claiming monetary damages against the Defendant on the basis that the Defendant had violated the provisions of TILA.
Defendant maintained the position that Plaintiffs were unable to cancel the transaction due to their failure to file the lawsuit within TILA’s permitted three-year time period. Defendant was able to support its position by citing to a recently decided Eighth Circuit case, Keiran v. Home Capital, Inc., in which the court held that where validity of notice of cancellation is disputed, borrowers were obligated to commence legal proceedings within three years of closing in order to preserve their alleged right to cancel the transaction.
In its review, however, the Supreme Court relied on the statutory borrower rights under TILA (15 U.S.C. s. 1601, et seq.), beginning with s. 1635(a), which states that a borrower has the right to cancel a residential mortgage loan transaction “until midnight of the third business day following the consummation of the transaction” or the delivery of the proper notice of right to rescind disclosures, whichever is later, “by notifying the creditor … of his intention to do so.”
The Court also noted that s. 1635(f) described the borrower’s right to cancel as expiring “three years after the date of consummation of the transaction or upon the sale of the property, whichever comes first,” regardless of whether proper lender disclosure was ever given to the borrower.
While the Court acknowledged that other sections of the statute were worded in a way that seemed to imply litigation between borrower and lender, s. 1635(a) was worded unambiguously and obligated only notice to the lender in order to preserve the borrower’s right to cancel the transaction. Further, s. 1635(f) was silent as to how notice should be given and merely described the applicable time frame in which to do so.
The Supreme Court reversed the Eighth Circuit and remanded the case (also overturning Keiran), agreeing with the borrower that TILA requires the borrower entitled to rescind only to provide notice of such cancellation to the lender within three years, regardless of whether the lender disputes the validity of the notice. There is no requirement to commence legal proceedings within the same time period.
What this means to the industry:
We need to make sure that we comply with statutory borrower rights under TILA (15 U.S.C. s. 1601, et seq.), beginning with s. 1635(a), get the right to rescind executed and close the day the documents are dated. As you know from working with my office. We pay attention to detail and do not back date documents.
The idea that a borrower of such a large sum of money could declare three years from closing that the transaction was void, is tough to reconcile. This case highlights how harrowing it can be for a real estate attorney who routinely close loan transactions, since it was evident from the Defendant’s arguments (or lack of argument) that the borrowers never did receive a proper statutory notice of their right to rescind at closing. Not to mention the pressure to close loans with “back dated documents”. Surely, every closing attorney has missed a borrower’s signature on a document at one point or another, or has discovered a problem with bank documents after a closing, and every closing attorney has been asked to close loans with back dated documents during the rescission period. The good attorneys stand their ground and refuse to close with “back dated” documents. At the time, the mistake or “back dated documents” may seem very minor in scope and harmless accommodation. It is not minor.
However, given that the seemingly small misstep of failing to obtain the borrower’s signature on the notice of the right to rescind, or failing to have it acknowledged where required, could lead to severe consequences for both the lender and the closing attorney, it is worth reviewing your office’s procedure with respect to handling closing documents.
For instance, prior to closing, confirm that the lender’s list of loan documents corresponds to what the lender actually sends. Also, if there is a question as to whether the borrower’s loan falls within the scope of the TILA notice requirements, raise the issue with the lender and obtain confirmation. After the closing, have a second set of eyes review the signed documents before sending them back to the bank. Finally, after delivering a copy of the signed loan documents back to the borrower, confirm with the borrower that the notice was in the package that the borrower received. Following these basic steps and adopting other minor safeguards will help protect you from the enormous liability stemming from a single error in a closing.
U.S. Supreme Court Weighs in on Borrower Right of Rescission
Jesinoski et ux. v. Countrywide Home Loans, Inc., et al.
(Decided January 13, 2015)