by
Evan Weinberger | Law360
Law360, New York (February 20, 2015, 2:16 PM ET) -- Slightly more
than a month after the
U.S.
Supreme Court found that borrowers need only to notify
their creditors of their intention to rescind a mortgage within
three years, lenders are still trying to figure out just how to
respond to a potential flood of rescission requests, attorneys say.
The Supreme Court’s
January
decision in
Jesinoski
et al. v. Countrywide Home Loans Inc. et al. said that the Truth
In Lending Act gave borrowers the power to rescind their mortgages
simply by notifying lenders of their intentions within three years.
The decision ended a circuit split wherein many courts had ruled
that borrowers were required to sue within three years of their
mortgage financing transaction in order to have it rescinded.
While the Supreme Court settled that question, it opened up a host
of other issues related to the mechanics of rescission.
Banks,
mortgage servicers and other mortgage creditors are now left in the
position of trying to figure out just how to respond to rescission
requests from years-old mortgages and how to make those rescissions
work if they move forward.
“What it really does is open up a potential can of worms in just
about every district and just about all the states,” said Dorsey
& Whitney LLP partner Joseph T. Lynyak.
TILA provides two different rescission rights to borrowers who apply
for and receive mortgages. The more common process allows borrowers
to rescind mortgages within three days of closing and before any
money is disbursed.
The law also provides a more expanded rescission right in situations
where borrowers do not receive mandated disclosures. There, the law
gives borrowers three years from the closing date to hand in notice
of recission, with proof that the documents were not provided,
although several circuits had found that an actual lawsuit needed to
be filed in that time.
Now that the Supreme Court has cleared up the issue of when a
rescission notice has to be provided, the biggest question facing a
bank is what to do when it gets one.
Under TILA, a lender has 20 days to determine whether the rescission
notice is valid or whether it is going to seek a declaratory
judgment in court that would block the rescission based on the
theory that it provided sufficient disclosures.
That is not a lot of time, and the decision could determine whether
or not the lender will retain a security interest in the mortgage or
give up its rights to get repaid, said
Ballard
Spahr LLP
partner Joel Tasca. Going through records from
mortgages financed long ago could prove time-consuming, and lenders
may consider having a blanket policy of challenging all such
rescission notifications in order to protect their interests.
“Lenders are going to feel like they may have to go into court and
file the [declaratory judgment] action against the borrower to get a
ruling that there was no disclosure violation,” Tasca said.
If a lender does not elect to go to court, there is still the thorny
issue of whether the borrower will be able to pay back what the
lender is owed.
Under TILA, in a rescission a lender is supposed to return any
points and fees that a borrower paid on a mortgage and release its
senior secured lien. In return, borrowers are supposed to return the
principal amount of the loan.
However,
borrowers may not have the cash to pay back the creditor, with most
of the proceeds of the loan going into the house. If the borrower is
unable to repay the principal balance, then the lender is left
without the cash and without any claim against the borrower, King
said.
“If the borrower doesn’t give you the money, then you don’t
have a secured loan,” he said.
The Jesinoski decision did not address the question of what happens
when the borrower can’t fulfill his or her part of the rescission
transaction.
Justice Antonin Scalia, who wrote the Jesinoski opinion, which came
with no dissent, specifically inveighed against the use of common
law standards when determining the appropriateness of rescission.
Now there are questions about whether that close reading of TILA
applies to the issue of borrowers repaying principal.
“There’s never been a lot of court cases or decisions about
that,” Lynyak said.
Those two questions are just the tip of the iceberg, attorneys say.
“The mechanics of rescission two or three years later just become
much more difficult,” King said.
Lenders are going to have to get answers soon, because plaintiffs
firms and troubled borrowers are likely to use the Supreme Court’s
Jesinoski ruling in the near future, he added.
“I suspect you’re going to be seeing a lot more of these
rescission claims as borrowers’ counsel realizes what the Supreme
Court said and its effect,” King said.
--Editing by Kat Laskowski and Mark Lebetkin.
