Friday, January 22, 2016

Virginia Eastern District: to enforce an extended rescission right under TILA, borrower must allege facts showing such right was available

The other day, the federal District Court sitting in Alexandria held that, to enforce a TILA rescission made outside the 3-day cool-off period, a borrower must allege facts showing that the extended right of rescission was available to the borrower at the time of mailing the rescission notice, i.e., facts showing that the borrower meets the TILA requirements for the applicability of the extended right of rescission.

The District Court noted that, while the 3-day rescission right is absolute, the 3-year rescission right is conditional (on lender's failures) and quoted the U.S. Supreme Court's language from Jesinoski that TILA's "regime grants borrowers an unconditional right to rescind for three days, after which they may rescind only if the lender failed to satisfy the Act's disclosure requirements."

The Court did not explicitly address the borrower's contention that TILA's language that "security interest becomes void upon such a rescission" and Jesinoski's language that "section 1635(a) nowhere suggests a distinction between disputed and undisputed rescissions" so that "rescission is effected when the borrower notifies" make it unnecessary for the borrower to allege or prove entitlement to the extended rescission right where the lender fails to challenge the borrower's rescission notice within the 20 days prescribed by the Act.

The Act is ambiguous on this point, and the line could be drawn elsewhere.  But the court drew the line so as to strike a balance it deemed desirable, probably to avoid opening the floodgates of residential mortgage plaintiffs rescinding their loans outright and relying on the bank's failure to act upon rescission notices within 20 days.

The court's ruling was not totally unexpected.  For instance, if someone mails a rescission notice on a commercial loan, that borrower could not enforce such rescission in court because TILA would not apply to the commercial loan.  Similarly, even if a borrower mails a rescission notice within 3 days of closing (when the rescission right is still absolute), such a borrower arguably cannot enforce that rescission if the Act's rescission right provision did not apply in the first place.  This can happen if the loan was a purchase money loan so that no rescission right was available, or where there was no disclosure violation, so that the extended right never became available.

But what if the parties disagree on whether the extended right was available?  Who is right, who determines who's right, and who has the burden of proof?  If the borrower takes the position that the extended right was available due to a disclosure violation and rescinds, and the lender fails to challenge that rescission within 20 days, there's a good argument that rescission becomes final by operation of statutory law ("security interest becomes void upon such a rescission") and the lender cannot contest it outside the statutorily allotted 20 days.

Indeed, the lender in Jesinoski "argue[d] that if the parties dispute the adequacy of the disclosures—and thus the continued availability of the right to rescind—then written notice does not suffice".  But the Supreme Court disagreed and remarked that § "1635(a) nowhere suggests a distinction between disputed and undisputed rescissions".  The Court explained that "the fact that [rescission] can be a consequence of judicial action when §1635(g) is triggered in no way suggests that it can only follow from such action," and that TILA's neighboring provisions have "no bearing upon whether and how borrower-rescission under §1635(a) may occur."  Thus, a lender's disagreement with borrower's rescission cannot per se  undo a non-judicially effected borrower-rescission triggered by operation of §§1635(a) and (b), -- just like a borrower's mere disagreement with an effected not-judicial foreclosure sale cannot undo such a sale.

Nonetheless, because this result is not compelled by the plain text of the Act, courts have room for interpretation, and will likely interpret the Act as narrowly as possible (i.e., as much against the borrower as possible).  But that is for another day.

More troublesome was the district court's quotation from Gilbert that "to complete rescission and void the contract, ... more is required."  This language seems at odds with Jesinoski's pronouncements that "rescission is effected when the borrower notifies", that "a borrower need only provide written notice to a lender in order to exercise his right to rescind" yielding a "unilaterally rescinded transaction", as well as with TILA's self-executing language of voiding security interest.  It remains to be seen where the courts will draw the line post-Jesinoski and whether the Supreme Court will be compelled to revisit the issue in the near future.

Read the full memorandum opinion of the District Court here.

1 comment:

  1. If the borrower does not rescind within 3 days, the court holdings are very clear; the borrower must allege facts that show a right to rescind thereafter.