Jesinoski v. Countrywide Home Loans: The U.S. Supreme Court Seems Ready to Hold that a Borrower’s Right of Rescission Under TILA Need Only be Exercised by Timely Notice, not a Lawsuit

By Stephen A. Fogdall

On November 4, 2014, the U.S. Supreme Court heard argument in Jesinoski v. Countrywide Home Loans, the case that will decide whether a borrower can timely exercise the right of rescission under the Truth in Lending Act simply by sending written notice of intent to rescind to the creditor within the three-year period set forth in the statute, or whether the borrower must instead file a lawsuit within that time period.  The Third, Fourth and Eleventh Circuits have held that written notice to the lender alone is sufficient to preserve the rescission claim. The First, Sixth, Eighth, Ninth and Tenth Circuits have held that filing a lawsuit within the three-year period is required. (You can find more on this issue here and here.)

At the argument, the creditor’s counsel focused heavily on TILA’s statement that the borrower’s right to rescind “shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first,” even if the forms and disclosures required by TILA were never delivered. In an earlier decision, Beach v. Ocwen Federal Bank, the Court had held that this provision “limits more than the time for bringing a suit, by governing the life of the underlying right [to rescind] as well.” The creditor’s counsel argued that, under Beach, a borrower who failed to file a lawsuit to obtain a rescission within three years would no longer have any right to rescind at all, regardless of whether the borrower had sent the creditor a notice within the three-year period. Thus, the failure to file a lawsuit should mean that the claim for rescission is extinguished.

Justices Ginsburg, Breyer, Sotomayor and Kagan were openly skeptical. They repeatedly returned to the fact that TILA itself refers only to written notice as the trigger for exercising the right to rescind. TILA states that “the obligor shall have the right to rescind the transaction until midnight of the third business day following consummation of the transaction,” or after the required disclosures and rescission forms are delivered by the creditor, whichever is later, simply “by notifying the creditor . . . of his intention to do so.” These four Justices seemed convinced that, given this language, a borrower’s right of rescission is exercised simply by sending such a notice. While litigation might ultimately be necessary to resolve whether the borrower in fact has a valid basis to rescind, filing such litigation is not necessary to preserve the right. Justice Ginsburg pointed out that in Beach the borrowers had never sent the creditor a notice of intent to rescind within the three-year period. Therefore, Beach could not have held that a notice of intent to rescind is insufficient to preserve the borrower’s rescission right.

In contrast to these four Justices, Justices Scalia and Alito emphasized that a rescission, by definition, requires that the parties be returned to where they were before the transaction was consummated. If the borrower lacks the ability to return the funds, then the rescission cannot be effectuated, regardless of whether the borrower sent the creditor a notice of intent to rescind. Thus, it seems, mere notice by the borrower could not be sufficient to accomplish a rescission. The implication, presumably, is that only a lawsuit could achieve that result, and thus filing a lawsuit within the three-year period is necessary.

The positions of Chief Justice Roberts and Justice Kennedy (the only other Justices who spoke during the argument) are much more difficult to read. Justice Kennedy’s questions largely dealt with situations in which the creditor disputes the borrower’s right to rescind. Some of his questions seemed sympathetic to the position apparently endorsed by Justices Ginsburg, Breyer, Sotomayor and Kagan — that litigation might be necessary to resolve the dispute, but is not needed to preserve the right to rescind itself. However, he also focused on an issue that these four Justices seemed not to be concerned with, namely, how long after giving notice the borrower can wait before bringing a lawsuit to rescind. The creditor’s counsel argued that one advantage of requiring the filing of a lawsuit to preserve the rescission right is that it clearly limits the time in which such a suit can be brought to three years from the date the loan is consummated, whereas the borrower’s position that notice is sufficient seems to leave that question unanswered. Justice Kennedy appeared to think that this consideration had some force.

Chief Justice Roberts made a single comment during the argument. At one point, the creditor’s counsel was attempting to find support for his position in a provision of TILA which provides that in “any action in which it is determined that a creditor has violated this section, in addition to rescission the court may award” other relief available under TILA, such as actual and statutory damages. The Chief Justice remarked that “you’re putting an awful lot of weight on a tiny, one-sentence provision,” and that “it would be very odd if that’s where Congress decided to place” a requirement that the borrower must bring a lawsuit within the three-year period.

Thus, at least five members of the Court (Justices Ginsburg, Breyer, Sotomayor and Kagan, and Chief Justice Roberts) seemed skeptical, to one degree or another, of the creditor’s position that timely notice alone is insufficient to preserve a borrower’s right to rescind under TILA. We will report on the outcome as soon as the case is decided.

Ninth Circuit addresses TILA tender requirement and RESPA statute of limitations

By Stephen J. Shapiro

Under the Truth in Lending Act (TILA), a borrower may seek to rescind a loan under certain circumstances. The rescission process under TILA is as follows: (1) the borrower notifies his lender that he intends to rescind the loan; (2) the lender returns any security interest to the borrower; and (3) upon return of the security interest, the borrower tenders the loan proceeds to the lender.  The Ninth Circuit recently held that a borrower need not plead that he has tendered the loan proceeds or has the ability to do so in order to state a rescission claim under TILA.

In Merritt v. Countrywide Financial Corp., the plaintiffs obtained a mortgage and took out a home equity line of credit from the defendant lender in connection with a home they purchased.  The plaintiffs alleged that, despite repeated requests, their lender did not send them the loan documentation required by TILA for almost three years. When they finally received the documents, the plaintiffs concluded that they were the victims of “predatory lending” and notified the lender that they were invoking their right to rescind the loan under TILA. When the lender did not respond to the rescission request, plaintiffs sued the lender under TILA, requesting rescission of the loan. The district court dismissed the TILA claim because the plaintiffs had not pled that they tendered the loan proceeds to the lender or had the ability to do so at the time they sought rescission.

On appeal, the Ninth Circuit reversed. The Court acknowledged that, in a prior case, it held that the district courts may require a TILA plaintiff to produce evidence of his ability to tender the loan proceeds in response to a summary judgment motion brought by the lender.  However, the Court held that its prior holding does not extend to motions to dismiss. In other words, if warranted by the circumstances, a borrower may be required to present evidence that he is able to tender to defeat a motion for summary judgment on a TILA claim, but he is not required to plead that he has the ability to tender in order to state a claim under TILA.

The plaintiffs also alleged that the lender violated Section 8 of the Real Estate Settlement Procedures Act (RESPA).  The district court dismissed the claims as time barred because plaintiffs filed their claims after RESPA’s one-year statute of limitations had expired. On appeal, the Court, addressing an issue of first impression in the Ninth Circuit, held that under the appropriate circumstances RESPA’s statute of limitations may be equitably tolled. Because the district court did not address whether the plaintiffs were entitled to equitable tolling, the Court remanded for consideration of that issue.

The Court also remanded, for initial consideration by the district court, another issue of first impression in the Ninth Circuit. Plaintiffs alleged that the defendant violated Section 8(b) of RESPA, which prohibits the “giv[ing] . . . [of] any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service . . . other than for services actually performed.” Plaintiffs alleged that the defendant violated this provision by charging them more for services provided by third parties in connection with the mortgage transaction than defendant paid for those services. The Court noted the split among the Circuits as to whether such allegations – claims that a defendant “marked up” the cost of services provided by third parties – are actionable under Section 8(b) of RESPA. Specifically, the Second and Third Circuits have held that such allegations state a claim under Section 8(b), while the Fourth, Fifth, Seventh and Eighth Circuits have held that they do not.  Because the “complicated issues of statutory interpretation and administrative law” involved in these decisions were not addressed by the district court, the Court remanded the issue for further development.

Creditors can be found liable for violating the FDCPA when they use third party debt collectors that do not make bona fide attempts to collect debts

By Stephen J. Shapiro

Last week the Second Circuit held that: (1) a creditor can face liability under the Fair Debt Collection Practices Act (FDCPA) when a third party it hires to contact debtors does not make bona fide attempts to collect the debt but rather acts as a mere conduit between the creditor and debtor; and (2) the assignee of a debt is not a “creditor” for purposes of the Truth in Lending Act (TILA).

The plaintiffs in Vincent v. The Money Store were several homeowners who took out mortgage loans, each from a different lender. Each mortgage was assigned to The Money Store, and each plaintiff thereafter defaulted on his or her mortgage.

The Money Store had an arrangement with a law firm, Moss Codilis, pursuant to which the firm would mail breach notices to borrowers who had defaulted. The Money Store provided Moss Codilis with spreadsheets containing contact information for the borrowers in default, and Moss Codilis would send each borrower a virtually identical letter stating that The Money Store had retained Moss Codilis to collect a debt. However, after sending the letters, Moss Codilis rarely played any further role in collecting the debts, and if The Money Store brought collection actions against the borrowers, other firms would handle those actions. The Money Store initially paid Moss Codilis $50 for each letter, but later reduced the payment to $35 per letter. During a five-year period, Moss Codilis sent almost 89,000 of these letters. Testimony suggested that the The Money Store used Moss Codilis to send default letters on the theory that a letter on law firm letterhead was more likely to catch the attention of the defaulted borrowers.

After receiving letters from Moss Codilis, plaintiffs brought a putative class action against The Money Store, arguing that, by having Moss Codilis send the letters, The Money Store violated the FDCPA. Plaintiffs also argued that The Money Store violated TILA by charging them unauthorized fees, which created credit balances on their accounts, and then refusing to refund those credit balances. The district court granted summary judgment to The Money Store on both claims.

On appeal, the Second Circuit first addressed the FDCPA claim. The Court noted that the FDCPA applies only to “debt collectors,” and that creditors such as The Money Store, as a general rule, do not qualify as debt collectors. However, the FDCPA includes within its definition of debt collector “any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts.” The Court held that:

[W]hen determining whether a representation to a debtor indicates that a third party is collecting or attempting to collect a creditor’s debts, the appropriate inquiry is whether the third party is making bona fide attempts to collect the debts of the creditor or whether it is merely operating as a “conduit” for a collection process that the creditor controls.

Because the record contained evidence from which a jury could find that Moss Codilis made no attempts to collect the debts and was merely acting as a “conduit” for The Money Store, the Court reversed the district court’s grant of summary judgment in favor of The Money Store on the FDCPA count, and remanded that claim for further proceedings.

On the TILA claim, the Court acknowledged that TILA requires “creditors” to refund credit balances on their borrowers’ accounts, but pointed out that an entity only qualifies as a “creditor” for purposes of TILA if the debt at issue was “initially payable” to that entity. The Money Store was not such an entity. Rather, other lenders originated the loans to the plaintiffs and The Money Store only later acquired the loans. Therefore, the Court held, The Money Store was not a “creditor” as that term is defined in TILA, and, as such, TILA did not require it to refund credit balances. In so ruling, the Court rejected the plaintiffs’ argument that the entity that receives the first payment on a loan is a “creditor” for purposes of TILA, regardless of whether that entity originated the loan.

Although it affirmed the dismissal of plaintiffs’ TILA claim, the Court questioned whether Congress intended the result that the statutory language mandated. The Court pointed out that TILA requires loan originators to refund credit balances on borrowers’ accounts, but exempts any entity other than the originating lender from that requirement. In light of the fact that many originators assign their mortgage loans to others, the narrow definition of “creditor” exempts a significant number of loans from the protections afforded by TILA. The Court surmised that this result may have been the unintended consequence of amendments Congress made to TILA, and “note[d] th[e] discrepancy . . . for the benefit of Congress and the Federal Reserve.”

Circuit split widens on actions borrowers must take to preserve their right to rescind under TILA

By Stephen J. Shapiro

Several circuit courts have reached conflicting conclusions about the actions borrowers must take to exercise their right to rescind a loan under the Truth in Lending Act. Recent opinions from the Eighth Circuit widen the divide.

Under TILA, lenders are required to make certain disclosures to borrowers. If a lender fails to make those disclosures, the borrower may rescind the loan within “three years after the date of the consummation of the transaction or upon the sale of the property, whichever occurs first.” The question that has divided the circuits is: what action must borrowers take to exercise their rescission rights? Is it sufficient for borrowers simply to notify their lenders that they are exercising their right to rescind, or must borrowers file suit-seeking rescission?

As we previously reported, earlier this year the Third Circuit, in Sherzer v. Homestar Mortgage Services, joined the Fourth Circuit in holding that mere notice by the borrower is sufficient to exercise the right to rescind under TILA.  This holding contradicted decisions by the Ninth Circuit and the Tenth Circuit, both of which held that a borrower must file suit to exercise the right to rescind.

The Eighth Circuit joined the fray earlier this summer with Keiran v. Home Capital, Inc., and Hartman v. Smith. In those cases, the Eighth Circuit sided with the Ninth and Tenth Circuits in holding that borrowers seeking to exercise their right to rescind under TILA must file suit, not just notify their lenders.

However, another recent opinion shows that considerable disagreement on this issue exists among the judges within the Eighth Circuit. In Jesinoski v. Countrywide Home Loans, Inc., two borrowers notified their lender that they were invoking their right to rescind their loan under TILA during the three-year period following consummation of the loan, but did not bring a rescission claim against the lender until after the three-year period expired. The trial court entered judgment on the pleadings in favor of the lender and the Eight Circuit, relying on its earlier decisions in Keiran and Hartman, affirmed. However, two of the three judges on the Jesinoski panel stated in concurring opinions that they believed Keiran and Hartman were wrongly decided and noted that, had they not been required to follow the decisions of those prior panels, they would have joined the Third and Fourth Circuits in holding that mere notice by borrowers of their intent to invoke their right to rescind under TILA is sufficient. This issue likely will continue to engender differences of opinion both between and within the circuits unless and until the Supreme Court resolves it.

UPDATE (4/29/14): The United States Supreme Court granted cert in the Jesinoski case.

Sherzer v. Homestar Mortgage Services: The Third Circuit Takes Sides in a Circuit Split Over How a Borrower Exercises Rescission Rights Under TILA

Schnader Alert by Stephen J. Shapiro:

The U.S. Court of Appeals for the Third Circuit recently took sides in a split between U.S. Circuit Courts of Appeal over what action borrowers must take to exercise their right to rescind a loan under the Truth in Lending Act. In Sherzer v. Homestar Mortgage Service, the Third Circuit ruled that borrowers need only send lenders valid notice, not file suit, within the time allowed under the statute in order to rescind a loan agreement.

Please click here to read the full Alert.

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