The Truth in Lending Act and Rescission: Lessons Learned by Lenders from Jesinoski v. Countrywide

The Supreme Court just made mortgage rescission a little bit easier for borrowers and scarier for lenders in Jesinoski v. Countrywide Home Loans. Under the Truth in Lending Act, 15 U.S.C. §1601-1677 (“TILA”), mortgage lenders are required to disclose the rights of obligors and other material disclosures to borrowers. Borrowers have a right of rescission for three days from the transaction or until the disclosures are made, up to three years after the transaction. The borrower must give notice to the lender of his or her exercise of the right to rescind within those time periods.

In Jesinoski, Countrywide failed to make the necessary disFamily meeting real-estate agent for house investmentclosures to the Jesinoskis as lenders. Three years to the day after the completion of the mortgage transaction, the Jesinoskis sent written notice of their intent to rescind the mortgage to Countrywide. A year and a day later, they filed suit. The question before the Supreme Court then became whether written notice was sufficient under the Truth in Lending Act as the Third and Fourth Circuits held (and the Consumer Financial Protection Bureau agreed), or whether the borrower must also file suit, as the Eighth, Ninth and Tenth Circuits held. The Court decided that the language of the statute makes clear that written notice alone is sufficient to fulfill the terms of the statute. The Court rejected Countrywide’s argument that there was a legitimate dispute over the adequacy of the disclosures that required the borrower to file suit to settle.

This case should give all lenders pause when making disclosures – all material disclosures should be (a) as thorough as necessary under TILA, and (b) timely enough to keep the rescission window to three days. The borrower’s right to rescind will expire at the three day mark if the mortgage lender makes all necessary disclosures at the closing table, but make sure the disclosures are complete and meet all TILA requirements. Inadequate disclosure could leave the borrower up to three years to rescind the loan, a lesson lenders just learned from the Supreme Court.

For more information on mortgage rescission or the Truth in Lending Act, please consult the attorneys at McBrayer.

CRichardsonChristopher A. Richardson is an associate at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Louisville, KY office. Mr. Richardson concentrates primarily in real estate, where he is experienced in residential and commercial closing transactions, landlord/tenant relations, and mortgage lien enforcement/foreclosure. Mr. Richardson has closed innumerable secondary market and portfolio residential real estate transactions and his commercial practice ranges from short-term collateralized financing and construction lending to development revolving lines of credit. He can be reached at 502-327-5400 or crichardson@mmlk.com.

This article is intended as a summary of  federal and state law and does not constitute legal advice.

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A New Beginning for Closings

Currently, under federal law, within three business days after receiving an application, mortgage lenders must deliver two different disclosures to the applicants: an early Truth in Lending Statement and a Good Faith Estimate. At closing, two more disclosures are required: a final Truth in Lending Statement and a HUD-1 settlement statement. Starting Aug. 1, 2015, that long-established process will change. The forms will be reduced to two and simplified so that consumers will be able to mortgage shop more easily and understand their mortgage terms and costs more thoroughly.

The mortgage crisis that began in 2008 was precipitated by many consumers taking on loans they could not afford. Though the industry has rebounded from the crisis, the dire situation highlighted the need for consumers to better understand the true costs and risks of a mortgage. Under the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) received the power to create new rules for the Real Estate Settlement Procedures Act (RESPA) and for most of the Truth in Lending Act (TILA), which are the laws that require the existing disclosure forms. After two years of research and testing, the CFPB decided that the simplified, so-called “Know Before You Owe” mortgage forms are the best way to educate consumers.

Beginning in August 2015, consumers will be provided with The Loan Estimate form  within three days after submitting a loan application. It replaces the first Truth in Lending statement (long-considered ironically named for the confusion and lack of clarity it gave to consumers) and the Good Faith Estimate. Consumers can use this form to compare costs and features of various loan options. Three business days before the loan closing, consumers will receive a Closing Disclosure. This replaces the final Truth in Lending statement and HUD-1 settlement statement. For the first time, consumers can review the final loan terms and costs before they take a seat at the loan closing table.

This upcoming change is just a part of CFPB’s initiative to reform the mortgage markets. Hopefully, consumers will not be the only ones to benefit from the future modifications. Lenders and real estate attorneys should be optimistic about the potential to cut down on administrative costs and lessen the “surprises” that can ruin a closing. Those in the mortgage industry should review the forms carefully and take necessary implementation steps in the year ahead.

CRichardson

Christopher A. Richardson is an associate at McBrayer, McGinnis, Leslie & Kirkland, PLLC in the Louisville, KY office. Mr. Richardson concentrates primarily in real estate, where he is experienced in residential and commercial closing transactions, landlord/tenant relations, and mortgage lien enforcement/foreclosure. Mr. Richardson has closed innumerable secondary market and portfolio residential real estate transactions and his commercial practice ranges from short-term collateralized financing and construction lending to development revolving lines of credit. He can be reached at 502-327-5400 or crichardson@mmlk.com.

This article is intended as a summary of  federal and state law and does not constitute legal advice.