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SCOTUS: Borrower Can Rescind Mortgage Just by Sending a Letter

How do you have to "notify" a creditor of an intent to rescind a mortgage? Five circuits to decide the issue held that "notify" meant filing a lawsuit, while three said that a written notice was sufficient.

A unanimous U.S. Supreme Court today agreed with the minority, holding that a simple letter notifying the creditor of the intent to rescind is good enough to rescind the loan.

Dear Bank: No Thanks

The Truth in Lending Act gives a borrower up to three years to rescind a loan if the lender failed to make the required disclosures. Exactly three years after the Jesinoskis refinanced their home mortgage, they sent a letter to Countrywide purporting to rescind the mortgage for Countrywide's failure to make disclosures. A few weeks later, the mortgage's new owner, Bank of America, sent a reply refusing to acknowledge the rescission. A year after that, the Jesinoskis sued, but Bank of America said the rescission was ineffective; it had to happen via lawsuit -- which was filed a year too late -- not by letter, the bank insisted. Both a district court and the Eighth Circuit agreed.

But Justice Scalia, writing for the unanimous Court, said the Truth in Lending Act doesn't require that at all. A loan can be rescinded by "notifying the creditor." It's as simple as that, and so is the inevitable conclusion. "Although Section 1635(f) tells us when the right to rescind must be exercised, it says nothing about how that right is exercised," Scalia wrote.

Only a Judge Can Do It?

Actually, no one disputes that. Written notice is enough to rescind the loan within three days. It's also enough to rescind the loan within three years if the lender never makes the required disclosures. Bank of America contended that when the borrower disputes the adequacy of the disclosures, only a lawsuit will work, because the issue becomes whether the right to rescind still exists.

That reasoning works only if the Court believed Bank of America's argument that a different subsection of the Act applied. Scalia said it didn't: While the other section, 1635(g), does allow a court to grant rescission, "the fact that it can be a consequence of judicial action when Section 1635(g) is triggered in no way suggests that it can only follow from such action."

The ruling is a victory for consumers who tried to argue that banks gave them loans without the full disclosures required by law. Had the Court gone the other way, homeowners who already couldn't pay their mortgages would have had to take the extra step of paying for a lawsuit in order to exercise their rights under the Truth in Lending Act. That's quite a big deal, as many consumers have contended ever since the 2008 mortgage crisis that they were pushed into mortgages by overeager lenders who didn't fully disclose the terms of the agreement.

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