Home loan borrowers need only send a letter to their bank to rescind a contract when disclosure violations are at issue.
The Supreme Court ruled 9-0 that Countrywide Home Loans erred when it required a couple to go to court to rescind a mortgage they said was inadequately disclosed under the Truth-in-Lending Act.
The U.S. Supreme Court handed a win to mortgage borrowers when they unanimously ruled a lender erred when it insisted that borrowers who opted to back out of a mortgage because of disclosure errors by the bank had to go to court to do so.
Instead, the Court said a mere letter to the bank was sufficient notice under the Truth in Lending Act so long as it was within the three-year window the Act allows.
“So long as the borrower notifies within three years after the transaction is consummated, his rescission is timely,” Justice Antonin Scalia wrote on behalf of the court. “The statute does not also require him to sue within three years,” Scalia added.
The Supreme Court decision overturned a ruling by the Eighth Circuit Court, and that of a lower federal court that both sided with the lender, saying that a lawsuit within the three-year window, not just a letter, was needed to rescind a mortgage with continued disclosure issues.
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It was a victory for Larry and Cheryle Jesinoski. The Eagan, Minn., couple signed for a $611,000 mortgage in February 2007 with the Countrywide Home Loans, which was bought out by Bank of America BAC, -2.24% in 2008, and opted to rescind the mortgage in February 2010 under the provisions contained in the Truth in Lending Act via a letter after they found significant disclosure errors by the bank. Countrywide, which was charged with fraud for activities related to its business practices during the mortgage crisis, was found to have stuck consumers with bogus fees.
Richard Simon, a Bank of America spokesman, said the Supreme Court decision was merely “a procedural ruling that narrowly addresses the timing of when a borrower may file a lawsuit seeking rescission. The decision does not expand the substantive rights presented by the statute.” Simon says he doesn’t know how many other cases at Bank of America would be impacted by the Supreme Court decision.
The background of the case is a complex one. The Truth in Lending Act, or TILA, was adopted in 1968, and enforced under a provision known in the industry as Regulation Z. But after the real estate crash, TILA was amended to further favor consumers, who were hurt by banks during the real estate boom when miscellaneous charges and interest rate changes were slipped into mortgage documents at the last minute.
Regulation Z also was strengthened through the Mortgage Disclosure Improvement Act of 2008, which required early disclosures for more transactions and added a waiting period between the disclosures and the signing of the mortgage documents.
In the Jesinoski’s case, the Minnesota couple filed their notice before the three-year period expired but was forced to file a lawsuit in February 2011 after Countrywide disputed their claim, arguing that the letter was insufficient for continued inadequate disclosure issues and that the lawsuit the couple filed was outside the three-year rescission window for a loan that was consummated in February 2007.
Last year, Bank of America agreed to pay more than $16 billion in a settlement with state and federal authorities as a result of Countrywide’s abuses during the mortgage boom and bust.