WASHINGTON Does telling a lender you are canceling a mortgage just begin the process of "rescission," or does it get you to the finish line?
That emerged as a key question in a Supreme Court case Tuesday that could determine if borrowers must file a lawsuit to exercise their right to rescind a loan. The law up to now has been read to mean rescission is triggered through notifying one's creditor, but some appeals courts have sided with banks in ruling borrowers must go further.
In oral arguments Tuesday, the justices challenged the positions of both parties in Jesinoski v. Countrywide Home Loans, though it was hard to discern how the high court might rule. At issue is how rescission rights are exercised under the Truth in Lending Act. (TILA was implemented through Federal Reserve Regulation Z.)
David Frederick, an attorney for the petitioners, noted that the Fed's regulation lays out that borrowers can give notice to a lender in writing.
But Justice Antonin Scalia signaled a belief that giving notice of rescission could be viewed as just a preliminary step in the process.
"By notifying in accordance with the regulations, it seems to me that speaks to the manner of notifying, not to the consequence of notifying," Scalia said. "And Regulation Z may indeed say what the consequence is, but I don't think that the statute authorizes Regulation Z to say that."
Under TILA, consumers have three days after a refinancing or home equity line closes to rescind the transaction. Yet the window extends to three years if the lender's mortgage disclosures are deemed inadequate.
But several lower court cases have taken up the question of how borrowers inform the lender.
Under the current reading, simple notification is required, though that could lead to a court battle if the bank disputes the rescission. Yet the Eighth Circuit Court of Appeals, in the Jesinoski case, said a lawsuit filing is required to preserve the borrower's rescission right in the first place.
Seth Waxman, an attorney representing Countrywide Home Loans, said only a court can actually grant the right of rescission.
"When a borrower sends a notice of intent to rescind and the lender disputes that the notice is timely or otherwise valid, then rescission, which is the unwinding of the transaction, will not occur unless and until a court awards it," Waxman said.
But justices also challenged Waxman's assertions.
Justice Sonia Sotomayor said relying on a court to decide litigation as a means for awarding rescission could prolong the process beyond three years.
"You can't guarantee that a court is going to act in three years," she said. "There are many state courts where that's just not true anymore."
Justice Elena Kagan said the fact that a disputed rescission may be the subject of litigation between a bank and a borrower does not necessarily mean a lawsuit filing is required to meet the three-year requirement under TILA.
"People understood that there would be litigation and" the statute "is an acknowledgment of that," she said.
The statute "says that in those cases the court can award not only rescission but damages," she added. "But that's hardly a requirement that the borrower bring suit subject to the clause of three years. It's just not the way you would write a dispute resolution provision."
Observers noted that the highly technical questioning by the justices indicates that defining key terms in the statute is partly at issue in the case.
"It seemed the justices were struggling with what rescission means," Gregory DeMars, a partner at the Honigman law firm in Detroit, said in an interview.
DeMars added that the case may break the justices' typical pattern of 5-to-4 rulings that divide the court's conservative and liberal wings.
"I think you are going to see some affiliations with some justices that normally don't vote together," he said, but the ruling won't be a "unanimous decision."
Meanwhile, some have predicted the court could resolve the Jesinoski case by clarifying two major issues.
One would be to hold that a notice to rescind "does not cause an automatic rescission where the lender contests it," said Marshall Tracht, a professor at New York Law School. Tracht previewed the case for the American Bar Association. The other step, he added, could lay out that TILA "does not preclude a subsequent suit provided the notice is sent within the three-year window."