United States Supreme Court: TILA Does Not Require Consumers To File A Lawsuit Within Three Years In Order To Assert A Right To Rescind

By: Brian M. Forbes and Gregory N. Blase

For several years, federal courts have struggled with the question of whether a consumer who wishes to rescind a loan pursuant to the federal Truth in Lending Act (“TILA”) may do so by sending a notice of rescission within three years after the closing date, or whether the statute also requires the consumer to file a lawsuit within that three-year time period. On January 13, 2015, the United States Supreme Court, in Jesinoski v. Countrywide Home Loans, Inc., No. 13-684, slip op. (U.S. Jan. 13, 2015), resolved that question and held that sending a written notice of rescission within three years after closing is sufficient to exercise the right of rescission under TILA; the statute does not require a consumer to also file a lawsuit within that timeframe.

Under TILA, a consumer has up to three years from the closing of his or her loan to elect to rescind the loan under TILA if the lender failed to provide the consumer with certain “material disclosures” as defined by the Act. Notably, a consumer may also rescind a loan held by an assignee to the same extent as the original creditor.

The Supreme Court ruling resolved a split among the federal circuit courts of appeal. Certain circuits had held that TILA requires a consumer to file suit within three years in order to exercise rescission rights. Other circuits took the position that written notice of rescission within three years is sufficient to exercise those rights.

Writing for a unanimous court, Justice Antonin Scalia noted that TILA “explains in unequivocal terms how the right to rescind is to be exercised: It provides that a consumer ‘shall have the right to rescind . . . by notifying the creditor, in accordance with regulations of the Board, of his intention to do so.’” That language, the Court held, “leaves no doubt that rescission is effected when the consumer notifies the creditor of his intention to rescind.” Thus, “so long as the consumer notifies within three years after the transaction is consummated, his rescission is timely,” and “[t]he statute does not also require him to sue within three years.”

The Court was not persuaded by the argument that the three-year limitation period in TILA’s Section 1635(f) sets the time by which a suit must be filed. Similarly, the Court declined to recognize a distinction for situations where the lender does not agree that the consumer has established a legal basis upon which to rescind a loan under TILA. The Court also declined to apply the common law doctrine of rescission-at-equity, which requires a court to order a rescission where the other side has not tendered the money or property they received from the transaction.

Finally, while it is well settled that there is “no federal right to rescind, defensively or otherwise, after the three-year period of §1635(f) has run,” the Supreme Court’s decision leaves unanswered the issue of when the limitations period runs for filing an action for rescission in the event the lender declines the consumer’s request. While the Court attempted to clarify the issue of “how” the right to rescind must exercised, further litigation over this unanswered question is likely to follow.