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Send letter; cancel 3-year-old loan?

November 5, 2014
by admin

Let’s say you fall behind on your mortgage payments, and you discover that the lender didn’t give you enough copies of a disclosure document when you got the loan three years ago. To cancel the loan, do you need to merely send a letter to the bank? Or do you have to file a lawsuit? The Supreme Court heard arguments this week on this question.

The case raises a few questions of my own:

  • When a lender makes a paperwork error, is justice served by forcing the lender to cancel the loan three years later? Should there be a less-drastic remedy?
  • Especially when the borrower already is behind on the house payments?
  • When a borrower signs a document at the closing table, acknowledging that he or she got all the required disclosures, are we supposed to take the borrower’s word for it, three years later, that he or she didn’t receive all the required disclosures?
  • How, exactly, do you rescind a mortgage three years later, anyway?

Some background

This Supreme Court case was brought by Larry and Cheryle Jesinoski of Eagan, Minnesota. They got a $611,000 refinance from Countrywide Home Loans on Feb. 23, 2007. On the same date in 2010, they sent a letter to Bank of America (which had bought Countrywide), saying that they were rescinding (canceling) their mortgage.

Here’s why: At a mortgage refinance closing, each borrower is supposed to receive two copies of a document called the Notice of the Right to Rescind and one copy of the Truth-in-Lending Disclosure. In court documents, the Jesinoskis say they got the disclosures, but not enough copies.

I mean, that’s what they say now. At the loan closing, they signed documents affirming that they had received all the required documents.

Severe consequences

If the lender doesn’t provide enough copies of each document to each borrower … well, the Consumer Financial Protection Bureau sums up the consequences succinctly: “Please note that if the lender fails to give you two copies of the right to rescind or the Truth-in-Lending Disclosure, you continue to have the right to cancel the loan for up to three years.”

In their petition to the Supreme Court, the Jesinoskis don’t say how many copies of those documents that they received. They just say that they didn’t get enough. Even though, at closing, they each signed documents swearing that they did receive the required number of copies.

The conflict begins

Three years after closing, the Jesinoskis were in foreclosure and they sent the letter saying that they intended to rescind the mortgage because they didn’t get enough copies of disclosures. The lender replied, essentially, “We dispute your assertion and we’re not letting you rescind the loan.” A year later, the Jesinoskis filed suit against Bank of America, and B of A asked to have the lawsuit dismissed because it was filed after the three-year deadline.

Arguments, boiled down

The Jesinoskis argue that federal law plainly states that all they had to do to rescind the mortgage was to send a letter to the bank. Bank of America argues that borrowers can’t merely send letters; they have to file lawsuits when the borrower and lender disagree about the facts. Because the right of rescission expires after three years, the lawsuit has to be filed within three years, B of A argues.

A federal district court sided with Bank of America. The Eighth Court of Appeals did, too, while noting that other federal appeals courts had ruled in favor of borrowers in similar cases. The conflicting rulings in appellate courts paved the Jesinoskis’ road to the Supreme Court.

Why this bugs me

This is a troubling case, because the Jesinoskis are correct that the Truth in Lending Act is plainly worded. If you read the words on the page, they clearly mean that all a borrower has to do is mail a letter and the loan is rescinded. But that’s crazy.

Here’s why that’s crazy: The facts are in dispute. Shouldn’t the Jesinoskis have to prove — in court — that they didn’t get enough copies?

Some legal perspective

Questions of good faith and fairness seemed to haunt the justices this week during the oral arguments, says lawyer Greg DeMars, who has been following the case (as an observer; he’s not on either side’s legal team).

DeMars, a partner at Honigman law firm in Detroit, says the justices wanted to know what happens when a delinquent borrower requests a rescission — what if it’s a ruse? And if the lender rejects the borrower’s rescission request, does that burden the borrower to take further action? The law doesn’t say, so the Supreme Court might have to fill in the blanks.

“I am sensitive to the lender’s viewpoint,” DeMars says, “but, frankly, I think the lender is at a disadvantage here” because the law doesn’t spell out what happens when the borrower and lender disagree.

What’s next

A decision is expected next spring. “It could be just so technically driven or narrow that it might not have broader implications,” DeMars says. “On the other hand, it could have broader implications.”

One other thing

Oh, and to answer a question that I asked above, here’s what’s supposed to happen when you rescind a refinance mortgage because of faulty paperwork (and the lender doesn’t dispute the rescission, and you rescind the loan more than three days after closing but before three years after closing):

  • Within 20 days of receiving the rescission letter, the lender returns the down payment.
  • It’s not clear whether the lender has to refund all interest paid.
  • Then the borrower returns the money borrowed, or turns over the property.

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