A U.S. Supreme Court decision in January, Jesinoski et al v. Countrywide Home Loans Inc. et al, that said borrowers had up to three years to advise their creditors they intended to rescind their mortgage, has left many lenders in a quandary over how to prepare for an anticipated large demand for rescission requests.

The Supreme Court’s ruling said that borrowers—under the Truth in Lending Act—have the power to rescind mortgages just by providing notification to their lenders within three years. Previously many courts had ruled that borrowers had to sue within that time period to have their mortgage rescinded. That ruling has left mortgage creditors, servicers, and banks to determine how to deal with older rescission requests and how to handle the requests that they will receive now.

Under TILA borrowers have two types of rescission rights: one allows them to rescind within three days of closing and before funds are disbursed; the other applies in cases where borrowers do not received required disclosures. Once a lender receives a rescission notice, it has 20 days to determine its validity and decide whether or not to pursue a declaratory judgment to block the rescission when it can show that it provided sufficient disclosures.

According to Joel Tasca, a partner at Ballard Spahr, that is a short timeline to complete the time-consuming process of reviewing records from older mortgages, but it is a decision that could have significant ramifications as to whether or not the lender retains a security interest or forfeits its rights to get repaid. In light of this, implementing a blanket policy of challenging all rescission notifications may be a prudent way to go.

“Lenders are going to feel like they may have to go into court and file the [declaratory judgment] action against the borrower to get a ruling that there was no disclosure violation,” he said.

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