The timing and mechanics of rescinding a loan under the Truth and Lending Act (TILA) has been a hotly contested legal issue. As highlighted during the recent oral argument in Jesinoski v. Countrywide Home Loans, Inc. before the U.S. Supreme Court, there are strong policy arguments that support a broad interpretation of the right to rescind. However, the right is not unlimited, as the Maryland Court of Appeals recently explained.

In Burson v. Capps, a borrower negotiated with a lender to refinance his mortgage loan. After rejecting two prior refinance offers, the lender extended the borrower a third refinance package. The borrower initially accepted the package, but before he executed the loan documents, he submitted a notice of rescission to the lender. However, despite submitting the notice, the borrower closed on the loan a few days later.

The borrower ultimately defaulted and the lender initiated a judicial foreclosure. The borrower moved to stay or dismiss the proceeding, arguing that he had rescinded the loan. The trial court rejected the borrower’s argument, permitted the foreclosure sale to occur, and subsequently ratified the sale. The borrower appealed, and the Court of Special Appeals reversed the circuit court’s decision. Despite the logical inconsistency of allowing a borrower to rescind a loan that had not yet been made, the court reasoned that nothing in TILA or its implementing regulation, Regulation Z, prohibited a borrower from rescinding a loan prior to consummation and that TILA should be interpreted broadly to give effect to its broad consumer-protection purpose.

The Court of Appeals reversed. Citing the statutory text, the court explained that the right of rescission belongs to borrowers only “in the case of any consumer credit transaction.” The court examined the text of both TILA and Regulation Z, and concluded the term “transaction” referred to a loan that was consummated. Based on this analysis, the Court of Appeals held that the borrower “could not have rescinded what he had not yet created.” Because the borrower’s notice of rescission was sent before he executed the loan documents, the loan could not be cancelled at that time and the rescission was ineffective. At that point, if the borrower wanted to avoid the loan, he could have refused to sign the loan documents, or could have promptly returned the loan proceeds after closing.

While there is certainly divergent authority regarding the scope of the right to rescind, it is reassuring that the Court of Appeals in Burson looked closely at the text of TILA and Regulation Z to define the limits of the right.