Three significant opinions issued by the US Supreme Court in the last few months will impact lenders and investors. Below are brief descriptions of each ruling and how you may be affected.
Bank of America v. Caulkett
In a major win for the nation’s mortgage lenders and investors—and reversing controlling precedent of the Eleventh Circuit in Florida—the Supreme Court ruled unanimously in two consolidated cases that wholly unsecured second mortgages cannot be “stripped off” in Chapter 7 cases. This ruling protects mortgage lenders in bankruptcy on underwater second mortgages issued during the housing boom. While this opinion settles once and for all a Chapter 7 debtor’s ability to either strip down or strip off an unsecured mortgage, it is unlikely to affect a Chapter 13 debtor’s ability to strip off wholly unsecured mortgages.
Wellness International Network v. Sharif
The Supreme Court clarified and confirmed the jurisdiction of US bankruptcy court judges to make final decisions on so-called “Stern claims” that arise in cases, if all involved parties consent. Such consent need not be express. This opinion is important because it calms the uncertain waters created by the Court’s prior ruling in the Anna Nicole Smith-related case, Stern v. Marshall.
Jesinoski v. Countrywide Home Loans
Your borrower may be able to walk away from your mortgage just by sending you a letter within three years of executing the loan documents. At least that’s what the U.S. Supreme Court recently said. This right is fairly limited, of course. Under the Truth In Lending Act (“TILA”), borrowers on home mortgages generally have a three-day right of rescission after the lender provides certain disclosures that are required by TILA. If the lender provides the disclosures at or prior to closing, the right of rescission is cut off three days later. If, however, the mortgage lender fails to provide the borrower with the mandatory disclosures, the TILA three-day period expands … to up to three years after closing (at which point the right of rescission ends, regardless of whether the disclosures were made). Moving forward, lenders need to ensure they make all TILA-required disclosures at or before closing and treat any document executed by the borrower affirming such receipt as carefully as they would the original note.