“Circuit Split on TILA Widens” Or “Three Years is a Lot Longer Than it Used to Be”

By: Matt Cherep

On February 5, 2013, the Third Circuit Court of Appeals sided with the Fourth Circuit in holding that under the Truth-in-Lending Act an obligor exercises her right of rescission solely by sending the creditor valid written notice of rescission and need not also file suit within the three year statutory period.  Sherzer v. Homestar Mortgage Servs. et al, No 11-4254, 2013 U.S. App. Lexis 2486 (3d. Cir. Feb. 5, 2013). The issue, which would seemingly arise rarely, has drawn Court of Appeals opinions from the 9th, 10th, 4th, and 3rd Circuits within the past 12 months. (See McOmie-Gray v. Bank of Am. Home Loans, 667 F.3d 1325 (9th Cir. 2012); Rosenfield v. HSBC Bank, USA, 681 F.3d 1172 (10th Cir. 2012); Gilbert v. Residential Funding, LLC, 678 F.3d 271 (4th Cir. 2012); Sherzer, 2013 U.S. App. Lexis 2486)  As the issue has gathered steam, the CFPB, the American Bankers Association, the Consumer Bankers Association, and the Consumer Mortgage Coalition all entered the fray, with the CFPB filing an amicus brief in support of the borrowers and the lenders associations filing amici briefs on the side of the lenders. 

The question creating so much hubbub is seemingly simple: does an obligor sufficiently exercise her right to rescind a loan subject to TILA simply by notifying the creditor in writing of her intention, or must the obligor also file suit to enforce her rights before the three-year statutory period expires? The answer, of course, is as clear as mud.

In relevant part, TILA, codified at 15 U.S.C. §1635, allows obligors a “no questions asked” right to rescind certain consumer credit transactions within a proscribed time period. Where a lender has provided an obligor with proper disclosure of credit terms, the obligor “shall have the right to rescind the transaction until midnight of the third business day.” (Id.) Obligors may exercise this right “by notifying the creditor, in accordance with regulations of the Bureau, of his intention to do so.” (Id.)  Where an obligor has not received proper disclosures, an obligor’s right of rescission continues past the three-day period, but “shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first." (Id.) The fundamental question – one left largely unanswered by TILA – is HOW does a party exercise their right to rescind. Is the unilateral sending of written notice to a lender an effective act of rescission? Does rescission require judicial action? Is the sending of a written notice merely alerting the lender that a borrower will seek its right of rescission through a lawsuit sufficient? Maybe the answer comes down to something more fundamental than even the statutory language itself. Maybe the answer comes from how we see the role of the judiciary in the rescission process. Is the judiciary’s role to enforce a rescission right already exercised or is the judiciary’s role part and partial of the rescission process, such that the two are necessarily one and the same.   Regardless, what is beyond debate is that TILA is silent as to judicial action in the context of rescission.

In Sherzer, borrowers obtained two loans from lender Homestar Mortgage Services (“Homestar”) in August 2004 secured by mortgages on their principal dwelling.  (Sherzer, 2013 U.S. App. Lexis 2486, at *1-4) Homestar later sold or assigned its interest in the loans to HSBC Bank (“HSBC”). In May 2007, borrowers’ counsel sent a letter to Homestar and HSBC (collectively, “Lenders”) asserting that Homestar failed to provide all necessary disclosures required by TILA. As such, the borrowers claimed to exercise their right to rescind their loan agreements under 15 U.S.C. §1635.  Lenders denied that rescission of the larger of the two loans was appropriate and claimed that Homestar had not violated TILA. The borrowers brought suit in November 2007 – more than three years after the loan closed – seeking a declaration of rescission, remedies for rescission, and damages.  Lenders moved for a judgment on the pleadings, arguing the borrowers’ right to rescission was time-barred under 15 U.S.C. §1635(f). The district court ruled in favor of HSBC, finding TILA requires borrowers to both send written notice of intent to rescind AND file a rescission action within three years. In so holding, the district court found that because the borrowers did not file suit within three years, the right of rescission became extinguished. Such a holding was in keeping with recent 9th and 10th Circuit opinions.

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Court Grants MSJ for Defendant Loan Servicer’s Breach of Contract Claim But Permits Three of Plaintiffs’ Counts To Proceed.

 

Photo: en.wikipedia.org

Bob Gaumont co-authored this post with Kara Boyle.

Ready, Aim, File! 
The same attorney for the plaintiffs in our last blog entry (and that in the Matthews and Spaulding cases cited therein) has filed another loan modification complaint in the U.S. District Court for the District of Maryland, this time before the Honorable James K. Bredar.  On February 1, 2013, Judge Bredar issued an opinion addressing Plaintiffs Marquis Neal et al.’s (the “Neals” or “Plaintiffs”) five causes of action—violations of the Maryland Consumer Protection Act ("MCPA"), common law fraud, promissory estoppel, negligence, and negligent misrepresentation, and Defendant Residential Credit Solutions, Inc.’s (“RCS” or “Defendant”) breach of contract counterclaim.  Neal et al. v. Residential Credit Solutions, Inc. (“Op.”), No. JKB-11-3707, 2013 WL 428675 (D. Md. Feb. 1, 2013).

First, given our prior blog entry, we note that Judge Bredar referred to as “an interesting theory” RCS’s claim that Plaintiffs’ state law claims were “foreclosed by the fairly universal acceptance by courts that no private right of action lies for a denial of a loan modification under the Home Affordable Modification Program (“HAMP”),[ but stated that Defendant had] cited no authority for this theory of implicit preemption.”  (Op. at 11.)  Consequently, the Court did not adopt the Defendant’s theory and instead adopted the conclusion from opinions by the Court finding that state law claims were not “foreclosed by the fact that they arose in the context of HAMP.”  (Id.);  see, e.g., Legore v. OneWest Bank, Civ. No. BEL-11-589, 2012 WL 4903087, *4 (D. Md. Oct. 15, 2012) and cases cited therein.

(See the “Closing the HAMPer?”  blog entry for more discussion of HAMP preemption in Maryland.)

Defendant’s Win MSJ On Breach of Contract Counterclaim
RCS alleged that on September 11, 2007, the Neals borrowed $231,300 from BankUnited FSB, as evidenced by a promissory note (the “Note”) executed on the same date.  (Def. RCS’s Answer to Complaint and Counterclaim at 8.)  RCS is the current loan servicer of the Note.  (Id.)

Plaintiffs argued that RCS, as a mere loan servicer, was not entitled to sue on the note.  (Op. at 2.)  RCS countered by submitting guidelines from Fannie Mae, which govern the relationship between Fannie Mae and loan servicers.  (Id. at 3.)  The guidelines conclusively establish that Fannie Mae allows a loan servicer to have temporary possession of the mortgage note, “whenever the servicer, acting in its own name, represents the interests of Fannie Mae in foreclosure actions, bankruptcy cases, probate proceedings, or other legal proceedings.  (Id.)  In sum, the servicer becomes the holder of the note.  (Id.)  The Court concluded therefore that RCS had standing to sue on the note as its holder and dismissed the Plaintiffs’ motion to dismiss the counterclaim.  (Id.)

Moreover, the Court granted RCS’ motion for summary judgment of this counterclaim because Plaintiffs “have never denied that they executed the note or that they are in default with respect to it.”  (Id. at 4.)  Mr. Neal testified in his depositions that they had not made any payments on the note in 2010 and leading up to their depositions in October 2011.  (Id.)  Mrs. Neal testified similarly at a hearing in the course of the foreclosure proceeding.  (Id.)  Plaintiffs’ only argument against RCS’s entitlement to judgment on its counterclaim relied on their argument to dismiss the counterclaim, which was denied as unmeritorious.  (Id.)  In sum, RCS “clearly established it [was] entitled to judgment.”  (Id.)  Thus, the Court granted RCS’s motion for summary judgment on the counterclaim.  (Id.)

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Closing the HAMPer? Maryland court holds HAMP does not preclude state law claims. But Plaintiffs lose anyway.

Kara Boyle co-authored this post with Bob Gaumont.

A mixed opinion for attorneys wishing to bring or defend claims based on the Home Affordable Modification Program ("HAMP"). 

In her January 8, 2013 opinion, the Honorable Catherine C. Blake of the U.S. District Court for the District of Maryland (the “Court”) dismissed plaintiffs Robert Goss and Shirley Goss’s (“Plaintiffs” or the “Gosses”) complaint against Bank of America, N.A. (“Defendant” or “Bank of America”).  Despite the Court’s recent dismissal of complaints presenting substantially similar claims under HAMP by the same attorney, Judge Blake issued an opinion that may provide an important distinction and fair warning to mortgage servicers.
  
In the previous two cases, Matthews v. Wells Fargo Bank, N.A., No. MJG-12-1204, 2012 U.S. Dist. LEXIS 126646 (D. Md. Sept. 5, 2012) and Spaulding v. Wells Fargo Bank, N.A., No. GLR-11-2733, 2012 U.S. Dist. LEXIS 101776, (D. Md. July 23, 2012), the Court stated that it had “made it clear that absent a [Trial Period Plan (“TPP”)] Agreement [between Plaintiff and Defendant], a suit that seeks the general enforcement of the HAMP guidelines must be dismissed.”  Spaulding, 2012 U.S. Dist. LEXIS 101776 at *10 (granting defendant’s motion to dismiss where plaintiffs’ claims were based on defendant’s denial of their HAMP application and plaintiffs did not allege that a TPP was in place or even offered); see Matthews, U.S. Dist. LEXIS 126646 (granting defendant’s motion to dismiss and adopting, mutatis mutandis, Judge Russell’s decision in Spaulding); Ramos v. Bank of Am., N.A., No. DKC-11-3022, 2012 U.S. Dist. LEXIS 77123, 2012 WL 1999867, at *3 (D. Md. June 4, 2012); Coulibaly v. J.P. Morgan Chase Bank, N.A., No. DKC 10-3517, 2011 U.S. Dist. LEXIS 87495, 2011 WL 3476994 at *15 (D. Md. Aug. 8, 2011); Allen v. CitiMortgage, Inc., No. CCB-10-2740, 2011 U.S. Dist. LEXIS 86077, 2011 WL 3425665, at *4 (D. Md. Aug. 4, 2011); see also Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 558-59 (7th Cir. 2012).  The Court explained that in these cases, the plaintiffs’ claims were allowed to proceed on the basis of a previously established TPP agreement.  Spaulding, 2012 U.S. Dist. LEXIS 101776 at *10.

In the Goss opinion, Plaintiffs had not entered into a TPP agreement with Defendant.  Nevertheless, Judge Blake explained that despite a plaintiff’s inability to “enforce HAMP guidelines on behalf of the federal government or as a third-party beneficiary of the HAMP participation agreement between the federal government and the mortgage servicer[,] . . . the absence of a private right of action from a federal statute provides no reason to dismiss a claim under a state law just because it refers to or incorporates some element of the federal law.”  (Op. at 4-5.)  Thus, Plaintiffs were not precluded from pursuing their state law claims, and Judge Blake proceeded to evaluate their six counts against Defendant.   (That said, Plaintiffs lost anyway.)

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