“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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