Saturday, May 5, 2012

FYI: 4th Cir Holds 3-Year TILA Rescission Period Does Not Require Filing Suit Within 3 Years

The U.S. Court of Appeals for the Fourth Circuit recently held that, where borrowers had sent written notice of rescission to a loan servicer within the three-year time limit under TILA, the borrowers had exercised their right to rescind and there was thus no need for them to file a lawsuit within that time period in order to further invoke the rescission right. 
A copy of the opinion is available at:
Plaintiffs-Appellants (Borrowers) refinanced their home mortgage loan and executed a deed of trust to secure the loan.  The loan ultimately became part of an asset securitization trust with defendant bank acting as trustee ("Loan Owner").  The Borrowers later defaulted on the loan.  The substitute trustee then initiated a foreclosure action against the Borrowers, and, within three years of the loan transaction, the Borrowers notified the loan servicer in writing that they were exercising their right to rescind under the federal Truth in Lending Act ("TILA").
About five months after the loan servicer rejected the Borrowers' demand for rescission -- and over three years after the loan transaction -- the Borrowers filed suit against the Loan Owner, the substitute trustee, and the servicer (collectively, "Defendants"), seeking, among other things, to enjoin the mortgage foreclosure sale and to rescind the loan.  The original lender was not a party to the lawsuit.
In their complaint, the Borrowers alleged in part that the Defendants:  (1) failed to provide them certain disclosures required under TILA and Regulation Z;  (2) engaged in unfair trade practices in violation of the North Carolina Unfair and Deceptive Trade Practices Act ("NCUDTPA"); and  (3) violated state usury law. 
The Defendants removed the case to federal district court and filed a motion to dismiss, which the district court granted.  The Borrowers appealed, challenging among other things the district court's dismissal of their TILA, usury, and NCUDTPA claims. 
The Fourth Circuit affirmed in part, reversed in part, and remanded, ruling that in order to exercise the right to rescind,  a borrower need only send written notification of rescission within TILA's three-year period.
As you may recall, the Truth in Lending Act provides in relevant part that "[a]n obligor's right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first, notwithstanding the fact that the information and forms required under this section or any other disclosures required under this part have not been delivered to the obligor." 15 U.S.C. § 1635(f).
In addition, TILA's implementing Regulation Z provides in part that "[t]o exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram or other means of written communication.  Notice is considered given when mailed, when filed for telegraphic transmission or, if sent by other means, when delivered to the creditor's designated place of business." 12 C.F.R. § 1026.23(a)(2).
Noting a split of authority as to whether a borrower must file a lawsuit within three years after entering into a loan agreement to exercise the right to rescind, or whether a borrower need simply send  written notice within the three-year period, the Fourth Circuit ruled that the district court improperly dismissed the Borrowers' rescission claims as untimely
In so doing, the Court of Appeals, referring to the statutory and regulatory language, stated:   "[t]aking the plain meaning of these texts, and assuming that the words say what they mean and mean what they say, we come to the conclusion that the [Borrowers] exercised their right to rescind with the [rescission] letter. Simply stated, neither 15 U.S.C. § 1635(f) nor Regulation Z says anything about the filing of a lawsuit, and we refuse to graft such a requirement upon them."
Distinguishing between "the issue of whether a borrower has exercised [the] right to rescind [and] the issue of whether the rescission has . . . been completed and the contract voided[,]" the Court ruled that a borrower exercises the right of rescission merely by providing written notice to the creditor of his intent to rescind.   The Court observed, however, that to complete the rescission and void the contract "[e]ither the creditor must 'acknowledge[] that the right of rescission is available' and the parties must unwind the transaction amongst themselves, or the borrower must file a lawsuit so that a court may enforce the right to rescind."    See American Mortgage Network, Inc. v. Shelton, 486 F.3d 815, 821 (4th Cir. 2007) ("unilateral notification of cancellation does not automatically void the loan contract.")
In so ruling, the Fourth Circuit noted that Beach v. Ocwen Fed. Bank, 523 U.S. 410, 417 (1998), neither addressed the proper method of exercising a right to rescind nor the timing of that right.  Instead, the Fourth Circuit ruled that the three-year limitation in Section 1635(f) "concerns the extinguishment of the right of rescission and does not require borrowers to file a claim for the invocation of that right."
Turning to the other issues before it, the Court concluded that under TILA's Section 1641(c), a consumer having the right to rescind may rescind as against an assignee of the original creditor, such as the Loan Owner and other defendants in this case. 
In addition, the Fourth Circuit ruled in part that:   (1) the Borrowers' claim for damages was not barred by  TILA's one-year statute of limitations, as the alleged TILA violation occurred when the servicer refused to rescind the loan transaction;  (2) the Borrowers had adequately pled the four elements of a state usury claim; and  (3) the Borrowers' NCUDTPA claims could proceed, because there was a sufficient factual basis for the TILA and usury claims, which claims may constitute a per se violation of the NCUDTPA. 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at: