The U.S. Court of Appeals for the Tenth Circuit recently held that a borrower's failure to file suit within three years of closing precluded a claim for rescission under the federal Truth in Lending Act, even though the borrower had sent notice of rescission to the loan holder within that three-year period. In so ruling, the Court rejected the CFPB's arguments to the contrary.
A copy of the opinion is available at:
Plaintiff ("Borrower") obtained a refinancing loan on her home from a lender that later assigned the loan to a bank ("Defendant Bank"). Within three years of the loan transaction, Borrower sent Defendant Bank a written notice of rescission supposedly rescinding the loan transaction based on the originating lender's alleged Truth in Lending Act ("TILA") disclosure violations. Defendant Bank never responded to Borrower's rescission notice.
After Borrower fell behind on her payments, Defendant Bank instituted foreclosure proceedings in Colorado state court. In response to the foreclosure action, Borrower raised the alleged rescission as a defense, asserting that she had previously rescinded the loan transaction when she sent Defendant Bank the notice of rescission. The state court rejected this argument and Defendant Bank scheduled a foreclosure sale of Borrower's property.
Shortly before the scheduled foreclosure sale, but more than three years after the loan closing, Borrower filed a lawsuit in state court seeking in part a declaratory judgment that the loan had been rescinded when she sent the rescission notice and that Defendant Bank thus could not proceed with the foreclosure.
Defendant Bank removed the case to federal court and filed a motion to dismiss.
Following the Supreme Court's decision in Beach v. Ocwen Fed. Bank, 523 U.S. 410 (1998) ("Beach"), the District Court dismissed Borrower's complaint, ruling that Borrower had failed to file suit within TILA's three-year statute of repose. The District Court further ruled that Borrower also failed to file suit within one year after she had notice of the alleged TILA violation, as required. Borrower appealed.
The Tenth Circuit affirmed, ruling in part that TILA's section 1635(f) extinguished Borrower's claim for rescission because she failed to file suit within three years of the loan transaction.
As you may recall, TILA provides 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). See also 12 C.F.R. §§ 226.1 -.59 (Regulation Z).
The Tenth Circuit affirmed, ruling in part that TILA's section 1635(f) extinguished Borrower's claim for rescission because she failed to file suit within three years of the loan transaction.
As you may recall, TILA provides 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). See also 12 C.F.R. §§ 226.1 -.59 (Regulation Z).
Relying on the Supreme Court's ruling in Beach that section 1635(f) is a statute of repose rather than a statute of limitations, the Tenth Circuit rejected Borrower's position that her lawsuit was timely because she had sent a notice of rescission to Defendant Bank within the three-year rescission period.
In so ruling the Tenth Circuit explained that the plain language of section 1635(f) was consistent with the goal of providing clear title to a buyer in a foreclosure sale and noted that "accepting a consumer's unilateral notice of an intent to rescind as a legally effective exercise of rescission, where the creditor has not in any sense actually acted on the consumer's wishes, would indirectly enlarge the congressionally established three-year time period under TILA, and would work to cloud the title of the property for an indefinite period of time."
The Court thus observed that although "the giving of notice is a necessary predicate act to the ultimate exercise of the right," it is not "sufficient for such exercise."
Significantly, the Court of Appeals disagreed with the Consumer Financial Protection Bureau ("CFBP") which had filed an amicus brief arguing that a TILA rescission is a "non-judicial rescission process" that may be "accomplished privately by notice" within the three-year period. In so ruling, the Tenth Circuit reasoned that the CFBP's position ran counter to the U.S. Supreme Court's ruling in Beach that a law suit must be filed within TILA's three-year period so as "to prevent the rescission right from acting to unduly 'cloud a bank's title on foreclosure.'"
Given its ruling on section 1635(f), the Tenth Circuit did not address the District Court's ruling on the one-year limitations period for failure to rescind after notice.
Given its ruling on section 1635(f), the Tenth Circuit did not address the District Court's ruling on the one-year limitations period for failure to rescind after notice.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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Email: RWutscher@mtwllp.com
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