This posting was written by Robert M. Jaworski.
On June 11, 2012, the 10th Circuit Court of Appeals in Rosenfield v HSBC Bank, 2012 WL 2427810 (10th Cir. 2012), rendered an important decision concerning the duration of a consumer’s right to rescind a residential mortgage loan transaction under the Truth-in-Lending Act (“TILA”). 15 U.S.C.A. § 1600 et seq. The court determined that, for a rescission claim to be viable, consumers must provide the creditor with notification of rescission and must commence suit to enforce their right to rescind within three years following the date of closing. It is not sufficient, the court says, for the consumer merely to send the creditor notification of rescission within three years – if the creditor takes no action in response to that notification, the consumer must also file suit within three years.The critical language in TILA is found in section 125, which 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 comes first.” 15 U.S.C.A. § 1635(f).
Plaintiff had argued that, although she failed to sue within three years to enforce her right to rescind her loan, she nevertheless timely exercised her rescission right under TILA by delivering to HSBC her notification of rescission before the three-year period expired. In support of this argument, plaintiff sought to characterize rescission under TILA as a non-judicial remedy, pointing to the provision in Regulation Z that states 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,” 12 C.F.R. § 1026.23(a)(2), and subsequent provisions that require the creditor and the consumer, following the creditor’s receipt of such a notification and within prescribed timeframes, to take actions necessary to unwind the transaction. 12 C.F.R. § 1026.23(d).
The court rejected this argument, stating:
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 it would work to cloud the title of the property for an indefinite period of time.
Slip Op. at p. 28 (italics in original).
The court further indicated that:
By its plain terms, § 1635(b) contemplates a reaction by the creditor in order to effectively “close the deal” – that is, the creditor “shall return to the obligor any money or property given as earnest money, downpayment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction … [w]ithin 20 days after receipt of [the] notice.” …. Absent this “return,” there has been no mutual recognition of cancellation of a loan in the literal sense.
Slip Op. at pp. 28-29 (footnote 11) (italics in original).
The court also noted that “unilateral notification of cancellation [of a loan] does not automatically void the loan contract,” because, “[o]therwise, a borrower could get out from under a secured loan simply by claiming TILA violations, whether or not the lender had actually committed any.” Id., quoting from Am. Mortg. Network, Inc. v. Shelton, 486 F.3d 815, 821 (4th Cir. 2007).
The 10th Circuit’s ruling is in agreement with previous decisions of the Ninth and Third Circuits, McOmie-Gray v. Bank of Am, 667 F.3d 1325, 1328 (9th Cir. 2012), and Williams v. Wells Fargo Home Mortg., Inc., 410 F. App’x 495, 498-99 (3rd Cir. 2011); and explicitly rejects a contrary opinion rendered by the Fourth Circuit, Gilbert v Residential Funding, LLC 678 F.3d 271, 2012 WL 1548580, at * 4-5 (4th Cir. May 3, 2012). It also signifies another defeat for the Bureau of Consumer Financial Protection, which submitted an amicus curiae brief in support of plaintiff’s position. Most importantly, the ruling establishes within the 10th Circuit a much-needed bright line after which mortgage lenders and assignees need not worry about rescission, and subsequent purchasers of mortgaged properties need not be concerned about potential defects in title.
Robert M. Jaworski is a partner in the Financial Services Regulatory Group of Reed Smith LLP, resident in the Princeton, N.J., office. Bob is formerly the Deputy Commissioner of Banking for New Jersey, a former New Jersey Deputy Attorney General, and a frequent speaker at national and regional bank regulatory conferences.