In a decision that possibly opens the door for renewed foreclosure delays, the U.S. Court of Appeals for the Fourth Circuit has held that a lawsuit seeking rescission is timely where the consumer provided notice of rescission to the subservicer within three years of closing but did not file suit until after the three-year deadline had passed.
The May 3, 2012, decision in Gilbert v. Residential Funding LLC is the first by a federal appellate court to hold that a borrower need only send notice of rescission within the three-year period to validly exercise a right to rescind.
The decision puts the Fourth Circuit in the minority. The majority of courts to consider the question—including the Third and Ninth Circuits—have held that the requirement for the borrower to file suit within the three-year period is consistent with the language of Section 1635 of the Truth in Lending Act and prior precedent, including the U.S. Supreme Court’s decision in Beach v. Ocwen Federal Bank. In its opinion, the Fourth Circuit rejected the subservicer’s reliance on Beach, observing that Beach “did not address the proper method of exercising a right to rescind or the timely exercise of that right” but only addressed whether Section 1635 was a statute of limitation that operated to extinguish the right after three years.
The borrowers in Gilbert had sent their rescission notice following the filing of a foreclosure action by the holder of their note. In doing so, they were employing a tactic that, since the mortgage foreclosure process began, borrowers have routinely used to delay a foreclosure even when the borrower has no real intention of rescinding (and perhaps even when the borrower does not know if he or she has any basis for rescinding or the ability to tender back the principal).
The Fourth Circuit distinguished “the issue of whether a borrower has exercised her right to rescind” from “the issue of whether the rescission has, in fact, been completed and the contract voided.” While acknowledging that, to complete a rescission and void the contract, the creditor must agree to rescind or the borrower must file a lawsuit, the Fourth Circuit did not directly address the question of how long after three years a borrower may wait to file suit. It held only that the borrower’s TILA claim for damages based on the subservicer’s refusal to rescind the loan was timely under TILA Section 130(e) because it was filed within one year of the date of the subservicer’s letter rejecting the rescission.
While we disagree with the Fourth Circuit’s conclusion that borrowers can bring rescission lawsuits more than three years from loan consummation, we believe that, if borrowers are allowed to do so, the one-year statute of limitations in Section 130(e) should apply.
The Fourth Circuit’s decision represents a victory for the Consumer Financial Protection Bureau, which had filed an amicus brief in Wolf v. Federal National Mortgage Association, another Fourth Circuit appeal involving the same rescission issue. In its brief, the CFPB took the position that notice within the three-year period is all that is required to validly exercise a right to rescind. The CFPB has filed amicus briefs taking the same position in the Third, Eighth, and 10th Circuits. (To read our blog posts on the CFPB’s amicus briefs, click here and here.)
The Fourth Circuit also reversed the district court’s dismissal of the borrower’s state law usury claim, although it directed the district court to consider, on remand, various North Carolina statutes that would have allowed the lender to charge any agreed rate. While affirming the district court’s dismissal of the borrowers claims under North Carolina’s unfair and deceptive trade practices law that were based on conduct of the original creditor who was not a party to the lawsuit, it reversed the dismissal of those claims against the noteholder, the subservicer, and other named defendants.