The U.S. District Court in Arizona may have launched a new defense to a rescission claim based on failure to give two copies of a right to cancel. We shall see how this all shakes out but here are the basics. Under the Truth in Lending Act, consumers have three days to rescind certain credit transactions. 15 U.S.C. § 1635. Once they rescind, they are not liable for any finance charge and the creditor must return earnest money, down payments and release any security interests. However, if the lender’s disclosures are somehow improper, the consumer’s rescission rights are extended to last three years. 15 U.S.C. § 1635(f).
A lender is required to provide borrowers with two copies of the right to rescind a transaction. 12 C.F.R. § 226.23. Most, if not all courts, have held that the failure to give two copies of the three-day right to cancel, in and of itself, extends the rescission period to three years. However, in Martenson v. RG Financing, 2010 U.S. Dist. LEXIS 11921 (D. Az. 2010), the court suggested that failure alone may not be enough to extend the rescission period. In Martenson, the plaintiff’s house had been foreclosed upon and she filed an emergency motion to stop her eviction. Among other things, the plaintiff claimed that she did not get two copies of the right to cancel.
In reviewing the motion, the court had to determine plaintiff’s “likelihood of success on the merits.” In that connection, the court said:
Martenson appears to contend Defendants violated TILA because Defendants were required to provide her with two copies of the Notice of Right to Cancel, her personal file contained only one copy, and she believes she kept everything she received at closing in that file. But she does not allege that receiving only one copy prevented her from exercising her right to cancel or that she would have exercised the right if she had received two copies.
Martenson got her injunction, but not because of her TILA arguments. Had the failure to provide two copies been her only argument against eviction, she would heve lost. For now, other courts will have to determine whether failure to provide two copies must be accompanied by some prejudice to the borrower’s rescission right to be actionable.