The Truth in Lending Act (TILA) requires lenders to provide borrowers with certain disclosures, and imposes certain criminal and civil penalties on lenders for noncompliance. Among other remedial rights, TILA affords borrowers the right to rescind a loan in equity. “TILA authorizes a borrower whose loan is secured with [a] ‘principal dwelling’ to rescind the loan transaction entirely ‘until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required . . . together with a statement containing [certain] material disclosures . . . whichever is later.’”1 “If the required TILA disclosures are never made, then the borrower’s right of rescission under § 1635(f) ‘shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first.’”2
- The Tenth Circuit Court of Appeals Tackles the Question as to What Constitutes a Consumer’s Timely Exercise of TILA’s Rescission Right
On June 11, 2012, the Tenth Circuit Court of Appeals issued an opinion in Jean C. Rosenfield v. HSBC Bank USA, et al., 681 F.3d 1172 (10th Cir. 2012), ruling that a borrower’s rescission claim may be barred by TILA’s three-year statute of repose despite the borrower’s having served a timely notice of rescission upon the lender and having raised a rescission defense in a non-judicial foreclosure proceeding. This developing law is increasingly relevant for lenders and loan servicers, who face an escalating number of borrower’s claims and disputed foreclosures, often involving alleged rescission rights.
In Rosenfield, a borrower brought suit seeking rescission of her loan more than three years after her loan closed. Prior to filing suit, and within three years of the closing of her loan, the borrower served the lender with a notice of rescission and thereafter asserted a rescission defense in a foreclosure proceeding brought by the lender under Colorado’s expedited non-judicial foreclosure procedures. The primary issue on appeal was whether the borrower had exercised her rescission rights in a timely fashion under TILA when she either: (i) sent written notice to the lender of her intent to rescind and thereafter received no response; or (ii) asserted a defense of rescission in an expedited foreclosure proceeding under Colorado’s Civil Procedure Rule 120.
Relying primarily on the United States Supreme Court’s ruling in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), the Rosenfield court found that the borrower had not timely exercised her TILA rescission rights in a timely manner and, thus, her right of rescission was time-barred. The specific holdings in Rosenfield are discussed below.
- TILA’s Three Year Bar in § 1635(f) is a Statute of Repose
The Rosenfield opinion confirms that § 1635(f) of TILA is a statute of repose, as opposed to a statute of limitations.3 In examining the Supreme Court’s Beach opinion, the Rosenfield court reiterated that “§ 1635(f) completely extinguishes the right of rescission under TILA at the end of the specified three-year period.”4 The Rosenfield court reasoned that, among other things, “a perpetual right of rescission could work to ‘cloud a bank’s title on foreclosure.’”5 Accordingly, as a statute of repose, § 1635(f) of TILA extinguishes borrowers’ rescission rights such that borrowers may not exercise rescission rights, as part of affirmative claims, defenses to foreclosures, or otherwise, after the three-year period runs. Thus, a borrower must exercise TILA’s right of rescission within three years of the consummation of the loan.
- Written Notice Does Not Constitute Exercise of a Borrower’s Rescission Right under TILA
The Rosenfield court also ruled that “[b]ecause of ‘Congress’s manifest intent . . . that the Act permit no federal right to rescind, defensively or otherwise, after the 3-year period of § 1635(f) has run,’ we must hold that the mere invocation of the right to rescission via a written letter, without more, is not enough to preserve a court’s ability to effectuate (or recognize) a rescission claim after the three-year period has run.”6
The Tenth Circuit found that TILA establishes rights of action that are generally redressable only when a party seeks recognition of it by invoking the power of the courts. As such, the Tenth Circuit determined that “it is the filing of an action in a court . . . that is required to invoke the right limited by the TILA statute of repose.”7 To that end, the Rosenfield court reasoned that notice of one’s intent to rescind is a necessary predicate act to the ultimate exercise of the rescission right, but is not sufficient, on its own, to constitute the exercise of such rights under TILA.8
Although the Tenth Circuit adopted the reasoning found in Rosenfield, there is not a consensus among the various circuit courts of appeals. Whether court action is necessary to exercise one’s right to rescind under TILA, or whether mere written notice suffices, is the subject of a developing debate among the federal circuit courts of appeals and the federal district courts. The Tenth Circuit, in Rosenfield, joined the Ninth and Third Circuits in finding that a rescission claim is time-barred if not made in court during the requisite three-year period, regardless of whether the borrower mailed a timely notice of rescission within the three years. The Fourth Circuit, in Gilbert v. Residential Funding, LLC, 678 F.3d 271 (4th Cir. 2012), however, relying primarily upon the text of TILA, and its implementing regulation, ruled that a rescission claim is timely regardless of when filed in court, provided that the borrower gave the creditor notice of rescission within the three-year period. As of the time of this GT Alert, several circuits, including the Eleventh Circuit, have not specifically addressed this issue.9
Accordingly, it is important when analyzing this issue to determine at the outset which jurisdiction the case is filed in as that will affect whether there is an argument for dismissal of the rescission claim under the analysis set forth in Rosenfield.
- A Rescission Defense in a Foreclosure Proceeding May Constitute the Exercise of a Borrower’s Rescission Right Under TILA
The Rosenfield opinion does not conclusively address whether a consumer properly exercises TILA’s rescission right by asserting it as an affirmative defense in a foreclosure proceeding. The Rosenfield court found that the borrower’s rescission defense in Colorado’s expedited foreclosure proceeding did not constitute her exercise of TILA’s right to rescission. The court reasoned that Colorado’s expedited foreclosure process under Colorado Civil Procedure Rule 120 is a non-judicial foreclosure that is not the proper forum for addressing issues such as TILA rescission claims. As such, the Rosenfield decision is limited in scope, and unlikely to be found applicable where a borrower raises a rescission defense in a judicial foreclosure proceeding. In dicta, the Rosenfield court noted that a defensive assertion of the TILA rescission right in a court proceeding may constitute the exercise of one’s right of rescission under TILA.
Accordingly, it is currently unresolved whether a borrower’s rescission defense in a foreclosure proceeding within three years of the loan’s consummation constitutes an exercise of the rescission right. How the courts settle this issue is of particular importance. If the courts find that a rescission defense does not constitute a proper exercise of the right, then a borrower’s defensive rescission claim in a foreclosure suit, even if made within three years of loan consummation, would not trigger the right to rescind and the claim would be deemed barred once the three years had passed.
The Tenth Circuit’s opinion in Rosenfield is the latest circuit court opinion addressing an area of TILA that is rapidly evolving, and which substantially affects the rights of lenders and loan servicers facing affirmative claims under TILA and TILA defenses in disputed foreclosure proceedings. The federal courts uniformly hold that § 1635 (f) is a statute of repose that wholly extinguishes TILA’s rescission right three years after a loan’s consummation. The courts, however, are split as to what constitutes the exercise of a borrower’s rescission right. Rosenfield represents the majority approach, finding that a rescission is time-barred unless exercised by assertion in court, either through an affirmative claim or potentially an affirmative defense, within the three-year period. Other circuits have found that a rescission claim may be brought after the three-year period has expired, so long as the borrower served the lender with a timely written notice of rescission.