A borrower can bring a lawsuit seeking rescission more than three years after loan consummation as long as the borrower has sent a written notice of rescission within the three-year period, the U.S. Court of Appeals for the Third Circuit has ruled.

In its February 8, 2013, decision in Sherzer v. Homestar Mortgage Services, the Third Circuit rejected the lender’s argument that the borrowers’ lawsuit was untimely because it was not filed within three years of the loan closing date. Reversing the district court’s dismissal of the lawsuit, the Third Circuit held that the borrowers had validly rescinded the loan by sending a notice of rescission to the lender within the three-year period.

The Third Circuit found that the borrowers’ position—that they needed only to send notice of rescission within the three-year period to validly exercise their rescission right—was not foreclosed by the U.S. Supreme Court’s interpretation of TILA Section 1635(f) in Beach v. Ocwen Federal Bank. The Supreme Court held that Section 1635(f), which provides that the right to rescind expires after three years, operates to extinguish a borrower’s rescission right if it is not exercised within the three-year period. According to the Third Circuit, Beach did not address how a borrower must exercise his or her rescission right within such period to prevent its extinguishment.

Amici supporting the lender  argued that allowing borrowers to rescind by written notice alone could cloud a lender’s title indefinitely beyond three years since uncertainty about  a borrower’s right to rescind could continue until either the borrower filed a rescission lawsuit or the lender brought a foreclosure or declaratory judgment action.

In response, the Third Circuit observed that “[o]nce alerted to the cloud on its title, a lender could sue to confirm that the obligor’s rescission was invalid or do nothing and assume the risk that a court might later rule that the rescission was valid.” However, the Third Circuit did acknowledge that its holding “could potentially impose additional costs on banks, as it costs little for an obligor to send a letter to the lender while, on the other hand, the lender would incur some cost to sue to determine title.”

The Consumer Financial Protection Bureau filed an amicus brief in support of the plaintiffs and participated in oral argument. It has also filed amicus briefs in other circuit court cases involving the same rescission issue.

Sherzer disagrees with the Third Circuit’s 2011 unpublished opinion in Williams v. Wells Fargo Home Mortgage, Inc.,410 Fed. Appx. 495. In Williams, the Third Circuit ruled that a borrower’s rescission claim was untimely because, despite having sent a rescission notice to her lender within the three-year period, the borrower did not file her lawsuit within such period. It is possible Williams will encourage the lender to seek rehearing en banc in Sherzer.

The Third Circuit has now joined the Fourth Circuit in holding that notice alone within the three-year period is sufficient to validly exercise a right to rescind, with the Ninth and Tenth Circuits having adopted a contrary view. This circuit split increases the likelihood that the U.S. Supreme Court will agree to hear the case if a petition for certiorari is filed.