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Federal Circuits Split on Required Action to Effect Rescission under Truth-in-Lending Act

The federal Circuit Courts of Appeal are split on the important question of what is required of a consumer who claims not to have received the proper disclosures from a lender and who wishes to rescind the loan within the three-year period following the closing.

The federal Truth-in-Lending Act (TILA) requires that, "in the case of any consumer credit transaction," the lender "shall clearly and conspicuously disclose" certain material terms and shall provide notice of right to cancel.  15 U.S.C. § 1635(a).  TILA allows the consumer who has received proper disclosure three days in which to rescind the transaction "by notifying the creditor . . . of his intention to do so."  15 U.S.C. § 1635(a).  However, if the lender does not provide the appropriate disclosures to the consumer, TILA provides that the consumer's right to rescind the transaction "expires three years after the date of consummation of the transaction or sale of the property, whichever occurs first." 15 U.S.C. § 1635(f).   

The disagreement among the circuits concerns whether a consumer must file suit to effect rescission within those appointed three years or whether simply putting the lender on notice that she wishes to rescind is sufficient.  The Supreme Court previously held that a borrower could not assert the right to rescind as an affirmative defense in a collection action brought by a lender more than three years after consummation of the transaction.  Beach v. Ocwen Fed. Bank, 523 U.S. 410 (1998).  However, the Circuit Courts of Appeal have not interpreted the implications of Beach uniformly.       

The Sixth Circuit Court of Appeals was recently confronted with an appeal by a consumer who had written the entity he believed to be servicing his mortgage loan within the three-year time period requesting copies of all documents relating to the origination of his mortgage loan.  Lumpkin v. Deutsche Bank Nat. Trust Co., 12-2317, 2013 WL 4007760 (6th Cir. Aug. 6, 2013).  After the three-year time period had expired, the consumer then filed suit for rescission of the loan, claiming that he had properly complied with the TILA requirement.  Id.  The Court found that his correspondence had not been sufficient to notify the recipient that he was rescinding, as the letter made no mention of rescission or TILA.  However, the Court went further, stating in dicta that "the three years defined by § 1635(f) were over by the time this suit was filed, and so Lumpkin's right to bring a rescission suit had expired, regardless of when and whether he notified the lender of his rescission within those three years."  Id. at *3.  

Several Courts of Appeals concur with the Sixth Circuit's belief that both notice and the filing of a lawsuit within three years are required to effectuate rescission.  See Rosenfeld v. HSBC Bank, USA, 681 F.3d 1172 (10th Cir. 2012); McOmie-Gray v. Bank of America Home Loans, FKA, 667 F.3d 1325 (9th Cir. 2012).  However, the Third and Fourth Circuit Courts of Appeals have reached the opposite result.  The Third Circuit Court of Appeals held that under the plain text of TILA, "to timely rescind a loan agreement, an obligor need only send a valid notice of rescission," within the three-year time period.  Sherzer v. Homestar Mortgage Servs., 707 F.3d 255, 258 (3d Cir. 2013).  The Sherzer Court cited the language in Beach that Section 1635(f) "says nothing in terms of bringing an action but instead provides that the 'right of rescission [under the Act] shall expire' at the end of the time period."  Id. at 259, quoting Beach, 523 U.S. at 417.  The Fourth Circuit Court of Appeals reached the same result, finding that putting the lender on notice of the borrower's intention to rescind was sufficient, finding that neither TILA nor its implementing regulation "says anything about the filing of a lawsuit, and we refuse to graft such a requirement upon them."  Gilbert v. Residential Funding LLC, 678 F.3d 271, 277 (4th Cir. 2012)

At some point in the not-too-distant future, the Supreme Court is likely to address the disagreement among the circuits concerning what is required under TILA in order for a borrower who has not received proper disclosure to effectuate a proper rescission. Fitch Law Partners LLP will continue to monitor developments in this area of the law as they unfold.  

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