By Fredric J. Gooch – General Counsel, DocuTech Corporation
In a recent case decided before the United States Court of Appeals for the Tenth Circuit, the court ruled that a written notice alone is insufficient for a consumer to rescind a loan under the rescission provisions of the Truth-in-Lending Act. The ruling was largely viewed as a victory for the lending industry and for several trade groups that filed amicus briefs including the American Bankers Association, Consumer Bankers Association and the Consumer Mortgage Coalition. The Consumer Financial Protection Bureau also filed an amicus brief on behalf of the defendant which marked the second time the CFPB has been on the losing side of a court ruling when it has filed a brief.
The Plaintiff Jean Rosenfield refinanced her mortgage with HSBC Bank in November of 2006. Rosenfield believed that HSBC has violated several consumer protection statutes including providing her with the required disclosures under the Truth-in-Lending Act in providing her with the refinance loan. Rosenfield sent a notice of rescission to HSBC in September of 2008 and received no response. In July of 2009 HSBC initiated foreclosure proceedings against Rosenfield alleging she had failed to meet her obligations under the loan agreement. In her response to the foreclosure action Rosenfield asserted a “defense of rescission.” The District Court for the City and County of Denver held that she could not assert her defense because the action was an expedited proceeding limited to evidence of default.
In December 2009 Rosenfield commenced an action in District Court seeking a declaratory judgment that the mortgage on her home had been rescinded and a preliminary and permanent injunction enjoining HSBC from selling her home. HSBC filed a motion to dismiss claiming that Rosenfield’s claims were procedurally barred because TILA sets a three year limitation on the borrower’s right of rescission measured from the closing of the transaction. The district court determined that the Supreme Court’s decision in Beach v. Ocwen Federal Bank, 523 U.S. 410, 118 S.Ct. 1408, 140 L.ed.2d 566 (1998) established that the TILA rescission limitation was a statute of repose that extinguishes a claim for rescission unless it is both noticed and sued upon within three years. The district court also held that asserting the rescission defense in the expedited foreclosure proceeding was not the equivalent of asserting the claim in a general lawsuit. Rosenfield appealed the decision to the Tenth Circuit.
The Tenth Circuit considered two issues Rosenfield presented to the court for review. First, she argued that the district court erred when it ruled that she field to exercise her right of rescission under TILA within the required three year time period. Second, that by raising her TILA defense in the Colorado foreclosure action she properly exercised her rescission rights. Rosenfield also raised a third issue the court did not consider. The court affirmed the district court’s ruling that Rosenfield’s TILA rescission rights were extinguished.
In holding that written notice alone is not sufficient to exercise the right to rescind under TILA the Tenth Circuit followed the same reasoning set forth by the district court. It reasoned that the three year limit on TILA rescission was a statute or repose rather than a statute of limitations. It stated that a statute of repose precludes a right of action after a specified period of time rather than providing that a cause of action must be brought within a certain period of time after the cause of action has accrued. The court also suggested that the statutory provision was purposely drafted this way to avoid uncertainty that could cloud a bank’s title on foreclosure. For these reasons the court held that provision of a written notice to rescind is not enough for a consumer to invoke her right to rescission under TILA where a creditor fails to respond.
The court of appeals also affirmed that Rosenfield’s raising the rescission defense in the foreclosure hearing was insufficient as notice. It ruled that these types of expedited proceedings are not proper forums to adjudicate a TILA claim. The Colorado Rule 120 expedited foreclosure hearing is designed to only address issues related specifically to the existence of a default. As Rosenfield was seeking to amend her pleading to add this claim, the court ruled that she would have gained no legal benefit from a proposed amendment adding a rescission defense.
With this ruling the Tenth Circuit joins the Ninth Circuit which has also ruled that a written notice alone is insufficient to exercise a rescission claim under TILA. However, the Fourth Circuit has concluded that a written notice alone is sufficient to exercise a right of rescission. The Eighth and Third Circuits are currently considering these same issues in pending cases. With different appeals courts coming to different decisions this is an issue that could come before the Supreme Court at some future time.
See Rosenfield v. HSBC Bank, USA 681 F.3d 1172 (2012)