Third Circuit Holds Notice Sufficient to Preserve Borrower's Three-Year TILA Rescission Right

CFPB TILA

On February 5, the U.S. Court of Appeals for the Third Circuit held that a borrower need only provide written notice of intent to rescind a loan within the statutory three-year rescission period to preserve that right; a borrower need not also file a complaint within the three-year period. Sherzer v. Homestar Mortg. Servs., No. 11-4254, 2013 WL 425835 (3rd Cir. Feb. 5, 2013). TILA allows borrowers three years to rescind a loan if the lender fails to provide certain required disclosures. In this case, counsel to the borrowers—who had obtained two mortgage loans from two different lenders—sent a letter to the lenders within three years of the closing date asserting that the lenders materially violated TILA by failing to provide certain disclosures.  The letter also notified the lenders that the borrowers were exercising their right to rescind the loans. When the lenders refused to rescind one of the loans, the borrowers filed suit more than three years after closing. On appeal, the court reversed the district court, which had dismissed the borrowers’ rescission claims as untimely. The Third Circuit instead held that (i) nothing in the language of the statute (or its implementing regulation) requires the filing of a court action to invoke the right to rescind, and (ii) valid written notice of rescission within the three-year period is sufficient. The court acknowledged concerns about the practical impacts of such a holding on lenders, but stated it was constrained by the statute’s text. In so holding, the Third Circuit agreed with the position advocated by the CFPB and already adopted by the Fourth Circuit, but split from the Ninth and Tenth Circuits, which have held that a borrower must file a complaint within the three-year period to properly exercise the rescission right. The same issue remains pending in the Eighth Circuit.