Borrower May Sue after Three Years To Rescind Mortgage Loan, 4th Circuit Rules

by Ballard Spahr LLP
Contact

In a decision that possibly opens the door for renewed foreclosure delays, the U.S. Court of Appeals for the Fourth Circuit has held that a lawsuit seeking rescission is timely where the consumer provided notice of rescission to the subservicer within three years of closing but did not file suit until after the three-year deadline had passed.

The May 3, 2012, decision in Gilbert v. Residential Funding LLC is the first by a federal appellate court to hold that a borrower need only send notice of rescission within the three-year period to validly exercise a right to rescind.

The decision puts the Fourth Circuit in the minority. The majority of courts to consider the question—including the Third and Ninth Circuits—have held that the requirement for the borrower to file suit within the three-year period is consistent with the language of Section 1635 of the Truth in Lending Act and prior precedent, including the U.S. Supreme Court’s decision in Beach v. Ocwen Federal Bank. In its opinion, the Fourth Circuit rejected the subservicer’s reliance on Beach, observing that Beach “did not address the proper method of exercising a right to rescind or the timely exercise of that right” but only addressed whether Section 1635 was a statute of limitation that operated to extinguish the right after three years.

The borrowers in Gilbert had sent their rescission notice following the filing of a foreclosure action by the holder of their note. In doing so, they were employing a tactic that, since the mortgage foreclosure process began, borrowers have routinely used to delay a foreclosure even when the borrower has no real intention of rescinding (and perhaps even when the borrower does not know if he or she has any basis for rescinding or the ability to tender back the principal).

The Fourth Circuit distinguished “the issue of whether a borrower has exercised her right to rescind” from “the issue of whether the rescission has, in fact, been completed and the contract voided.” While acknowledging that, to complete a rescission and void the contract, the creditor must agree to rescind or the borrower must file a lawsuit, the Fourth Circuit did not directly address the question of how long after three years a borrower may wait to file suit. It held only that the borrower’s TILA claim for damages based on the subservicer’s refusal to rescind the loan was timely under TILA Section 130(e) because it was filed within one year of the date of the subservicer’s letter rejecting the rescission.

While we disagree with the Fourth Circuit’s conclusion that borrowers can bring rescission lawsuits more than three years from loan consummation, we believe that, if borrowers are allowed to do so, the one-year statute of limitations in Section 130(e) should apply.

The Fourth Circuit’s decision represents a victory for the Consumer Financial Protection Bureau, which had filed an amicus brief in Wolf v. Federal National Mortgage Association, another Fourth Circuit appeal involving the same rescission issue. In its brief, the CFPB took the position that notice within the three-year period is all that is required to validly exercise a right to rescind. The CFPB has filed amicus briefs taking the same position in the Third, Eighth, and 10th Circuits. (To read our blog posts on the CFPB’s amicus briefs, click here and here.)

The Fourth Circuit also reversed the district court’s dismissal of the borrower’s state law usury claim, although it directed the district court to consider, on remand, various North Carolina statutes that would have allowed the lender to charge any agreed rate. While affirming the district court’s dismissal of the borrowers claims under North Carolina’s unfair and deceptive trade practices law that were based on conduct of the original creditor who was not a party to the lawsuit, it reversed the dismissal of those claims against the noteholder, the subservicer, and other named defendants.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). The group includes the firm’s Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial residential mortgage industry with formidable skill in litigation and depth in enforcement actions and transactions.

The Consumer Financial Services Group also produces the CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe to the blog, use the link provided to the right.

For more information, please contact Practice Leader Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Practice Leader Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; Martin C. Bryce, Jr., 215.864.8238 or bryce@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Practice Leader Michael S. Waldron, 202.661.2234 or waldronm@ballardspahr.com; or Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com.


 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ballard Spahr LLP | Attorney Advertising

Written by:

Ballard Spahr LLP
Contact
more
less

Ballard Spahr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.