The Eighth Circuit recently held that a borrower must file suit before foreclosure to exercise rescission rights under TILA. The court now joins the Ninth and Tenth Circuits in holding that notice alone is not sufficient. In Hartman v. Smith, the Eighth Circuit found because the borrowers failed to file a rescission action before the sale, the right of rescission expired upon the sale of the property.

The case involved three borrowers who filed suit against the defendants, a bank and a real estate finance firm, asserting violations of TILA and state law. The bank moved to foreclose after the borrowers failed to make payments. After the property was sold at a sheriff’s sale, the borrowers sued to rescind the loans under TILA on the ground they had provided written notice of rescission prior to the foreclosure sale.

The district court granted summary judgment in favor of the defendants and dismissed the borrowers’ TILA rescission claim and state law claims; the borrowers appealed. On appeal, the bank argued that because the borrowers failed to file suit before the foreclosure sale, their rescission claim failed. The court noted the circuits are split on the question of whether a borrower must file suit within the repose period to exercise the right to rescind. While the Fourth Circuit has found notice sufficient for rescission to occur, the Ninth and Tenth Circuits have disagreed, requiring borrowers to file suit to rescind.

Applying its recent holding in Keiran v. Home Capital, Inc., the Eighth Circuit found that notice by itself, while necessary, was insufficient to exercise rescission, and that a borrower seeking rescission under TILA must file suit within three years to preserve the right of rescission. Here, where the foreclosure sale occurred within the three-year rescission period, the court held that the borrowers were required to file a rescission action before the foreclosure sale. Because the borrowers failed to do so, the court held that their rescission claim was barred.

Judge Melloy wrote a concurring opinion noting that the Consumer Financial Protection Bureau recently weighed in on this issue in courts across the country as amicus curiae and argued that sending notice is all that is required.