The Third Circuit has now joined the Fourth Circuit in ruling that a lawsuit seeking rescission filed more than there years after loan consummation is timely as long as the borrower sent a written notice of rescission within the three-year period.
In its decision issued on February 5 in Sherzer v. Homestar Mortgage Services, the Third Circuit rejected the lender’s argument that the borrowers’ lawsuit was untimely because it was not filed within three years of the loan closing date. Reversing the district court’s dismissal of the lawsuit, the Third Circuit held that the borrowers had validly rescinded their mortgage loan by sending a notice of rescission to the lender within the three-year period. For more information on Sherzer, see our legal alert.
As part of its amicus program, the CFPB filed amicus briefs supporting the borrowers in Sherzer and three other similar cases. In Gilbert v. Residential Funding LLC, et. al, the Fourth Circuit adopted the CFPB’s position which it advocated in an amicus brief filed in another Fourth Circuit case involving the same rescission issue. In Rosenfield v. HSBC Bank, USA, the Tenth Circuit case in which the CFPB filed an amicus brief, the court rejected the CFPB’s position and ruled that notice alone within the three-year period was insufficient to validly exercise a right to rescind. The CFPB also filed an amicus brief in Sobieniak v. BAC Home Loans Servicing, which is still pending in the Eighth Circuit. Oral argument in Sobieniak was held on October 16, 2012.
The Third Circuit attempted to reconcile its decision with the U.S. Supreme Court’s decision in Beach v. Ocwen Fed. Bank, 523 U.S. 410 (1998), in which the Supreme Court held that §1635(f) of TILA “completely extinguishes” the right to rescind after the three-year period. However, Sherzer improperly transforms a “statute of repose” into something less than a statute of limitations, with an open-ended invitation for rescission suits to be filed into the future. This undermines the certainty contemplated by Congress in enacting §1635(f) to provide a bright-line rule—and cut-off—for rescission, and to avoid clouding title. The decision creates great uncertainty where there should be none and also conflicts with prior decisions of the Ninth and Tenth Circuits as well as a majority of the district courts to have decided the issue.