Three years after loan consummation, a borrower is able to file a lawsuit seeking rescission as long as the borrower has sent a written notice of rescission within that timeframe, attorneys with Ballard Spahr said in a recent report.

In a recent case, Sherzer v. Homestar Mortgage Services, the Third Circuit rejected the case of the lender, who argued that the borrowers’ lawsuit was untimely since it wasn’t filed within three years of the closing date. Since the borrowers had sent a notice of rescission to the lender within three years after the loan’s consummation, the Third Circuit was able to reverse the district court’s dismissal of the lawsuit.

It was found by the Third Circuit that the position of the borrower — that a notice of rescission is all that’s needed — wasn’t closed by the U.S. Supreme Court’s interpretation of TILA Section 1635(f) in Beach v. Ocwen Federal Bank.

The goal of Section 1635(f) is to extinguish a borrower’s rescission right if it is not exercised after three years. The Third Circuit claims that Beach failed to address how a borrower must exercise his or her rescission right within such period to prevent extinguishment.

Interested parties who supported the lender argued that allowing this could dim a lender’s title beyond three years because uncertainty about the rights of the borrower may continue until the borrower filed a rescission suit or the lender brought a closing or declaratory judgment action.

The Third Circuit responded that “[o]nce alerted to the cloud on its title, a lender could sue to confirm that the obligor’s rescission was invalid or do nothing and assume the risk that a court might later rule that the rescission was valid.” However, the Third Circuit did acknowledge that its holding “could potentially impose additional costs on banks, as it costs little for an obligor to send a letter to the lender while, on the other hand, the lender would incur some cost to sue to determine title.”

The Consumer Financial Protection Bureau filed an amicus brief supporting the plaintiff. The CFPB also filed amicus briefs in similar court cases regarding the same rescission issue.

In Williams vs. Wells Fargo Home Mortgage, Inc., the Third Circuit determined that a borrower’s rescission claim was untimely since the borrower didn’t file her lawsuit within such a period. 

The Third Circuit now backs the Fourth Circuit in arguing that notice alone within the three-year period is enough to validly exercise a right to rescind. The Ninth Circuit and Tenth Circuit hold an opposing view. The circuit split increases the likelihood of the Supreme court allowing a hearing of the case if a petition for certiorari is filed.

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