Alert February 19, 2013

Third Circuit Holds Notice, Not Suit, Triggers Right to Rescind Under TILA

Considering "what action an obligor must take to exercise the right of rescission" under the Truth in Lending Act, the United States Court of Appeals for the Third Circuit ruled that a letter providing notice of a borrower’s intent to rescind met 15 U.S.C. § 1635’s requirement, and that the statute does not require the filing of a lawsuit. At issue were two loans that had closed in August 2004. The borrowers wrote a letter in May 2007 claiming they never received notice of their right to rescind, and informing the lender they were thereby exercising their right to rescind. The borrowers did not file suit until November 2007, outside TILA’s three-year statute of repose. The lender argued that failure to sue within the three-year period waived the right of rescission; the district court agreed. The borrowers appealed and the CFPB filed an brief on their behalf (see April 17, 2012 Alert; see also April 3, 2012 Alert (discussing the CFPB’s 10th Circuit amicus brief)).

In reversing the district court’s opinion, the Court rejected the Ninth and Tenth Circuit’s rulings, holding that if rescission is disputed, written notice is not enough—the borrower must file suit within three years. The Court also rejected defendants’ arguments that Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), which held that (1) Supreme Court precedent requires filing suit within three years; (2) the right to rescind would have already vanished by the time suit was filed under the three-year statute of repose; and (3) allowing rescission through notice alone would present practical problems and unduly increase lending costs, was dispositive. Instead, agreeing with the Eleventh and Fourth Circuits, the Court observed that Section 1635 makes "no mention of filing a suit"; rather, the statute’s only two references to courts concern their ability to alter statutory procedures for rescission and to award damages in addition to rescission.