QUESTION
We sued a borrower for defaulting on a residential mortgage loan after the 3-year extended rescission period had expired. The borrower countersued us by claiming they had the right of rescission by way of recoupment even after the lapse of the 3-year period. They say there was a material violation of TILA, so their right to rescind is allowed.
This lawsuit is with our lawyer. I'm not a lawyer, but I know when I'm being conned. This makes no sense. I don't see how the borrower can open up rescission on us - and we're not even the original owner of the mortgage. The original owner had the loan for years. Maybe you can get me through all the legalese. I've never encountered this situation before. I asked our attorney to phrase the question I should be asking you. Here it is.
May a borrower assert the right of rescission by way of recoupment even after the lapse of the three-year period, assuming a material TILA violation by the creditor, if the borrower did not previously assert that right?
ANSWER
This is a good question, as it frames the context of the TILA issue. We will need a little legalese, but I will clarify the terms and implications for you.
Let's go to a working definition of the so-called "Right to Cancel." Briefly put, for any credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, TILA, and Regulation Z, give each consumer residing in the dwelling whose ownership interest is or will be subject to the security interest the right to rescind the transaction. That's a mouthful!
It is important to understand, too, that the rescission right does not apply to transactions expressly exempted by Regulation Z, such as residential mortgage transactions (purchase money transactions) and in those rare instances when the consumer has appropriately waived the right to rescind.
Regulation Z[i] allows the consumer to exercise the rescission right until the third "business day" following the last in time of the following events:
(1)
consummation of the (consumer) credit transaction;
(2)
delivery of the notice of right to rescind required by Regulation Z;[ii]
or
(3) delivery of all "material disclosures."
If the required notice of right to rescind or the "material disclosures" are not delivered, the right to rescind expires three years after consummation, upon transfer of all of the consumer's interest in the property, or upon sale of the property, whichever event first occurs.
Before going on to your specific scenario, there is a recent case that comes to mind that highlights both the meaning of a residential mortgage transaction and also the requirement to file a rescission claim in the required timeframe.
Many consumer law claims involving rescission, where consumers who miss filing their rescission claims within the 1-year or 3-year period, attempt to fall back on an argument that equitable tolling excused their delay.
The term "equitable tolling" means a pause or "toll" in a statutory limitation period after that period has commenced. The period is suspended, but not that the limitation period starts all over again. To trigger this legal principle, the plaintiff must show that they took reasonable care and due diligence and also did not discover the injury until after the period expired.
The case I have in mind is Plong v. Fisher, decided by a federal district court in California.[iii] After discussing it briefly, I will move on to your question.
· In August 2007, the Plongs obtained a home mortgage loan from Countrywide Home Loans, Inc. to purchase their residence. In May 2022, they filed a Truth-in-Lending Act (TILA) rescission claim.
· The court dismissed the claim as time-barred, which means that a plaintiff can't bring a claim because the statute of limitations has expired. The Plongs had until August 2010 to demand rescission. Instead, they waited 12 more years.
Equitable tolling, even if it were based on fraudulent concealment, could not apply because equitable tolling does not apply to rescission under TILA. In fact, TILA completely extinguishes the right to rescind after the 3-year period ends, even if the lender never made required TILA disclosures.[iv] The applicable TILA section is a statute of repose, depriving courts of subject matter jurisdiction after the 3-year period.
There is a difference between a statute of limitations and a statute of repose.
A statute of repose differs from a statute of limitations because a statute of limitations generally does not begin to run until the injury or damage giving rise to the cause of action occurs. Certain equitable principles, such as equitable tolling and the fraudulent concealment doctrines, also generally do not toll or pause a statute of repose because repose provisions set an outer limit independent of the plaintiff's knowledge. Both types of statutes may apply to the same claim.
But, TILA's right to rescind did not apply to the Plongs' loan anyway because the loan, as a "residential mortgage transaction" (defined by TILA), was exempt from TILA's right to rescind.
Now, having provided some background, let's move on to answering your question.
You asked: May a borrower assert the right of rescission by way of recoupment even after the lapse of the three-year period, assuming a material TILA violation by the creditor, if the borrower did not previously assert that right?
As a matter of fact, the U.S. Supreme Court resolved this question in 1998!
The dispute was Beach v. Ocwen Fed. Bank.[v]
· In 1986, the Beaches refinanced their Florida home with a loan from Great Western Bank. In 1991, they stopped making mortgage payments, and in 1992, Great Western began foreclosure proceedings.
· The Beaches acknowledged their default but raised affirmative defenses, alleging that the bank's failure to make TILA disclosures gave them the right to rescind the mortgage loan.
· The Florida state courts rejected that defense, holding that any right to rescind had expired in 1989, three years after the loan closed.
· The U.S. Supreme Court affirmed, holding that a borrower may not assert the right to rescind as an affirmative defense in a collection action brought by the lender after the 3-year limitations period has run.
According to the Court, in the context of an affirmative defense, the 3-year period is not a statute of limitations that governs only the institution of a lawsuit. Instead, it operates, with the lapse of time, to extinguish the right of rescission. TILA's relevant statute is uncompromising, as it states that the borrower's right shall expire with the running of time and manifests a congressional intent to completely extinguish the right of rescission at the end of the 3-year period.
The absence of a provision authorizing rescission as a defense stands in stark contrast to the TILA section that says TILA's 1-year limitation on actions for recovery of damages
"does not bar … assert[ion of] a violation … in any action … brought more than one year from the date of the … violation as a matter of defense by recoupment."
Recoupment of damages and rescission in the context of recoupment receive manifestly different treatments that, under the normal rule of construction, are understood to reflect a deliberate intent on the part of Congress. Recoupment, or equitable recoupment, is an equitable remedy that is sought when there is an effort to recover or collect money previously unduly paid out. It's considered an affirmative defense used by a defendant to reduce a plaintiff's claim by an amount the defendant argues the plaintiff owes the defendant arising from the same transaction.
Because a statutory rescission right could cloud a bank's title on foreclosure, Congress may have chosen to circumscribe that risk while permitting recoupment of damages regardless of the date a collection action may be brought.
The Court in Beach v. Ocwen Fed. Bank concluded its decision with this statement:
"We respect Congress's manifest intent by concluding that the Act permits no federal right to rescind, defensively or otherwise, after the 3-year period of § [125(f)] has run." [My emphasis.]
A closing observation. The Dodd-Frank Wall Street Reform and Consumer Protection Act amended TILA to allow certain defenses to foreclosure but did not change the rules regarding rescission or allow TILA rescission to be used as a defense or other bar to foreclosure.
Jonathan Foxx, Ph.D., MBAChairman & Managing Director
[i] 12 CFR § 1026.23(a)(3)
[ii] See Regulation Z § 1026.23(b)
[iii] Plong v. Fisher, 2022 U.S. Dist., C.D.
Cal. June 27, 2022
[iv] TILA § 125(f)
[v] Beach v. Ocwen Fed. Bank, 523 U.S. 410
(1998)
