QUESTION
In January, you answered a question about the three-year expiration on the Right of Rescission. The questioner said that they were being sued even after the expiration period had expired because, they claimed, there was a material violation of TILA, so the right to rescind should be allowed.
As our company’s General Counsel and Compliance Officer, I was particularly interested in your answer because it explored several factually important aspects posed by the question. Your answer led to us improving our procedures relating to rescission reviews.
I believe the right of rescission is not open forever to the consumer to file a suit to enforce rescission. But I can’t find any provision(s) in TILA that supports my view. I hope you will provide some guidance about the time of such litigation.
Does TILA state a timeframe to initiate a lawsuit to enforce rescission?
ANSWER
The FAQ article you refer to is Right of Rescission after Three-Year Expiration, published on January 5, 2023. The question was:
"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?"
My answer used, in part, a decision by a federal district court in California regarding how much time is allowed for filing a rescission action after TILA’s 3-year limitation period expires;[i] that is, when a borrower has exercised the right to cancel but hasn’t yet initiated litigation when the 3-year period expires.
Your question asks, in effect, about when a cause of action for rescission arises.
A consumer cannot wait indefinitely before filing a suit to enforce rescission. TILA does not answer how long the consumer may wait, so a court facing the issue will borrow the most closely analogous state or federal limitations period.
After that time period, a lender can at least be assured that the consumer cannot file a timely offensive court action. However, the consumer might be able to raise the fact of rescission as a defense to an action filed by the lender. TILA specifies that its rescission provisions do not affect a consumer’s right of rescission in recoupment under state law.[ii]
A case, Shetty v Block, was recently decided by the U.S. Court of Appeals for the 9th Circuit, affirming a California federal district court decision.[iii] I think this decision offers some valuable insights in answer to your question.
Here’s a brief outline.
· In December 2005, Zaharescu contacted New Haven Financial to inquire about a loan to purchase a home.
· New Haven offered her a loan for 50 percent of the purchase price.
· On December 29, 2005, New Haven sent Zaharescu loan documents, which she signed. She received only blank copies of the documents she signed.
· After signing, she received phone calls from New Haven requesting more documentation. Fearing that the New Haven loan would not close in time to purchase the property, Zaharescu obtained a loan from Liberty instead, which closed on January 20, 2006.
· On January 31, 2006. New Haven sent Zaharescu a check for $77,786 and a closing statement reflecting a closing date of January 27.
· When Zaharescu contacted New Haven to say she had received a loan from someone else and no longer needed the New Haven loan, she was told the loan could not be canceled and that she should use the money to make monthly payments on the loan.
· In February 2008, Zaharescu defaulted on the New Haven loan.
· On or about July 7, 2008, she sent a demand for rescission under TILA.
· New Haven provided a copy of the loan file, which showed altered documents and different terms from those Zaharescu had originally signed.
· On September 25, 2008, Zaharescu recorded a notice of rescission and mailed copies to New Haven.
· On July 18, 2021, nearly thirteen years later, Zaharescu sued for rescission under TILA, among other remedies.
Ø The district court dismissed the complaint as time-barred.
Ø The 9th Circuit affirmed. When a lender fails to act on a borrower’s notice of rescission, courts in the 9th Circuit look to state law to determine the statute of limitations for a borrower’s suit to enforce the rescission. The state statute of limitations for a breach of contract applied in this situation, which, in California, was 4 years.
The statute of limitations for enforcement of rescission began to run at the latest 20 days after Zaharescu recorded her notice of rescission on September 25, 2008 – twenty (20) days because that was TILA’s deadline for the lender to return any money or property given to anyone in connection with the loan and take any action necessary to reflect the termination of the security interest. Note this occurred about 13 years before the filing of the complaint, well outside the 4-year statute of limitations.
Lenders have argued that the rescission procedures are unfair and that allowing consumers to unilaterally rescind by sending notice empowers them to void security interests even when the consumer has received all required disclosures. But this argument ignores the fact that only valid notices result in rescission.
As a practical matter, a lender may find itself caught between a rock and a hard place.
When a court looks back at the receipt of a rescission notice, it can look at the documents, circumstances, testimony, and arguments, and decide whether the rescission notice was valid or invalid. In contrast, a lender must look forward. A lender often cannot know in advance whether the rescission notice is valid and cannot know for sure what a court might someday decide.
When a lender receives a rescission notice, a lender wants to know its effect immediately. A lender must quickly (within 20 calendar days) decide how to respond. Sometimes, a lender can tell by looking at the documents that a mistake was made, and the consumer is correct – a material disclosure violation occurred, giving the consumer a right to rescind. Sometimes, a lender is almost certain it did everything correctly. Other times, the answer is unclear and won’t be clear until a court, maybe an appellate court, maybe even the Supreme Court, has reviewed it.
Accordingly, a lender might prefer to operate under a default mode that assumes a notice of rescission is valid. As a practical matter, to ensure regulatory compliance, it may need to handle all rescission notices as valid. Heading straight to court offers no help; the likelihood of getting the issue resolved by a court within 20 calendar days is nil.
Regulation Z[iv] sums it up:
“Any security interest giving rise to the right of rescission becomes void when the consumer exercises the right of rescission. The security interest is automatically negated regardless of its status and whether or not it was recorded or perfected. Under § 1026.23(d)(2), however, the creditor must take any action necessary to reflect the fact that the security interest no longer exists.”[v]
Chairman & Managing Director
[i] Plong v. Fisher, 2022 U.S. Dist., C.D.
Cal. June 27, 2022
[ii] TILA § 125(i)(3)
[iii] Shetty v. Block, 2022 U.S. Dist. (C.D.
Cal. Jan 27, 2022), aff’d, 2023 U.S. App. (9th Cir. Aug. 22, 2023)
[iv] Comment 23(d)(1)-1
[v] “Within 20 calendar days after receipt of a notice of rescission, the creditor shall return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest.” § 1026.23(d)(2)
