Third Circuit Holds Notice Of Rescission Sufficient To Rescind Loan Under Truth In Lending Act

On February 5, in Sherzer v. Homestar Mortgage Services, Inc., No. 11-4254, 2013 U.S. App. Lexis 2486 (3d Cir. Feb. 5, 2013), the U.S. Court of Appeals for the Third Circuit rendered a precedent-setting decision finding that the borrowers' rescission action, which they filed more than three years after the closing on their loan, was timely. In that case, the court held that a borrower's sending of a notice of rescission to the lender within the three-year statute-of-limitations period is all that is required to exercise the right to rescind under the Truth in Lending Act ("TILA").

Congress enacted TILA to promote the "informed use of credit" by requiring "meaningful disclosures of credit terms." 15 U.S.C. 1601(a). Under TILA, if a lender fails to provide the requisite disclosures of a loan secured by the borrower's principal dwelling, the borrower has a right for three years after the transaction to rescind the loan agreement. 15 U.S.C. 1635(f). The question before the Third Circuit in Sherzer was what action a borrower "must take to exercise the right of rescission" within that three-year period. 2013 U.S. App. Lexis 2486, at *3.

The facts of Sherzer were as follows. On August 26, 2004, the borrowers obtained two loans from Homestar Mortgage Services ("Homestar"). Id. The loans were secured by mortgages on their primary residence. Id. Subsequently, the loans were assigned to HSBC Bank ("HSBC"). Id. Three months before the three-year anniversary of the loan closing, borrowers' counsel sent a letter to Homestar and HSBC (collectively, the "Lenders") in which the borrowers alleged that Homestar failed to provide the required TILA disclosures and, therefore, they were rescinding their loans. Id. Because HSBC agreed to rescind only one of the two loans, the borrowers instituted an action for rescission of the other loan. Id. The lawsuit was filed on November 30, 2007, shortly after the expiration of the three-year period. Id. at *4.

The district court dismissed the lawsuit on the ground that the action was time-barred because the borrowers did not file suit within three years of the loan closing. Id. The borrowers appealed, asserting that they timely exercised their rescission rights under TILA because they provided written notice of rescission to the Lenders before the three years expired. Id.

The Consumer Financial Protection Bureau (the "CFPB") filed an amicus brief in favor of the borrowers' interpretation that notification to the lender...