In its Sherzer v. Homestar
Mortgage Services, 2013 WL 425835 (3d Cir. 2013) opinion, the Third Circuit
Court of Appeals reversed its prior position and held that mailing a rescission
demand letter - - and not filing a lawsuit - - satisfies the Truth in Lending Act, 15 U.S.C. §§1601 et seq.'s ("TILA") three (3)
year limitations period.
Specifically, TILA, which
allows consumers to rescind residential mortgage loans following lender's failure
to make required disclosures, sets forth that the "right of rescission"
expires three (3) years after the loan is closed. 15 U.S.C. §1635(f).
In Sherzer v. Homestar
Mortgage Services, the Third Circuit reversed the district court’s
dismissal of the action and rejected the lender’s argument that the lawsuit was
not timely because it was not filed within three (3) years of the loan's
closing holding that by mailing a rescission notice within the three (3) year
period the borrowers had timely rescinded the loan.
The Third Circuit found that
the borrowers’ position was not foreclosed by the U.S. Supreme Court’s TILA interpretation
in Beach v. Ocwen Federal Bank, 523 U.S. 410, 411–13, 118 S.Ct. 1408 (1998)
which the Sherzer opinion interpreted as not addressing how a borrower
must exercise his rescission right within such period to prevent its
extinguishment.
The Sherzer opinion also
contradicts the Third Circuit’s 2011 unpublished Williams v. Wells Fargo
Home Mortgage, Inc., 410 Fed. Appx. 495 (3d Cir. 2011) decision in which it
deemed a borrower’s rescission claim "untimely" because, despite
having sent a rescission notice within three (3) years of the closing, the
borrower did not file her lawsuit within such period.
Further, the Third Circuit
rejected concerns that allowing borrowers to rescind soley by written notice could
indefinitely cloud a lender’s title because uncertainty about the right to
rescind could continue until either the borrower filed a rescission lawsuit or
the lender brought a foreclosure or declaratory judgment action.
Instead, despite
acknowledging 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 Third Circuit found 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.” 2013 WL 425835 at pg. 7-9.
The Third Circuit joins the Eleventh
and Fourth Circuits in holding that notice alone within the three (3) year
period is sufficient to validly exercise a right to rescind whereas the Ninth, Tenth
and First Circuits adopt the contrary view. See Gilbert v. Residential Funding
LLC, 678 F.3d 271, 277–78 (4th Cir. 2012); Williams v. Homestake
Mortgage Co., 968 F.2d 1137, 1139–40 (11th Cir. 1992); Rosenfield v. HSBC Bank, USA, 681 F.3d
1172, 1188 (10th Cir. 2012); Yamamoto v. Bank of N.Y., 329 F.3d 1167,
1172 (9th Cir. 2003); Large v. Conseco Fin. Servicing Corp., 292 F.3d 49, 54–55
(1st Cir. 2002).
In light of this "circuit
split" if a petition for certiorari
is filed it is likely that the U.S. Supreme Court will agree to hear the case.
