TILA Rescission Rights and the CFPB’s Amicus Strategy

May 21, 2012

Due to advocacy by the Consumer Financial Protection Bureau (CFPB) and a recent Fourth Circuit decision, mere notice of a Truth in Lending Act (TILA) violation may toll the three year statute of limitations for rescinding a loan

The Issue: The Truth in Lending Act[1] mandates that creditors make certain disclosures at the time a loan is made. If a lender fails to provide the required disclosures, the borrower can rescind the loan. Such rescission must occur within three years after the earlier of the consummation of the loan or the sale of the property.[2]

A number of cases across the circuits are deliberating what a borrower must do when a lender refuses a borrower’s request to rescind. In the recently decided case of McOmie-Gray v. Bank of America Home Loans, 667 F.3d 1325 (9th Cir. Feb. 8, 2012) (found here), the Ninth Circuit ruled that the borrower must file a lawsuit within three years from the consummation of the mortgage loan. If the borrower does not file suit within those three years, they lose the right to rescind. The Ninth Circuit believed such a conclusion was necessarily inferred from the Supreme Court case of Beach v. Ocwen Fed. Bank, 523 U.S. 410 (1998) (found here) and Ninth Circuit dicta.

However, the CFPB believes the borrower must merely provide notice of intent to rescind within those three years. Since March, the CFPB has filed amicus briefs in a number of circuits arguing this position (for example, see here). The CFPB’s contrarian view appears to be gaining traction: On May 3 the Fourth Circuit agreed with the CFPB and ruled that mere notice of intent to rescind a mortgage was sufficient, even if a lawsuit was not filed within the three year deadline. The case was Gilbert v. Residential Funding LLC, 10-2295, 2012 WL 1548580 (4th Cir. May 3, 2012) (found here). The Fourth Circuit rejected the Ninth Circuit’s interpretation of Beach v. Ocwen, stating that the Supreme Court “did not address the proper method of exercising a right to rescind or the timely exercise of that right.”

In its press release the CFPB said it intends to file amicus briefs whenever “its views will assist the courts in correctly resolving the matters” and to “ensure that the statutes it oversees are correctly and consistently interpreted by the courts, even in cases in which the CFPB is not itself a named party.”

Implication: As we wait for other circuits to decide the question, and possibly for the Supreme Court or Congress to resolve the circuit split, lenders should not assume that the mere passage of three years without a rescission lawsuit will extinguish the risk of the borrower unwinding the loan under TILA. Since merely asserting an intention to rescind is without cost (unlike a lawsuit), lenders should expect to see more borrowers deploy “intentions to rescind” to gain leverage during loan restructuring negotiations and/or foreclosure processes.
Per 12 U.S.C. § 5512 the CFPB can issue orders, guidance and regulations as necessary to “carry out the purposes and objectives of the Federal consumer financial laws.” Although the CFPB could have issued a regulation with its interpretation of TILA, it chose instead to file an amicus brief. It is not clear whether the CFPB’s filing of an amicus brief interpreting a statute signals that it will not codify that interpretation in a regulation. Regardless, entities should also expect the CFPB to file amicus briefs on behalf of consumers in other important consumer finance litigation cases.

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[1] 15 U.S.C. 1601 et seq. as implemented by the CFPB’s Regulation Z.

[2] 15 U.S.C. 1635(f).