3rd Circuit: Not Necessary To File TILA Lawsuit Within Three Years To Exercise Loan Rescission Rights; Firing Off Letter To Mortgage Holder Invoking Claims Enough To Satisfy Statute

Forbes reports:

• A recent decision by the Third Circuit Court of Appeals gives borrowers an indefinite period to rescind their home-equity loans, complicating life for lenders and setting up a conflict that may have to be resolved at the Supreme Court.
  
  Home buyers normally have three days to rescind a loan, and after that mortgages to purchase a property can’t be reversed. But federal law allows other types of loans to be rescinded for up to three years if the borrower can prove violations of the Truth in Lending Act, such as an inaccurate interest rate or undisclosed finance charges. If they prevail — and have enough cash to repay the loan principal — borrowers can get a refund of their interest and fees.
  
  Most courts, including the Ninth Circuit Court of Appeals, have held that borrowers who want to do this also must sue the bank within the three-year deadline.(1)
  
  But the Third Circuit, in Sherzer vs. Homestar, ruled that borrowers only have to send a letter of notice to the bank. They can sue whenever they want after that, leaving a potential cloud on the lender’s claim against the property that can only be resolved if the lender gets a declaratory judgment denying the recission.
  
  The ruling released Tuesday follows a similar decision by the Fourth Circuit(2) and gives borrowers another tactic for delaying lenders that want to seize the collateral backing their loan.
  
  “If you’re having trouble making payments and worried about foreclosure, you could fire off letter to the lender saying you believe there was a material TILA violation,” said Martin Bryce Jr., a partner with Ballard Spahr in Philadelphia. “Then you get to sit back and hold that in your pocket.”

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• Under the reasoning adopted by the Third and Fourth Circuits (based in Philadelphia and Richmond, respectively) borrowers don’t need to worry about whether they have the cash to pay off the loan, however. The smartest course is to fire off a letter demanding recission within three years and keep it on hand in case they get in trouble. Then it becomes a bargaining chip with a lender who’s already facing a certain loss on the loan. The question becomes how much more the lender wants to spend on legal fees to gain clear title to the collateral.
  
  Other borrowers, of course, pay the price. Look for this case, or one like it, to percolate up to the Supreme Court.

For more, see Court Decision Gives Lenders A Headache, Borrowers An Ace In The Hole.

For the ruling, see Sherzer v. Homestar Mortgage Services, No. 11-4254 (3d Cir. February 5, 2013).

(1) See 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).

(2) Gilbert v. Residential Funding LLC, 678 F.3d 271, 277–78 (4th Cir. 2012). See also Williams v. Homestake Mortgage Co., 968 F.2d 1137, 1139–40 (11th Cir. 1992) (explaining that rescission occurs automatically upon notice).

Note: The binding effect of these federal appeals court rulings are limited to all lower Federal courts located in the states within the appeals court's jurisdiction, but may be considered for its persuasive effect by other courts. To find out which Federal appeals court has jurisdiction over appeals from the lower Federal courts in your state, you can check the U.S. Circuit Court of Appeals Map.