On March 26, 2012, the Consumer Financial Protection Bureau (“CFPB”) filed an amicus curiae brief in Rosenfield v. HSBC Bank, USA, et al. in the United States Court of Appeals for the 10th Circuit in support of the consumer-appellant, arguing that courts have not correctly interpreted the federal Truth-in-Lending Act (“TILA”) regarding how long a consumer has to rescind a mortgage loan. This brief is the first of four briefs that the CFPB intends to file in the appellate courts regarding this issue, which is being litigated in 10 separate appeals in four jurisdictions.

Existing Law

Section 1635(a) of TILA provides a consumer with the right to rescind certain qualifying mortgage transactions within three business days of the loan closing by notifying his or her mortgage lender of the intent to rescind the loan. 15 U.S.C. § 1635(a). In addition, TILA provides that a consumer will have up to three years after the mortgage loan closing by which to notify his or her lender of the consumer’s intent to rescind the mortgage loan, if the mortgage lender fails to provide the consumer with notice of the consumer’s right to rescind a mortgage loan and/or with the material terms of the mortgage transaction. Section 1635(f) of TILA expressly provides that:

[a]n obligor’s right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first, notwithstanding the fact that the information and forms required under this section or any other disclosures required under this chapter have not been delivered to the obligor . . .

15 U.S.C. § 1635(f).

In Rosenfield, the trial court granted defendant HSBC’s motion to dismiss because it found that the borrower did not file her lawsuit within three years of her mortgage loan closing. In doing so, the district court followed the majority of district courts, two appellate circuit courts, as well as the United States Supreme Court, in holding that a consumer’s desire to rescind a mortgage transaction “must both be noticed and (if ignored or rejected by the lender) sued upon within three years.” See CFPB Brief pg. 8 citing Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998). The district court noted that Beach was not directly on point because, unlike the borrower in Rosenfield, who gave timely notice of her intent to rescind to HSBC, the borrower in Beach did not. CFPB Brief pg. 8. In issuing its ruling granting HSBC’s motion to dismiss, the district court held that the right of rescission must be “coterminous” with the filing of a lawsuit. Id.

In its brief, the CFPB cited only three district court cases that have held that section 1635 of TILA only limits the time period in which a consumer must provide notice to the lender, and in no way impacts the time frame for filing a lawsuit. However, the ruling in one of those district court cases, Barnes v. Chase Home Fin., LLC, No. 11-cv-142, 2011, WL 4950111 (D. Or. 2011), appears to be inconsistent with its controlling appellate court (the 9th Circuit).

CFPB’s Position

The CFPB argues that section 1635 of TILA does not require consumers to both provide notice to their lender of their intent to rescind a mortgage transaction and to file a lawsuit against the lender to recognize that the consumer has exercised the right of rescission within the three-year time period. The CFPB suggests that “[t]he timeliness of the consumer’s lawsuit is entirely independent of the timeliness of the consumer’s exercise of the right to rescind.” CFPB Brief pg. 18.

The CFPB argues that by requiring a consumer to file a lawsuit within the three-year time frame, it forces the rescission process into litigation that, according to the CFPB, should only occur when the lender does not acknowledge a consumer’s notice of intent to rescind. While the CFPB does not suggest a time frame to file a lawsuit, footnote 4 suggests that consumers could be provided “one year from the lender’s refusal to unwind the transaction after receiving the notice of rescission.” CFPB Brief pg. 24 (internal citations omitted). Presumably this suggests that a consumer should file the lawsuit within a year after the 20-day period prescribed in section 1635(b) of TILA passes without the rescission being acknowledged.

Implications

By requiring consumers to both provide notice to their lenders of their intent to rescind the loan and to file a lawsuit within the three-year period prescribed in section 1635(f), TILA provides certainty to both parties regarding enforceability of the loan.

Should the CFPB prevail in its argument that a consumer should not have to file a lawsuit within the three-year time period of section 1635(f) of TILA, the CFPB will have arguably succeeded in overturning a Supreme Court decision without having to revise Regulation Z through the regulatory review process, and thereby changing the landscape for how a court should interpret the rescission period of Regulation Z.