Eighth Circuit’s TILA Decision: Another Catch-22 for Lenders
Recently, the Eighth Circuit Court of Appeals joined a growing number of jurisdictions in holding that a borrower’s written notice of intent to rescind a home mortgage loan is insufficient to preserve the borrower’s right to rescind under the Truth in Lending Act. The reason: the borrower failed to file a lawsuit for rescission within TILA’s three-year rescission period.
However, the court didn’t stop there, holding that even though the borrower could not rescind the loan, the lender still could be held liable for damages. As such, while the decision clarifies what triggers rescission rights under TILA, it also highlights the layers of complexity for Nebraska- and Iowa-based mortgage lenders seeking to determine the proper course of action when faced with a written notice to rescind under TILA.
Legal Background
For three business days after a mortgage loan closing, the borrower can rescind the loan under TILA, no questions asked. However, if the lender violated any of TILA’s complicated disclosure requirements, a borrower’s right to rescind is extended to three years after closing. If the borrower seeks a rescission, the lender has just twenty days to cancel its security interest in the property and return all fees, costs, and interest payments it received from the borrower, and the borrower must return the loan proceeds. Obviously, this narrow window of time to take action presents a major compliance challenge for lenders.
Summary of Holding
The question before the court in the consolidated cases of Steven Sobieniak, et al. v BAC Home Loans Servicing, LP, et al. and Keiran v. Home Capital, Inc.,1 was whether the borrower’s written notice to the lender alone triggered the lender’s obligation to rescind the loan. The court, weighing in for the first time on an issue that has divided circuit courts across the country, held that the written notice was not enough. Rather, to preserve the right to rescind, the borrowers also must have filed a lawsuit within the three-year rescission period.
However, because TILA affords borrowers multiple statutory remedies for disclosure violations, the inquiry did not end there. Although the borrowers’ lawsuit for rescission was too late, the Court nevertheless held that the borrowers did have a timely claim for damages based on the lenders’ refusal to rescind when the lender received the rescission notice. In what can only be characterized as cruel irony, the Court stated the borrowers’ claims for damages for the lenders’ failure to rescind accrued when the borrowers sent written notice and the lenders denied their request. Because the lawsuit for damages was brought within one year of the lenders’ denial, it was within TILA’s one-year statute of limitations for damages claims.
The decision is a Catch-22 for lenders: the court held that the lender was not obligated to rescind upon receipt of written notice because the borrower did not file a lawsuit, but the lender potentially was liable for damages because the lender did not rescind upon receipt of written notice.
While the Court ultimately denied the borrowers’ damage claims because they failed to prove TILA violations, this case illustrates the complex interaction of the remedies provisions of TILA and the importance of quickly assessing the validity of a borrower’s claim for rescission based on alleged TILA violations.
Practical Implications
The Eighth Circuit’s holding is a good reminder of the need to comply with all of TILA’s requirements. In addition to providing the requisite disclosures to borrowers, a lender must be aware of how to respond to a borrower’s notice of intent to rescind. If the borrower provides notice of his or her intent to rescind within three business days of loan closing, the lender must evaluate whether the loan in question is even eligible for TILA rescission, including whether: (1) the loan is secured by borrower’s primary residence; (2) the loan is for personal, family, or household purpose and not business purposes; and (3) the loan is not for construction or purchase of primary residence. If the loan is eligible for rescission under TILA’s “no questions asked” three-day period, then the lender should cancel its security interest in the collateral, return any fees paid by the borrower and recover the loan proceeds.
The less common but more complicated occurrence is when the borrower sends written notice of intent to rescind the loan months, or even years, after the loan closing. By this time the loan proceeds have been disbursed and the borrower has made a number of payments. Beyond verifying that the loan in question is eligible for TILA rescission based on the factors listed above, there are additional considerations including: (1) has the primary residence securing the loan been sold or transferred; (2) has the loan been refinanced; (3) is the borrower able to return the loan proceeds; (4) has the borrower alleged a violation of TILA; and (5) does the lender believe it violated TILA’s disclosure requirements?
If after all these considerations, the lender believes the borrower has a valid basis for rescission, it should petition the court for an order for simultaneous performance. Such an order will condition the lender’s cancellation of its security interest upon the borrower’s return of the loan proceeds, insuring that the lender is not left with an unsecured debt.
Conclusion
The proper response to each situation will vary depending on the facts of the individual case. If the borrower is entitled to rescission, the lender has only twenty days from the borrower’s written notice to take the necessary actions to rescind. Upon receipt of a notice to rescind a loan based upon TILA, the lender should immediately review the loan documents and take action to determine the appropriate response.
1 No. 11-3878 (8th Circuit 2013) and No. 12-1053 (8th Circuit 2013).