Ballard Spahr LLP: Borrower Can Sue after Three Years To Rescind Mortgage Loan, 3rd Circuit Rules

Ballard Spahr LLP: Borrower Can Sue after Three Years To Rescind Mortgage Loan, 3rd Circuit Rules

By the Mortgage Banking Group

A borrower can bring a lawsuit seeking rescission more than three years after loan consummation as long as the borrower has sent a written notice of rescission within the three-year period, the U.S. Court of Appeals for the Third Circuit has ruled.

In its February 5, 2013, decision in Sherzer v. Homestar Mortgage Services [enhanced version available to subscribers], the Third Circuit rejected the lender's argument that the borrowers' lawsuit was untimely because it was not filed within three years of the loan closing date. Reversing the district court's dismissal of the lawsuit, the Third Circuit held that the borrowers had validly rescinded the loan by sending a notice of rescission to the lender within the three-year period.

The Third Circuit found that the borrowers' position-that they needed only to send notice of rescission within the three-year period to validly exercise their rescission right-was not foreclosed by the U.S. Supreme Court's interpretation of TILA Section 1635(f) in Beach v. Ocwen Federal Bank [enhanced version available to subscribers]. The Supreme Court held that Section 1635(f), which provides that the right to rescind expires after three years, operates to extinguish a borrower's rescission right if it is not exercised within the three-year period. According to the Third Circuit, Beach did not address how a borrower must exercise his or her rescission right within such period to prevent its extinguishment.

Amici supporting the lender  argued that allowing borrowers to rescind by written notice alone could cloud a lender's title indefinitely beyond three years since uncertainty about  a borrower's right to rescind could continue until either the borrower filed a rescission lawsuit or the lender brought a foreclosure or declaratory judgment action.

In response, the Third Circuit observed 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." However, the Third Circuit did acknowledge 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 Consumer Financial Protection Bureau filed an amicus brief in support of the plaintiffs and participated in oral argument. It has also filed amicus briefs in other circuit court cases involving the same rescission issue.

Sherzer disagrees with the Third Circuit's 2011 unpublished opinion in Williams v. Wells Fargo Home Mortgage, Inc., 410 Fed. Appx. 495 [enhanced version available to subscribers]. In Williams, the Third Circuit ruled that a borrower's rescission claim was untimely because, despite having sent a rescission notice to her lender within the three-year period, the borrower did not file her lawsuit within such period. It is possible Williams will encourage the lender to seek rehearing en banc in Sherzer.

The Third Circuit has now joined the Fourth Circuit in holding that notice alone within the three-year period is sufficient to validly exercise a right to rescind, with the Ninth and Tenth Circuits having adopted a contrary view. This circuit split increases the likelihood that the U.S. Supreme Court will agree to hear the case if a petition for certiorari is filed. 

Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of the firm's Consumer Financial Services Group, which is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact Martin C. Bryce, Jr., at 215.864.8238 or, Mortgage Banking Group Practice Leader Michael S. Waldron at 202.661.2234 or, Mortgage Banking Group Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or, Mortgage Banking Group Practice Leader John D. Socknat at 202.661.2253 or, or CFS Group Practice Leader Alan S. Kaplinsky at 215.864.8544 or

Copyright © 2013 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.


Sign in with your ID to access Real Estate Law resources on or any of these Mathew Bender  Real Estate Law publications

Click here to order Property Law treatises/resources and Mathew Bender publications. 

Click here to order Real Estate Law treatises/resources and Mathew Bender publications. 

LexisNexis Publications:

View the LexisNexis Catalog of Legal and Professional Publications

LexisNexis eBooks

Click here for a list of available LexisNexis eBooks.

Click here to learn more about LexisNexis eBooks.

For more information about LexisNexis products and solutions connect with us through our corporate site.