By the Ballard Spahr LLP Mortgage Banking Group
The Eighth Circuit recently held that a borrower must file suit before foreclosure to exercise rescission rights under TILA. The court now joins the Ninth and Tenth Circuits in holding that notice alone is not sufficient. In Hartman v. Smith, [enhanced version available to lexis.com subscribers], the Eighth Circuit found because the borrowers failed to file a rescission action before the sale, the right of rescission expired upon the sale of the property.
The case involved three borrowers who filed suit against the defendants, a bank and a real estate finance firm, asserting violations of TILA and state law. The bank moved to foreclose after the borrowers failed to make payments. After the property was sold at a sheriff’s sale, the borrowers sued to rescind the loans under TILA on the ground they had provided written notice of rescission prior to the foreclosure sale.
The district court granted summary judgment in favor of the defendants and dismissed the borrowers’ TILA rescission claim and state law claims; the borrowers appealed. On appeal, the bank argued that because the borrowers failed to file suit before the foreclosure sale, their rescission claim failed. The court noted the circuits are split on the question of whether a borrower must file suit within the repose period to exercise the right to rescind. While the Fourth Circuit has found notice sufficient for rescission to occur, the Ninth and Tenth Circuits have disagreed, requiring borrowers to file suit to rescind.
Applying its recent holding in Keiran v. Home Capital, Inc. [enhanced version available to lexis.com subscribers], the Eighth Circuit found that notice by itself, while necessary, was insufficient to exercise rescission, and that a borrower seeking rescission under TILA must file suit within three years to preserve the right of rescission. Here, where the foreclosure sale occurred within the three-year rescission period, the court held that the borrowers were required to file a rescission action before the foreclosure sale. Because the borrowers failed to do so, the court held that their rescission claim was barred.
Judge Melloy wrote a concurring opinion noting that the Consumer Financial Protection Bureau recently weighed in on this issue in courts across the country as amicus curiae and argued that sending notice is all that is required.
- Melanie J. Vartabedian and Anthony C. Kaye
Copyright © 2013 by Ballard Spahr LLP.http://www.ballardspahr.com/(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.
For more information about LexisNexis products and solutions connect with us through our corporate site