Fourth Circuit, In Disagreement With Sister Circuits, Holds That Section 1635(f) Of TILA Only Requires The Borrower To Exercise, Not Enforce, The Right Of Rescission Within Three Years Of Closing

In Gilbert v. Residential Funding LLC 678 F.3d 271 (4th Cir. May 3, 2012), the borrowers defaulted on their mortgage loan, which they took in a refinance transaction on May 5, 2006. On April 5, 2009, and less than a month after the assignee of the mortgage loan initiated a foreclosure against the borrowers, the borrowers’ counsel sent a notice, to the loan’s subservicer rescinding the loan on the basis of several alleged violations of TILA. In a letter, dated April 14, 2009, the subservicer denied the borrowers’ rescission claims leading the borrowers to file on September 14, 2009 a complaint against the servicer and assignee requesting rescission, damages and attorney’s fees under TILA. The assignee moved to dismiss on the ground that the TILA rescission claims were not brought within TILA’s three-year limitation period. The district court granted the motion and the borrowers appealed. The Circuit Court reversed finding that neither the plain text of section 1635(f), nor section 226.23(a)(2) of Regulation Z, say anything about filing a lawsuit. According to 226.23(a)(2) a borrower exercises her right of rescission by merely communicating in writing to her creditor her intention to rescind. The appellate court distinguished the Supreme Court’s holding in _Beach v. Ocwen Fed. Bank_, 523 U.S. 4 118 S. Ct. 1408, 140 L. Ed. 2d 566 (1998), by reasoning that in _Beach_ the Supreme Court did not address the proper method of exercising a right to rescind or the timely exercise of that right. The Supreme Court’s decision in Beach was confined to the holding that section 1635(f) of TILA extinguishes the right of rescission within three years, but does not require the borrower to file a claim invoking that right within three years. Accordingly, the fact that the borrowers failed to seek enforcement of their right to rescind within the three years does nothing to take away from the fact that they exercised their right of rescission within the time period required under section 1635(f) of TILA. In reaching its decision the Appellate Court noted its disagreement with the Ninth Circuit’s recent holding in _McOmie-Gray v. Bank of Am. Home Loans_, 667 F.3d 1325 (9th Cir. February 8, 2012), which held that the borrower must file a lawsuit within the three-year time period to exercise the right to rescind and that simply notifying the creditor does not preserve the right beyond the three-year period. Notably, the Ninth Circuit’s holding in _McOmie-Gray_ is in accord with holdings of two other circuits, the Third Circuit in _Williams v. Wells Fargo Home Mortg., Inc._, 410 F. App”x 495, 498 (3d Cir. February 8, 2011) and the Tenth Circuit in its most recent decision in _Rosenfield v. HSBC Bank, USA_, 10-1442, 2012 WL 2087193 (10th Cir. June 11, 2012).

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