In Hoang v. Bank of America, N.A., No. 17-35993 (9th Cir. Dec 6, 2018), in connection with the refinance of the borrower’s mortgage, the originating bank failed to give the borrower a notice of the right to recession as required under Section 1635 of the federal Truth in Lending Act (“TILA”). Consequently, the borrower had three years from loan consummation to rescind the loan, and the borrower proceeded to rescinded within such three-year period by mailing a notice of intent to rescind to the bank. The bank took no action in response to receiving the notice.
Approximately four years after the bank received the notice of rescission, the bank declared default and initiated a non-judicial foreclosure. The borrower in response brought a suit against the bank to enforce the rescission of the mortgage through injunctive and declaratory relief under TILA. The bank moved to dismiss the suit arguing that the borrower was time barred, because borrower failed to bring the suit within three years of consummation. The district court applied TILA’s one-year statute of limitation under section 1640(e) of TILA to dismiss the action. On appeal the Ninth Circuit reversed and remanded.
In support of its decision, the Ninth Circuit explained that the district court incorrectly applied the time limitation in section 1640(e) to the injunctive and declaratory relief sought by the borrower. The appellate court opined that section 1640(e) one-year limitation applies to money damages under TILA and not to the equitable enforcement of the rescission itself. The appellate court acknowledging that TILA does not provide a time frame to enforce rescission by the borrower once notice of intent to rescind is made and that some limitation must apply.
In the absence of statute of limitation, the Ninth Circuit determined that it must apply analogous state law as there was no federal law that provides closer analogy. The appellate court rejected the bank’s argument that the applicable state of Washington’s default statute of limitation of two years should apply. Instead, the appellate court opted to apply Washington’s six-year contract statute of limitation as the “most analogous statute” to the action, thus finding the borrower’s claim for equitable rescission was not time barred.
Notes and Comments
This is a case of first impression dealing with the consequences of the U.S. Supreme Court’s decision Jesinoski v. Countrywide Home Loans, Inc., 135 S. Ct. 790, 790, 190 L. Ed. 2d 650 (2015), where the court held that all the borrower has to do to rescind a loan under TILA is to mail a notice of intent to rescind to the lender and that TILA does not require the borrower to also bring a lawsuit within three years to enforce the rescission. In Jesinoski, the Supreme Court did not address the issue of what would be the time limit to for the borrower to enforce the rescission if the lender or assignee does not respond to the notice of rescission.
However, the appellate court’s approach of using a state analogous statute rather than attempting to find a uniform federal alternative is arguably problematic. It results in unequal rights to borrowers and uncertainty to lenders and assignees. Specifically, by using a state analogous law instead of a federal alternative, borrowers in different states will have different time frames to enforce the same equitable rescission claim under TILA if the loan is timely rescinded. For example, assuming courts would uniformly follow state contract law as analogues law, a borrower in Illinois would have ten years to enforce rescission where a borrower in Maryland will only have three years. Additional confusion would result if court would not uniformly choose contract law and may employ different state law as analogous. This would create great uncertainty for borrowers and the mortgage industry and would likely result in increased cost of litigation.
One possible federal alternative that was not considered by the Ninth Circuit in its decision here, is the federal default four year statute of limitation under Section 1658 (28 USC 1658). Although Section 1658 only applies to federal causes of action enacted after the enactment of Section 1658, which was enacted in 1990, and thus on its face does not apply to TILA rescission right which predated the section, it does arguably represent a general statement of policy by Congress that where a federal claim does not have a time limitation for action, a four-year limitation period is the appropriate limitation. Accordingly, Section 1658 should be raised as alternative analogous limitation period that should be considered by courts as the appropriate time limit for equitable enforcement of TILA rescission in the absence of a federal timeframe. Employing the time limitation of Section 1658 will result in providing equal rights to borrowers and much needed certainty to the mortgage industry.
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