The nation’s regulator of consumer financial products has indicated in an appeals court filing that borrowers should be able to maintain their ability to sue a lender beyond three years in cases where required disclosures weren’t provided as long as a notice of rescission was given to the lender within three years.
The lawsuit on appeal was first filed in a Colorado state court on Dec. 21, 2009, by Jean C. Rosenfield against HSBC Bank, USA.
Rosenfield originally took out a refinance mortgage on Nov. 3, 2006, with Ownit Mortgage Solutions, a subprime lender that has since gone out of business. Ownit, which assigned the loan to HSBC, allegedly violated the Truth in Lending Act by failing to provide a notice of the borrower’s right to rescind the loan, giving her incomplete disclosures regarding her adjustable-rate mortgage and inaccurately stating the total finance charges.
Within three years of closing on the loan, Rosenfield sent a notice of rescission to HSBC, which ignored the notice.
So she filed a lawsuit three years and one month after the loan closed. Rosenfield sought an injunction barring HSBC from foreclosing on her home. She also asked the court for a declaratory judgment that she had rescinded the loan and for damages.
HSBC removed the case to a federal court in Denver, and its motion to dismiss the lawsuit was granted.
The U.S. District Court cited the Supreme Court’s decision in Beach v. Ocwen Federal Bank and held that such a lawsuit would need to be filed within three years in addition to the borrower’s notice of rescission being made within the same period. But the district court did acknowledge that Beach v. Ocwen Federal Bank was not directly on point.
So Rosenfield filed an appeal with the U.S. Court of Appeals for the Tenth Circuit.
In an amicus brief filed Monday by the Consumer Financial Protection Bureau, the regulator maintains that the prior Supreme Court decision doesn’t mandate that the litigation needs to be filed within three years, just that the notice of rescission be made within that period. The CFPB noted that litigation is not required to rescind a loan even though it might follow such a notice.
In a news release, the CFPB explained that TILA requires lenders to disclose to borrowers on home-equity loans and second mortgages the various credit terms such as annual percentage rates and finance charges. If these TILA requirements are not met, then the borrower can rescind the loan as long as the proceeds are returned. At that point, the lender must release its liens against the property.
“Tethering the time in which consumers must initiate litigation to the length of the underlying rescission right would vitiate the statutory scheme established by Congress,” the brief stated. “Requiring consumers not only to notify their lender but also to file a lawsuit within three years would incentivize consumers to file suit immediately, rather than working privately with the lender to unwind the transaction. It would also encourage lenders to stonewall in response to a notice of rescission, because if the consumer failed to file suit before the right expired, even a valid rescission would be-come a nullity.”
