July 23, 2014
Under the Truth in Lending Act (TILA), a borrower may seek to rescind a loan under certain circumstances. The rescission process under TILA is as follows: (1) the borrower notifies his lender that he intends to rescind the loan; (2) the lender returns any security interest to the borrower; and (3) upon return of the security interest, the borrower tenders the loan proceeds to the lender. The Ninth Circuit recently held that a borrower need not plead that he has tendered the loan proceeds or has the ability to do so in order to state a rescission claim under TILA.
In Merritt v. Countrywide Financial Corp., the plaintiffs obtained a mortgage and took out a home equity line of credit from the defendant lender in connection with a home they purchased. The plaintiffs alleged that, despite repeated requests, their lender did not send them the loan documentation required by TILA for almost three years. When they finally received the documents, the plaintiffs concluded that they were the victims of “predatory lending” and notified the lender that they were invoking their right to rescind the loan under TILA. When the lender did not respond to the rescission request, plaintiffs sued the lender under TILA, requesting rescission of the loan. The district court dismissed the TILA claim because the plaintiffs had not pled that they tendered the loan proceeds to the lender or had the ability to do so at the time they sought rescission.
On appeal, the Ninth Circuit reversed. The Court acknowledged that, in a prior case, it held that the district courts may require a TILA plaintiff to produce evidence of his ability to tender the loan proceeds in response to a summary judgment motion brought by the lender. However, the Court held that its prior holding does not extend to motions to dismiss. In other words, if warranted by the circumstances, a borrower may be required to present evidence that he is able to tender to defeat a motion for summary judgment on a TILA claim, but he is not required to plead that he has the ability to tender in order to state a claim under TILA.
The plaintiffs also alleged that the lender violated Section 8 of the Real Estate Settlement Procedures Act (RESPA). The district court dismissed the claims as time barred because plaintiffs filed their claims after RESPA’s one-year statute of limitations had expired. On appeal, the Court, addressing an issue of first impression in the Ninth Circuit, held that under the appropriate circumstances RESPA’s statute of limitations may be equitably tolled. Because the district court did not address whether the plaintiffs were entitled to equitable tolling, the Court remanded for consideration of that issue.
The Court also remanded, for initial consideration by the district court, another issue of first impression in the Ninth Circuit. Plaintiffs alleged that the defendant violated Section 8(b) of RESPA, which prohibits the “giv[ing] . . . [of] any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service . . . other than for services actually performed.” Plaintiffs alleged that the defendant violated this provision by charging them more for services provided by third parties in connection with the mortgage transaction than defendant paid for those services. The Court noted the split among the Circuits as to whether such allegations – claims that a defendant “marked up” the cost of services provided by third parties – are actionable under Section 8(b) of RESPA. Specifically, the Second and Third Circuits have held that such allegations state a claim under Section 8(b), while the Fourth, Fifth, Seventh and Eighth Circuits have held that they do not. Because the “complicated issues of statutory interpretation and administrative law” involved in these decisions were not addressed by the district court, the Court remanded the issue for further development.