Circuit split widens on actions borrowers must take to preserve their right to rescind under TILA

By Stephen J. Shapiro

Several circuit courts have reached conflicting conclusions about the actions borrowers must take to exercise their right to rescind a loan under the Truth in Lending Act. Recent opinions from the Eighth Circuit widen the divide.

Under TILA, lenders are required to make certain disclosures to borrowers. If a lender fails to make those disclosures, the borrower may rescind the loan within “three years after the date of the consummation of the transaction or upon the sale of the property, whichever occurs first.” The question that has divided the circuits is: what action must borrowers take to exercise their rescission rights? Is it sufficient for borrowers simply to notify their lenders that they are exercising their right to rescind, or must borrowers file suit-seeking rescission?

As we previously reported, earlier this year the Third Circuit, in Sherzer v. Homestar Mortgage Services, joined the Fourth Circuit in holding that mere notice by the borrower is sufficient to exercise the right to rescind under TILA.  This holding contradicted decisions by the Ninth Circuit and the Tenth Circuit, both of which held that a borrower must file suit to exercise the right to rescind.

The Eighth Circuit joined the fray earlier this summer with Keiran v. Home Capital, Inc., and Hartman v. Smith. In those cases, the Eighth Circuit sided with the Ninth and Tenth Circuits in holding that borrowers seeking to exercise their right to rescind under TILA must file suit, not just notify their lenders.

However, another recent opinion shows that considerable disagreement on this issue exists among the judges within the Eighth Circuit. In Jesinoski v. Countrywide Home Loans, Inc., two borrowers notified their lender that they were invoking their right to rescind their loan under TILA during the three-year period following consummation of the loan, but did not bring a rescission claim against the lender until after the three-year period expired. The trial court entered judgment on the pleadings in favor of the lender and the Eight Circuit, relying on its earlier decisions in Keiran and Hartman, affirmed. However, two of the three judges on the Jesinoski panel stated in concurring opinions that they believed Keiran and Hartman were wrongly decided and noted that, had they not been required to follow the decisions of those prior panels, they would have joined the Third and Fourth Circuits in holding that mere notice by borrowers of their intent to invoke their right to rescind under TILA is sufficient. This issue likely will continue to engender differences of opinion both between and within the circuits unless and until the Supreme Court resolves it.

UPDATE (4/29/14): The United States Supreme Court granted cert in the Jesinoski case.

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