Homeowners seeking rescission – cancellation – of their homeloans on the basis that the lender failed to meet their legal requirement to disclosethe terms and conditions of the loan were recently handed a victory by theFourth Circuit appellate court. Lenders lament that the court’s decision willopen the door to increased foreclosure delays.
Gilbert v. ResidentialFunding LLC is the first decision by a federal appellate court to hold thata borrower need only send notice of his or her intent to cancel the loan withinthree years of closing in order to validly exercise the right to cancel theloan.
The Gilberts sent notice of the rescission to the lender within three years, but filed a lawsuit a little more than three years after the closing. All of the other courts have ruled that borrowers must file their lawsuits within three years of the completion of the loan or the case will be thrown out of court as being untimely.
The decision puts the Fourth Circuit in the minority of the courts that have considered the issue. The case was released May 3.
The Truth in Lending Act (TILA) requires that a creditor make certain disclosures at the time the loan is made. If the creditor fails to comply with this mandate, the borrower has the right to rescind the loan up to three years after the transaction.
The Gilberts closed the loan with their lender on May 5, 2006, but they did not file the lawsuit until September 14, 2009. However, they notified their lender by letter in April 2009 that they were exercising their right to rescind. So, the court noted, although the Gilberts did not file the lawsuit within three years of closing the loan, they did notify the lender that they were exercising their right to rescind during that three-year time period.
The court gave two reasons for its decision. First, that the plain meaning of the law required that it come to such a result. And, second, the court noted the ruling in a 2009bankruptcy case,In re Hunter, 400 B.R. 651 (Bankr. N.D. Ill. 2009), where the bankruptcy court held that “TILA gives a consumer the right to rescind a credit transaction simply by notifying the creditor, within a specific period of time, that she intends to do so.”
The court also declared that in coming to its decision, it was disagreeing with a recent decision on the matter made by the Ninth Circuit Court of Appeals.