In a brief filed Tuesday the CFPB argued to the Tenth Circuit Court of Appeals in Denver that a consumer need not file a lawsuit in order to rescind a home equity line of credit, second mortgage or refinance when proper disclosures have not been given.

Section 1635 of the Truth in Lending Act requires lenders to disclose certain terms. Consumers are entitled to rescind loans within three business days following the consummation of a transaction or the delivery of the required disclosures and rescissions forms. However, if proper disclosures and forms are not provided, the consumer has three years after the consummation of the transaction (or upon the sale of the property) to rescind. 

Rescinding is easy according to the CFPB. All a consumer needs to do is notify the creditor that he is rescinding the loan. This notice can be given by mail, telegram or any other means of written communication. The CFPB maintained that when the consumer exercises a valid right of rescission the transaction is cancelled.  That means that the consumer is not liable for any finance or other charge and the obligor’s security interest is void. 

Within twenty days after receipt of a proper notice of rescission, the lender must return any money or property given in connection with the transaction and take all necessary steps to terminate the security interest.  15 U.S.C. 1635(d). 

In the case before the court, Jean Rosenfield claimed that her lender Ownit Mortgage Solutions failed to provide her with proper notice of her right to rescind. Within three years of obtaining the loan, Rosenfield sent notice of rescission to HSBC (which had purchased the loan from Ownit). HSBC did not respond and three years and one month after she closed her loan, Rosenfield filed the lawsuit seeking to stop HSBC from foreclosing on her home. She also asked for a declaratory judgment that she had rescinded the loan and for damages. HSBC asserted that Rosenfield had filed her claim too late. The district court agreed and threw her case out of court. 

On appeal the CFPB asked to file an amicus brief. In it, it argued that most district courts, including the lower court in this case had gotten the law wrong. The CFPB summarized its position stating:

“When a consumer has a right to rescind, timely notice to the lender effectuates the rescission as a matter of law; consumers need not go to court to unwind the loan. Requiring consumers to file suit within the three-year timeframe disregards the statutory and regulatory text, forces potentially unnecessary litigation on lenders and waste valuable judicial resources – all in contravention of the statutory scheme to provide a private, non-judical mechanism to rescind mortgage loans.”

The CFPB argued that the consumer need not do anything more than send a notice to the lender to rescind a loan.  Rescission is not something a court awards under TILA. Courts holding otherwise, “fail to understand that the statutory right of rescission under TILA – - consistent with rescission under the common law and many other statutes – - is accomplished privately by notice.” 

The CFPB predicted there would still be litigation, but said claims will arise in this way: “Either the lender will refuse to unwind the transaction (and the consumer will sue), or the consumer will stop paying (and the bank will sue or attempt to foreclose).” The CFBP took no position on how much time after a lender refuses to honor a rescission demand a lawsuit must be filed. It noted that some courts apply the TILA one-year statute of limitations following a violation, while others focus on well-established borrowing principles for finding an analogous statutory provision. 

Although not an issue in the Rosenfield case, the CFPB repeatedly outlined the process for rescission in its brief.  The consumer sends a written notice of rescission. The lender then returns finance and other charges and voids the security interest. Then and only then must the consumer tender to the lender the loan principle. While not commenting directly on existing law, the CFPB surely knows that many courts require a consumer to either allege or show evidence of an ability to tender before they may precede with a rescission case. Its outline of the process probably foreshadows its position on tender. Additionally, the CFPB noted that TILA permits a court to modify the rescission process, but used as an example a situation where a borrower is in bankruptcy and may be prohibited from tendering to the creditor. This example differs greatly from the common situations where the creditor simply does not believe that the borrower has the ability to repay the principle. 

The CFPB is now in the amicus brief writing business. Its briefs will influence at least some courts. Our expectation is courts that rely on the CFPB will rarely rule in favor of the lender.