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Recent Developments concerning TILA Rescission Rights

Under the Truth in Lending Act (“TILA”), consumers are granted a right of rescission for mortgage loan transactions.  Normally, a mortgage lender provides the consumer notice of this rescission right, and the consumer has three business days to rescind the transaction.  If the mortgage lender does not provide the required TILA disclosures, the right to rescind is extended from three business days to three years.  The Eight Circuit and the Eastern District of North Carolina have both recently provided additional guidance with respect to a consumer’s rescission rights and the rescission process.

In the case of Baker v. Bank of America, N.A., the Eastern District of North Carolina held that rescission is not automatic upon a consumer’s delivery of a rescission notice to the mortgage lender.  Instead, rescission is not effective until the lender and/or borrower take additional steps to completely unwind the transaction and return to the status quo.  Thus, in situations where a lender does not voluntary comply with a rescission notice, the consumer may be forced to sue to enforce their rescission rights.  In the Baker case the court discussed the statute of limitations for bringing suit to enforce rescission rights, but did not have to make a conclusive determination because the consumer had waited over six years to file suit.

The Eighth Circuit, in Bank of America, N.A., v. Peterson, also recently considered a statute of limitations issue related to the TILA right of rescission.  The Eight Circuit determined that, in situations where the right of rescission has been expanded to three years, the consumer must actually file suit within the three year period to protect the right of rescission.  More importantly, however, the Eight Circuit held that, even after the statute of limitations has run to rescind a transaction, consumers may file suit seeking damages.  The statute of limitations for a consumer to file a damages claim is one year from the date the lender failed to rescind the transaction.

Lenders should take a couple of important points from these developments.  First, in situations where a consumer has provided notice of rescission, lenders should recognize that they must take further action to actually unwind the transaction.  If the parties are not returned to the status quo, the lender may be subject to an unwanted lawsuit.  Additionally, lenders should generally be aware that even after the right of rescission has expired, consumers may have the right to bring damages claims against them.