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Third Circuit Permits TILA Rescission Lawsuit for Failure to Adequately Disclose Terms - Sherzer v. Homestar Mortgage Services

February 11, 2013

Vincent Howard and our Riverside County predatory lending lawyers use the Truth in Lending Act when pursing predatory lending cases for clients who were defrauded when they took out their loans. So we were interested to see Sherzer v. Homestar Mortgage Services, in which the Third U.S. Circuit Court of Appeals permitted a TILA lawsuit to go forward. Daniel and Geraldine Sherzer wrote a letter to Homestar and HSBC, its successor in interest, to notify them they were exercising their right to rescind their home loan. The Sherzers didn't file the rescission lawsuit until after the three-year notice period had ended, however. The eastern Pennsylvania district court dismissed their lawsuit, saying it was untimely, but the Third Circuit reversed, saying the rescission notice requirement was met.

In 2004, the Sherzers took out two mortgages on their principal home, both from Homestar. A few months short of the three-year anniversary of the closing, their attorney wrote a letter to Homestar and HSBC, to which the loans had been assigned, arguing that Homestar had failed to provide all of the disclosures required by the TILA. These were material violations of the law, they said, and thus they were exercising their right to rescind both loans. HSBC agreed to rescind the smaller of the two loans, but claimed Homestar did not violate the TILA with the larger loan and refused to rescind. The Sherzers sued a few months later, putting their suit after the three-year deadline required for notice of rescission. The lenders filed for judgment on the pleadings, arguing that the lawsuit was untimely; the Sherzers disagreed, saying only notice was required to be given within three years. The district court sided with the lenders and dismissed the case.

On appeal, however, the Third Circuit sided with the borrowers and an amicus, the Consumer Financial Protection Bureau. Both argued that the suit is not part of the statute's rescission process--just a mechanism to enforce it. The lenders, by contrast, argued that rescission doesn't take place until either the parties agree or a court enters judgment. Both views are supported by other circuit courts, but the Third ultimately found that the statute's language and its implementing Regulation Z support the Sherzers' view. The statute and regulation never mention lawsuits, but say rescinding the transaction is done by written notice, the court said. The courts finding otherwise have cited a U.S. Supreme Court case that the Third Circuit said was inapposite because the borrowers in that case didn't provide written notice within three years. Thus, it reversed the dismissal of the Sherzers' case and remanded.

Vincent Howard and our Costa Mesa predatory lending attorneys strongly agree with this decision. The language of the statute does not appear to create a need to sue in order to rescind the loan. Indeed, as the Third Circuit pointed out, to read one in would make the three-day period, during which the borrower can rescind for any reason, useless for practical purposes. That outcome may not bother lenders, but it would eviscerate the TILA and be bad for consumers. We're also pleased to see the CFPB weighing in on this issue, since TILA is very much a consumer protection statute. At Howard Law, P.C., our Ontario predatory lending lawyers use TILA when appropriate to help clients get out from under unmanageable loans created by deceit or lack of disclosure when they were made.

If you believe you were misled or outright lied to when you took out a home loan, don't wait to call Vincent Howard and the team at Howard Law to discuss how we can help. You can reach us through our website or call 1-800-872-5925.

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