Suit up! Favoring lenders over borrowers, Eighth Circuit requires lawsuit commencement to effect TILA rescissions.

• Author: Guntli, Timothy M.
• Position: Truth in Lending Act

Keiran v. Home Capital, Inc., 720 F.3d 721 (8th Cir. 2013)

1. INTRODUCTION

   With about two-thirds of Americans, on average, owning their homes, (1) mortgages are big business in the United States. To protect home loan borrowers, Congress enacted the Truth in Lending Act (TILA) in the late 1960s as a protective measure to ensure that lenders provide material disclosure of credit terms so that consumers can borrow responsibly and safely. (2) As a remedy for a failure of a lender to make such disclosures, borrowers may rescind the loan if they do so within three years of the closing. (3) Rescission is an enormously powerful tool, and in a process where borrowers have little control, it remains the "singular source of borrower leverage in a legal and economic climate that remains generally inhospitable to homeowners." (4)

   Recently, an examination of the language contained in TILA and the related regulations has centered around a seemingly simple issue: May a borrower exercise the right to rescind simply by sending the lender notice of intent to do so, or must the borrower file a lawsuit demanding rescission? Because rescission remains the only leverage that a borrower has over a lender in a mortgage transaction, the answer to this question is vitally important to borrowers. Prior to Keiran v. Home Capital, Inc., the United States circuit courts of appeals had split evenly on the issue. (5 Then, in Keiran, the U.S. Court of Appeals for the Eighth Circuit tipped the balance in favor of lenders when it held that sending notice of intent to rescind to a lender is insufficient and that a borrower must instead file suit in order to exercise the right of rescission. (6) This Note argues that Keiran was decided incorrectly based on principles of statutory interpretation, application of legal precedent, and legislative intent. (7)

   Part II of this Note will discuss the facts and holding of Keiran. Part III will examine the legal background and history of TILA and explain recent precedent regarding the specific issue presented in Keiran. In Part IV, this Note will explore the analysis of the majority and dissenting opinions in Keiran. Finally, Part V concludes this Note by criticizing the court's analysis in the instant decision and contemplating future effects of the decision on borrowers and lenders.

2. FACTS AND HOLDING

   This appeal arose from two consolidated cases of borrowers, the Keirans and the Sobieniaks, attempting to rescind mortgage loans. (8) In the Sobieniaks' case, the borrowers, seeking to refinance, executed a promissory note for a mortgage loan on March 22, 2007, which was secured by their principal residence. (9) At closing, the Sobieniaks acknowledged receiving two copies of the notice of right to cancel (or rescind) the loan but only one copy of the TILA disclosure statement. (10) On January 15, 2010, less than three years after execution of the promissory note, the borrowers sent a notice of rescission to the lender, claiming a rescission right on grounds that the lender had failed to provide two copies of the TILA disclosure at closing. (11) On January 29, the lender denied the rescission, claiming that the correct number of copies of all required documents was provided for the borrowers at closing. (12)

   On January 14, 2011, more than three years after execution of the promissory note, the borrowers filed suit, claiming money damages, rescission of the loan, and a declaration that the loan was void because the lender failed to provide two copies of the TILA disclosure at the closing. (13) The trial court granted summary judgment for the lender, finding, among other things, that the borrowers "had no right to rescind because they did not file the suit for rescission within the three-year statute of repose contained in 15 U.S.C. [section] 1635(f)." (14)

   In the Keirans' case, the borrowers and the lender executed a promissory note for a mortgage loan in December 2006. (15) At closing, the Keirans acknowledged receiving two copies of the notice of right to rescind but only one copy of the TILA disclosure statement. (16) On October 8, 2009, less than three years after executing the promissory note, the Keirans sent rescission notices to the lender, claiming that they did not receive sufficient copies of required TILA disclosures at the closing. (17) The lender denied the request and, on January 7, 2010, informed the Keirans that there was no basis for rescission. (18)

   On October 29, 2010, the Keirans filed suit against the lender, seeking money damages, rescission of the loan, and a declaration that the lender's security interest in the loan was voi. (19) Like the Sobieniaks, the Keirans alleged that rescission was proper because they did not receive, as required by statute, more than one copy of the TILA Disclosure Statement at closing. (20) Nevertheless, the district court granted summary judgment for the lender, holding that the three-year statute of repose contained in 15 U.S.C. [section] 1635(f) barred the Keirans' claim for rescission. (21)

   These cases were consolidated on appeal, and a panel of the Eighth Circuit affirmed the lower court's decisions. (22) The court held that when a borrower seeks to rescind a mortgage loan based on the lender's failure to make required disclosures or provide rescission notices under TILA, a borrower must file a suit seeking rescission, rather than merely giving to the lender notice of intent to rescind, within three years of the execution of a promissory note. (23)

3. LEGAL BACKGROUND

   Part III.A will discuss the general history and intent of TILA as well as one of its specific purposes in assuring meaningful disclosure of terms and conditions to borrowers of home mortgage loans. Then, Part III.B will describe recent cases decided by various United States circuit courts of appeals interpreting TILA and its associated regulations concerning the same issue presented in Keirarr. May a borrower exercise the right of rescission simply by sending notice to the lender of intent to do so, or must the borrower tile a lawsuit demanding rescission?

   1. The Truth in Lending Act

      With an underlying interest in protecting consumers and improving lending practices, (24) TILA was passed in (1968) as one of President Lyndon Johnson's "Great Society" initiatives. (25) The enactment of TILA marked the beginning of a consumer-protective era, and its "consumer-centric sentiments" were meant to shield borrowers from predatory lenders. (26) The official main purpose of TILA is "to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices." (27) In laymen's terms, TILA makes it possible for consumers to "comparison shop for credit," a feat previously impossible because lenders "had no uniform way of calculating interest or determining what [other] charges would be included in an interest rate." (28)

      To resolve the issue of a lack of uniformity in lenders' calculations and rates, TILA mandates that lenders provide potential borrowers with "specific, standardized information about ... credit transactions in an attempt to both (1) increase transparency and competition in the credit markets and (2) promote the 'informed use of credit.'" (29) Congress authorized the Federal Reserve Board to implement TILA, (30) and the Board effected this implementation through Regulation Z. (31)

      As one of its protections afforded to borrowers, TILA entitles borrowers to a three-business-day period within which he or she may rescind the execution of a mortgage loan on the borrower's principal dwelling. (32) However, if the lender fails to provide the borrower with a notice of the right to rescind or other material information about the loan during the closing, the right to rescind extends to "three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first." (33) To exercise the right of rescission, Regulation Z's complementing provision states the following:

      To exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram, or other means of written communication. Notice is considered given when mailed, or when filed for telegraphic transmission, or, if sent by other means, when delivered to the creditor's designated place of business. (34) Because TILA was enacted with the purpose of protecting consumers by increasing transparency and competition in the credit markets from their previous levels and by better enabling consumers to compare available credit terms, it is remedial in nature, and multiple courts have held that it therefore must be construed liberally in favor of borrowers. (35)

      In addition to being a remedial statute, the Supreme Court of the United States has held that section (1635f) is a statute of repose, (36) limiting the right of a borrower to assert rescission more than three years after execution of a mortgage loan as an affirmative defense when the borrower is a defendant in a collection action. (37)

      In Beach v. Ocwen Federal Bank, borrowers conceded that they did not have a right to an independent action of rescission because they had not made any attempt to rescind within three years of their loan's execution. (38) Nevertheless, they claimed that rescission could be asserted as an affirmative defense to the lender's collection efforts. (39) The Supreme Court of the United States held that section (1635f) went "beyond any question whether it limits more than the time for bringing a suit, by governing the life of the underlying right as well." (40) Reasoning that the statute spoke in terms of a right's duration rather than a period within which a suit must be commenced, (41) the Court concluded that "the Act permits no federal right to rescind, defensively or...