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4th Circuit tees up issue for Supreme Court

Homeowners can exercise their right to rescind a mortgage under the Truth in Lending Act by providing written notice of rescission within the three-year statutory window, and need not file a lawsuit within that period, the 4th U.S. Circuit Court of Appeals has ruled.

The court overturned the finding of the district court and set up a circuit split with the 9th Circuit—which has held just the opposite—creating the possibility that the Supreme Court might soon step in the resolve the issue.

In May 2006, Rex and Daniela Gilbert refinanced the existing loan on their Hyde County property, but defaulted on the $525,000 loan in 2008, prompting the holder of the note to begin a foreclosure action.

The Gilberts took their case to Katherine Parker-Lowe, a real estate attorney on Ocracoke Island, to see if anything could be done to save their home. Upon examining the documents, Parker-Lowe found more than $115,000 in hidden finance charges buried in the disclosures, in violation of the TILA.

The TILA gives borrowers who refinance their primary residence three business days to cancel the transaction. When certain closing documents are incorrect, or fees not fully disclosed, the rescission period is extended from three days to three years. The hidden fees in the Gilbert’s refinancing triggered their statutory right to rescind the mortgage agreement.

The law provides that, even under the extended period of rescission, homeowners must rescind the mortgage within three years of the transaction. Parker-Lowe sent a letter to GMAC, the sub-servicer of the note, in April 2009 providing notice that the Gilberts were rescinding their mortgage.

About a week later, GMAC responded with a letter saying that it found “no basis to conclude that there were any material disclosure errors that would give rise to an extended right of rescission,” and that it would not rescind the transaction. In September, after the three-year window had expired, the Gilberts filed suit in Hyde County alleging TILA violations and seeking, among other things, to rescind their loan.

The banks had the case removed to federal court and filed a motion to dismiss, which the district court granted. On appeal, the 4th Circuit overruled the district court, saying that, looking at the plain language of the statute, the Gilberts had exercised their right to rescind within the three-year period.

“Simply stated, neither [the statute] nor [the federal regulation] says anything about the filing of a lawsuit, and we refuse to graft such a requirement upon them,” Judge Henry Floyd wrote for a unanimous court.

The banks argued that the court should follow the reasoning of a recent 9th Circuit case, McOmie-Gray v. Bank of America Home Loans, which held that “rescission suits must be brought within three years from the consummation of the loan, regardless [of] whether notice of rescission is delivered within that three-year period.” The court explicitly disagreed with that decision.

The question has rapidly become a hot topic in the circuit courts. Cases hinging on the very same issue are currently pending in the 3rd, 10th and 8th circuits. The newly created Consumer Financial Protection Bureau issued some of its first-ever amicus briefs in those cases. In addition, there is a petition pending for re-hearing pending in the 9th Circuit case and another case pending in the 4th Circuit on the same issue.

Circuit splits increase the likelihood that the Supreme Court will take up a question. An attorney who spoke about the issue on background said that the Supreme Court was almost certain to take up the rescission question in the very near future.

Parker-Lowe, who agreed that a Supreme Court ruling settling the issue was quite possible, praised the 4th Circuit’s decision.

“I think it’s a great decision from a very serious court. The Truth in Lending Act means what it says and says what it means,” Parker-Lowe said. “Courts have tried to strip away at these rights, which is why you see the advocates and courts trying to say that you can’t just send a notice and rescind, even though that is the plain wording of the TILA. You have courts saying, ‘No, that’s not right, you have to file an action.’ There’s nothing of that in the plain language of the way the act was written.”

Marc James Ayers, Nicholas J. Voelker and Jonathan M. Hooks of Bradley Arant Boult Cummings represented the appellees. Attorneys from Bradley Arant directed inquiries to the law firm of Ballard Spahr, which will be handling the case going forward. Attorneys from Ballard Spahr could not be reached for comment.

The 17-page opinion is Gilbert v. Residential Funding LLC (Lawyers Weekly No. Lawyers Weekly No. 12-01-0510). The full text of the opinion can be found at


Opinion Brief

Case name: Gilbert v. Residential Funding LLC

Court: U.S. Court of Appeals for the 4th Circuit

Judge: Henry Floyd, with William Traxler and Michelle Childs (sitting by designation) concurring

Attorneys for plaintiffs: Katherine Parker-Lowe (Ocracoke)

Attorneys for defendants: Marc James Ayers (Birmingham, Alabama), Nicholas J. Voelker (Charlotte) and Jonathan M. Hooks (Birmingham, Alabama), of Bradley Arant Boult Cummings

Issue: Can a borrower exercise the three-year right of rescission under the Truth in Lending Act by providing notice to the lender that the borrower is rescinding the transaction, or does the borrower have to commence a rescission suit?

Holding: Nothing in the statute or the regulation requires a borrower to file a rescission suit within the three year period. Notice to the lender of the borrower’s rescission is sufficient under the statute to rescind the mortgage.

Effect: The decision sets up a circuit split on the question that may be ripe for adjudication by the Supreme Court.

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