Avoiding the Nuclear Option: Balancing Borrower and Lender Rights Under the Truth in Lending Act's Right of Rescission

Abstract

The Truth in Lending Act (TILA) represents a major piece of consumer credit legislation passed by Congress to protect consumers from unfair credit practices. In the context of loans, TILA gives consumers a right of rescission under four conditions: (1) the consumer is a natural person; (2) the loan is for personal, household, or family purposes; (3) the loan is secured by the consumer’s principal dwelling; and (4) the loan is not a residential mortgage transaction. Nonpurchase transactions, such as refinancing or home equity loans, will usually meet all four conditions.

A consumer can exercise TILA’s right of rescission within three business days of the latest of the following: (1) consummation of the transaction; (2) delivery of the right to rescind notice; or (3) delivery of all required material disclosures. Examples of material disclosures required by TILA include terms of the loan and finance charges. If the creditor fails to deliver either the right to rescind notice or the required material disclosures, then the consumer’s right of rescission extends to three years after either the consummation of the transaction or sale of the property, whichever occurs first. The consumer’s extended right of rescission under TILA is the focus of this Note.

The U.S. Supreme Court addressed TILA’s extended right of rescission in Beach v. Ocwen Federal Bank. However, the Court never explicitly stated how a consumer exercises TILA’s extended right of rescission. As a result, the Circuit Courts of Appeals have split over the issue. Recently, the Eighth, Ninth, and Tenth Circuits have determined that consumers validly exercise TILA’s extended right of rescission by providing creditors with written notice and filing suit within the three-year period -- the "Notice-and-Filing Approach." However, the Third and Fourth Circuits have determined that consumers only have to provide creditors with written notice -- the "Notice-Only Approach." Under this latter approach, a consumer can provide a creditor with written notice within TILA’s three-year period then file suit after the three-year period expires. The Consumer Financial Protection Bureau, the federal agency given authority to interpret TILA’s provisions, has endorsed the Notice-Only Approach.

This paper evaluates the arguments and counterarguments for the Notice-and-Filing Approach and the Notice-Only Approach. Then, this paper argues that the Notice-and-Filing Approach serves as a better option to resolve the circuit split.

Keywords: TILA, Right of Rescission, Consumer Financial Protection Bureau, Beach v. Ocwen Federal Bank