The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:
The Ninth Circuit has held that a borrower’s claims for rescission under TILA and for damages under state law are governed by the analogous state statute applicable to actions for breach of contract, rather than by TILA itself. [Hoang vs. Bank of America, N.A., 2018 Westlaw 6367268 (9th Cir.).]
Facts: A homeowner refinanced his home mortgage. The refinancing lender failed to provide him with the requisite “Truth in Lending Act” (TILA) disclosure of his right to rescind the transaction within three days, thus violating the statute. As a result of that violation, his right to rescind extended over a period of three additional years.
Just less than three years after the refinancing, he gave notice of his intent to rescind. However, he did not file suit at that time, and the lender took no action. After four more years had elapsed, the bank sought to non-judicially foreclose on his home. He filed suit against the bank, more than four years after giving notice of his intent to rescind. In his suit, he sought rescission under TILA and also sought damages under state law.
The bank moved to dismiss his suit as time-barred. The trial court granted that motion, invoking the one-year statute of limitations under TILA for damage claims.
Reasoning: The circuit court reversed. Citing Jesinoski v. Countrywide Home Loans, ––– U.S. ––––, 135 S.Ct. 790, 190 L.Ed.2d 650 (2015), the court first observed that the borrower’s rescission was effective when he gave notice, within three years of the refinancing transaction. He did not need to bring suit within that three year period. However, the appellate court noted that the Jesinoski court had left an unresolved issue:
[A]lthough emphasizing that the borrower need only give the notice of rescission within the three years, the Court did not clarify when a suit to enforce the rescission must be brought after a lender’s failure to act on that notice of rescission. We are now presented with that question: when a borrower effectively rescinds a loan under TILA, but no steps are taken to wind up the loan, when must suit be brought to enforce that rescission?
Deciding a matter of first impression, the court held that the trial court should have borrowed the analogous six year state statute of limitations applicable to actions for breach of contract:
The loan agreement between [the borrower] and the Bank is a contract in writing. An action to rescind that loan (under TILA or otherwise) arises out of that written agreement. Because TILA rescissions necessarily require a contract to be rescinded, contract law provides the best analogy and we adopt the general contract law statute of limitations . . . . There is no federal law that provides a closer analogy, nor do TILA policies at stake and the practicalities of TILA rescission litigation make federal law a more appropriate vehicle for interstitial lawmaking.
Author’s Comment: Putting Jesinoski and Hoang together, these two decisions mean that a borrower could theoretically stretch out the TILA litigation process for nine years, at least in Washington (where the contract statute of limitations is six years): first, the borrower would have three years (under Jesinoski) just to give notice of rescission, plus another six years (under Hoang) to file suit. This creates a very long “tail” of litigation risk for the lending industry.
The lesson is fairly obvious: don’t mess with TILA. The opinion does not explain how the lender could have omitted the required TILA disclosures. Presumably, this was not a company-wide practice but was instead an isolated paperwork glitch. In theory, a good checklist should have avoided this problem. In the real world, checklists often go unchecked.
These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.