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Media Alerts - Sherzer v. Homestar Mortgage Services
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February 6, 2013
  Sherzer v. Homestar Mortgage Services
Headline: Consumers can exercise the right of recession under the TILA by providing written notice of rescission within three years.

Area of Law: Truth in Lending Act (TILA), 15 U.S.C. ยง 1601

Issues Presented: Can a consumer/obligor exercise her right to rescind a loan under the TILA by notifying the lender in writing within the three-year period prescribed by the TILA or is she required to file a lawsuit within that period in order to effectuate the rescission?

Brief Summary: This case arises under the TILA. The TILA provides a right of recession on any loan in which the lender fails to make material disclosures. The consumers in this case obtained two mortgage loans. The consumers eventually sent written notice to the lenders, within the three year requirement set forth in the TILA, that the lenders failed to comply with the requirements under TILA and that the consumers would be exercising their right to rescind. After the lenders refused to rescind both loans, the consumers filed a lawsuit seeking a declaration of recession, which was eventually dismissed on the grounds that the lawsuit was time-barred. On appeal, the Third Circuit addressed whether the right of rescission required written notice or a filing of a lawsuit within the three-year period. The Third Circuit reversed the District Court and held that the right of rescission only required written notice within the three year period, but did not require the consumer to also file a lawsuit within that period.
Significance (if any): A consumer does not have to file a lawsuit in order to effectuate a rescission of a loan. Instead, she must only provide valid written notice of rescission within the three-year period prescribed by the TILA.

Extended Summary:
Under TILA, a consumer who takes out a loan (obligor) has a right to rescind that loan within three business days after the closing on the loan without filing a lawsuit. If the lender fails to disclose material loan information, then the three-day right of rescission does not begin to run. However, after three years, the right to rescind expires.
The consumers in this case, Daniel and Geraldine Sherzer, signed two loans for their house in the amounts of $705,000 and $171,000 from Homestar Mortgage Services (Homestar). The loans were then assigned to HSBC Bank. At some later time, the Sherzers' lawyer informed the lenders that they had failed to comply with TILA, the failures were material, and that the consumers were exercising their right to rescind. This written notice was sent prior to the expiration of the three-year period. The lendesr responded and agreed to rescind the smaller loan but not the larger loan.
The consumers then filed a lawsuit, which was commenced more than three years after the closing date on the loan. The lenders, thus, argued that the lawsuit was time-barred. In response, the consumers argued that a lawsuit did not have to be filed in the three-year period under the TILA because they had exercised the right of rescission by mailing a written notice. The district court rejected this argument and dismissed the case. The consumers then appealed to the Third Circuit.
On appeal, the consumers argued that, under the TILA, they could exercise the right of rescission by sending the lenders written notice within the three-year period prescribed by the statute. In reversing the decision of the district court, the Third Circuit determined that the language of the statute only required the obligor to send notice of rescission within the three year period. In so holding, the Court explained that if Congress had wanted to require the commencement of a civil action as a condition to effectuate a rescission, it plainly could have done so. Since the TILA only provides that the right of rescission expires after three years, but contains no reference to filing a lawsuit within that period, the Third Circuit determined that a consumer can properly exercise the right of rescission by sending the lender written notice within the three-year period.

To read the full opinion, please visit http://www.ca3.uscourts.gov/opinarch/114254p.pdf.

Panel (if known): Sloviter, Rendell, and Hardiman, Circuit Judges

Argument Date: September 19, 2012

Argument Location:

Date of Issued Opinion: February 5, 2013

Docket Number: No. 11-4254

Decided: reversed and remanded

Case Alert Author: Kathleen D. Tran

Counsel: Matthew B. Weisberg, Counsel for Appellants; Sandra M. Di Iorio, Joe N. Nguyen, Nipun J. Patel, Henry F. Reichner, Edmund D. Krulewicz, and Kellie A. Lavery, Reed Smith, Counsel for Appellees.

Author of Opinion: Judge Hardiman

Circuit: 3rd Circuit

Case Alert Circuit Supervisor: Professor Mary E. Levy

    Posted By: Susan DeJarnatt @ 02/06/2013 12:04 PM     3rd Circuit  

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