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Sixth Circuit Nixes TILA Rescission Claim

Two homeowners tried to rescind their home mortgage loan when they weren’t notified that the deed of trust had been assigned.  Although this argument may have been a creative way to stave off a foreclosure, it was not persuasive to a recent Sixth Circuit panel.

In Robertson v. U.S. Bank, N.A., — F.3d — (6th Cir. Aug. 3, 2016), the plaintiffs, a married couple, had obtained a mortgage on their home in Memphis, Tennessee in 2003 from Mortgage Lenders Network.  The note also included an endorsement from Mortgage Lenders Network to EMAX Financial Group.  After the initial paperwork, their mortgage documents followed a familiar, circuitous route.  First, EMAX endorsed the note to Residential Funding Corporation.  The note was later bundled into a mortgage-backed trust with U.S. Bank designated the supervisor of the trust.  MERS (Mortgage Electronic Registration Systems) was designated the beneficiary of the trust.  Eventually, the Robertsons stopped making payments and defaulted on their loan.  MERS then assigned the deed of trust to U.S. Bank, and the deed’s trustee began foreclosure proceedings, sending the plaintiffs a Notice of Trustee’s Sale.  The Robertsons’ response was a “notice of rescission” to U.S. Bank and the trustee—and a lawsuit.

Before the Sixth Circuit, the plaintiffs argued (among other things) that they had a right, under 15 U.S.C. § 1635 of the Truth-in-Lending Act (TILA), to rescind the loan because U.S. Bank failed to notify them of the assignment of the deed of trust as it was allegedly required to under 15 U.S.C. § 1641(g).  No circuit court of appeals had yet addressed this novel theory.

The Sixth Circuit began with the plain language of Section 1641(g), which was enacted in 2009 after the housing crisis.  That section provides that “not later than 30 days after the date on which a mortgage loan is sold or otherwise transferred or assigned to a third party, the creditor that is the new owner or assignee of the debt shall notify the borrower in writing of such transfer.”  (Emphasis added).  Because the plain language of the statute (and the regulation implementing TILA, Regulation Z) refers only to assignment of mortgages or debts, and not to the instrument securing the transaction (the deed of trust) the Sixth Circuit held that notice of the assignment of the deed of trust did not trigger Section 1641(g)’s notification requirement.

Even if the bank had violated the notification requirement, the Sixth Circuit was dubious that this would entitle a homeowner to rescind the loan under Section 1635.  That section provides that “in the case of any consumer credit transaction,” involving a mortgage, “the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section together with a statement containing the material disclosures required under this subchapter, whichever is later.”  The right to rescind therefore hinges on “material disclosures” that take place in a “consumer credit transaction.”

This language presented two problems for the plaintiffs:  First, the assignment of the deed of trust from MERS to U.S. Bank wasn’t a “consumer credit transaction.”  No consumers were party to that transaction; only financial institutions were.  Second, “material disclosures,” as defined by 15 U.S.C. § 1602(v), referred only to disclosure of the terms of a loan—not disclosure of an assignment.  In all likelihood, the plaintiffs did not have a right to be notified of the assignment at all.

There is no doubt that plaintiffs will continue to try creative arguments to avoid foreclosure as the fallout from 2008 continues to make its way through the courts.  This opinion is a good reminder to financial institutions defending against such claims to start with the plain language of the statute: the courts will, too.

Diana M. Comes