In a recent decision, the Third Circuit held that that a borrower seeking rescission may satisfy the Truth In Lending Act ("TILA") three-year statute of limitations merely by submitting a written notice, in the form of a simple letter, to the lender - a formal lawsuit is not required to preserve a rescission claim.

On February 5, 2013, in Sherzer v. Homestar Mortgage Services, the Third Circuit Court of Appeals held that a borrower may rescind a loan subject to TILA by sending the lender a valid notice of rescission (e.g., a simple letter) within three years of the mortgage transaction. In so holding, the Third Circuit rejected the Lender's claim that when there is a dispute regarding the propriety of rescission, the obligor (i.e., the borrower) must file suit within three years of the closing date to exercise the right of rescission or be forever time-barred.

In Scherzer, the court applied a strict textual approach to the interpretation of 15 U.S.C. § 1635 (TILA) and its implementing regulation (Regulation Z), finding that to timely rescind a loan agreement, an obligor need only send a valid notice of rescission. According to the Court, "Neither § 1635(a) nor Regulation Z states that the obligor must also file suit; both refer exclusively to written notification as the means by which an obligor exercises his right of rescission." The Third Circuit acknowledged that its holding "could potentially impose additional costs on banks, as it costs little for an obligor to send a letter to the lender while, on the other hand, the lender would incur some cost to sue to determine title."

The Third Circuit did not specifically rule on a borrower's maximum length of time to file suit after sending a TILA written notice to rescind. However, the implication of this decision is that the borrower probably has at least six months after sending written notice based on the facts of the case. Furthermore, it is likely that a borrower may have one year based on the suggestion of the Consumer Financial Protection Bureau in its amicus brief.

Due to a split in Circuit decisions, this issue could end up before the U.S. Supreme Court. The Third Circuit now backs the Fourth Circuit in reasoning that notice alone within the three-year period is enough to validly exercise a right to rescind. The Ninth Circuit and Tenth Circuit hold a contradicting view.

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