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What to Do About Rescission Letters

A decision last month by a federal appeals court may have profound effects on how borrowers and lenders approach rescission letters. In Sherzer v. Homestar, the U.S. Court of Appeals for the Third Circuit decided that in order for a borrower to toll the statute of limitations on a rescission action, all they need to do is request rescission in writing from the lender.

This may not seem groundbreaking, but when one considers that it was previously the uniform rule that borrowers needed to file a lawsuit to enforce rescission rights within the limitations period, the effects are profound. Now (at least according to this court) once a borrower initiates a rescission letter, they can literally sit back and wait. This means that a borrower, in theory, could send a rescission letter and, if the lender does not respond, at some point in the distant future pay-off the loan and demand the restitution of interest in accordance with the Truth in Lending Act. In the meantime, a lender receiving such a notice would be sitting on a loan for which foreclosure rights could be compromised as a result of a borrower’s mere request—valid or not—for rescission.

Ultimately, it appears that—at least in the Third Circuit—a lender needs to affirmatively seek court intervention in order to resolve a mere request for rescission. Otherwise, the bank’s collateral is forever compromised. Moreover, if the bank takes no action, a borrower who might not at the time of the rescission letter have the means to repay the principal—a mandatory requirement to order rescission—could essentially perfect the right to rescission by sending the letter, waiting to acquire the financial means, and—at that point—initiating a lawsuit to enforce the rescission request.

There are appeals courts that have disagreed with the Third Circuit. However, the fact that uncertainty now exists should cause lenders to reexamine the manner in which they respond to rescission requests.

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