The United States District Court for the Southern District of West Virginia recently dismissed a portion of debtors’ pleadings that alleged that a lender violated the Truth in Lending Act (“TILA”) by failing to rescind a security interest within twenty days of the debtors’ notice of rescission.  See In re Pinson, 548 B.R. 443 (Bankr. S.D.W. Va. 2016).  In the case, the debtors refinanced with the lender and, after defaulting on the mortgage less than three years later, delivered a notice of rescission to the lender.  The debtors claimed they had not received the proper TILA disclosures at the time of the closing, and therefore had three years to rescind instead of the normal three-day limitation period.  Pursuant to TILA, within twenty days of this notice, a lender must “return to the obligor any money or property given as earnest money, down payment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction.”  See 15 USC 1635(b).  On the twentieth day after receiving the notice, the lender instituted an action seeking a declaratory judgment that it had made the proper disclosures and that the debtors’ time to rescind therefore had lapsed.  The debtors then filed for bankruptcy and instituted an adversary proceeding against the lender in which they sought damages for the lender’s failure to rescind.  The lender counterclaimed for the same declaratory judgment as in its original action and then sought judgment on the pleadings. 

Though the debtors argued that the lender’s institution of a declaratory judgment action was insufficient to meet TILA’s requirement that it “take any action necessary or appropriate to reflect the termination of any security interest created under the transaction[,]” the Court disagreed.  Finding that the statute and the relevant provision of the Code of Federal Regulations were ambiguous on this point, the Court deferred to the Consumer Financial Protection Bureau’s official interpretations, which stated “[t]he 20–day period for the creditor’s action refers to the time within which the creditor must begin the process” and that “[w]here the consumer’s right to rescind is contested by the creditor, a court would normally determine whether the consumer has a right to rescind and determine the amounts owed before establishing the procedures for the parties to tender any money or property.”  12 C.F.R. Pt. 226, Supp. I, Paragraph 23(d)(2)(3)-(d)(4)(1) (emphasis added).  Therefore, the Court found that the institution of a declaratory judgment seeking a determination of the debtors’ right to rescind was sufficient under the statute.  

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.