Eleventh Circuit Clarifies Meaning of Consummation of Transaction in Dismissing Borrowers’ TILA Right of Rescission Claim

By: Anthony Yanez

In Woide v. Federal Nat’l Mortg. Ass’n, the United States Court of Appeals for the Eleventh Circuit held that consummation of a contract for purposes of asserting a right of rescission under the Truth in Lending Act (“TILA”) occurs when a borrower signs the pertinent loan documents. Woide v. Federal Nat’l Mortg. Ass’n., 2017 WL 3411701 (11th Cir. Aug. 9, 2017).

Background

On December 7, 2011, Federal National Mortgage Association (“Fannie Mae”) filed a foreclosure lawsuit against Charles and Susannah Woide (“Plaintiffs”) in state court after they defaulted on their mortgage. On April 1, 2015, the Plaintiffs notified Fannie Mae by mail that they were rescinding the mortgage pursuant to Section 1601-1667f of TILA. Subsequently, Plaintiffs filed a lawsuit in the Middle District of Florida[1] against Fannie Mae and the law firms that handled their foreclosure action seeking a declaratory judgment that Plaintiffs rescinded their mortgage obligation under TILA and requesting that Fannie Mae disgorge all monies that it allegedly unlawfully retained under Plaintiff’s mortgage.

Congress enacted TILA in 1968, as part of the Consumer Credit Protection Act, Pub.L. No. 90-321, 82 Stat. 146 (1968) (codified as amended at 15 U.S.C. §§ 1601-1616), “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.” 15 U.S.C. § 1601(a). Regulation Z implements requirements under TILA and provides that “[c]onsummation means the time that a consumer becomes contractually obligated on a credit transaction.” 12 C.F.R. § 226.1(a); 12 C.F.R. § 226.2(13).

“Under TILA, a debtor may rescind a mortgage ‘until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms . . . , whichever is later . . . .’” Smith v. Highland Bank, 108 F.3d 1325, 1326 (11th Cir. 1997) (per curiam) (quoting 15 U.S.C. § 1635(a)). In the event that the debtor never receives the information and disclosures required by TILA, the “right of rescission shall expire three years after the date of consummation of the transaction,” 15 U.S.C. § 1635(f), which TILA defines as “the time that a consumer becomes contractually obligated on a credit transaction.” 12 C.F.R. § 1026.2(a)(13).

All Defendants moved to dismiss Plaintiff’s complaint, and the district court granted the motion to dismiss, holding that the Plaintiffs’ right of rescission expired three years after they consummated the note and mortgage, which was on December 28, 2010. The district court determined the consummation date to be December 28, 2007, which was the date that Plaintiffs had signed the note and mortgage, and then added three years to that date as the bright-line rescission deadline under TILA. Thus, the district court held that the Plaintiffs’ right of rescission letter, dated April 1, 2015, was ineffective as a matter of law. Further, since the district court determined that all of Plaintiffs’ claims derived from their legally ineffective rescission of the mortgage obligation under TILA, the district court dismissed the complaint with prejudice because any amendment would be futile. See Woide v. Federal Nat’l Mortg. Ass’n, 2016 WL 4567132 (M.D. Fla. Sept. 1, 2016). Plaintiffs appealed.

 Eleventh Circuit’s Decision

The Eleventh Circuit affirmed the district court’s dismissal, finding that the district court correctly determined that the Plaintiffs’ right to rescind under TILA expired in 2010 and that the Plaintiffs’ alleged notice of rescission could not have legally rescinded their mortgage obligation in 2015. Relying on Bragg v. Bill Heard Chevrolet, Inc., 374 F. 3d 1060, 1065 (11th Cir. 2004) and the plain language of Regulation Z, the Eleventh Circuit explained that “consummation occurs when the consumer signs the offered contract, not when the contract becomes binding under state law.” See Bragg, 374 F.3d at 1066-1068. The Plaintiffs contended that their note and mortgage never became binding under Florida law and that their mortgage obligation was never consummated within the meaning of TILA. The Eleventh Circuit rejected this argument because the issue of whether a contract was formed under state law is irrelevant to whether consummation occurred under TILA. Specifically, the Eleventh Circuit found that the question of consummation is governed by federal law, and federal law explains that the right to rescind accrues from the date that the borrower signs the operative loan documents, which, in this case, occurred in 2007.

Ultimately, because the Plaintiffs became obligated under the note and mortgage by signing the loan documents in 2007, all of their claims, which were based on their attempted rescission in 2015, were without merit. Accordingly, the Eleventh Circuit held that the district court did not err in dismissing the case with prejudice without granting leave to amend because a more carefully drafted complaint would not have stated a claim against the Defendants.

 Conclusion

This decision reaffirms the long established principle that a borrower’s right of rescission lasts no more than three years from a loan closing if that borrower never receives the information and disclosures required by TILA at the closing. Lenders and servicers should also be aware that federal law, and not state law, controls when the rescission right accrues.

[1] The Plaintiffs also asserted claims under the Fair Debt Collection Practices Act, (“FDCPA”), 15 U.S.C. §§ 1692–1692p, and the Florida Consumer Collection Practices Act (“FCCPA”), Fla. Stat. §§ 559.55–559.785 on the grounds that the Defendants attempted to collect on their mortgage debt despite Plaintiff’s claim of “rescission.”