Spring 2007-06 Class action not available for Truth-in-Lending rescission suit

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Number 67
Spring 2007


Class action not available for Truth-in-Lending rescission suit


Even though mortgage borrowers may have the right to rescind certain transactions if the lender breached the Truth-in-Lending Act, they must do so individually, not as a class. McKenna v. First Horizon Home Loan Corp., 475 F.3d 418 (1st Cir. 2007).


TiLA rescission

The federal Truth-in-Lending Act protects consumer borrowers by requiring that lenders disclose the actual cost and other terms of the loan. Failure to do so could result in fines and civil damage suits. In the case of some mortgage loans the borrower enjoys an additional privilege: the right to rescind (i.e., cancel) the mortgage and get back everything he or she has paid to date. The borrower must, of course, still pay the loan, but the lender would have no collateral security.

TiLA grants borrowers three day to rescind. The catch is that the rescission period starts to run when the lender delivers to the borrower the loan information required by the law, plus a statement describing the right to rescind.

McKenna

Ralph G. McKenna and other homeowners in Massachusetts filed suit for rescission, claiming that the three-day period had not expired because lender First Horizon Loan Corp. had failed to deliver valid loan cost information. Not satisfied with that, they also filed on behalf of all other First Horizon customers under similar circumstances. What is legally called a "class action suit."

Class action

Federal rules permit a class action to be filed in order to determine the rights of a large number of applicants with a common claim. In order for a judge to be able to permit a class action suit, he or she must find that:

  • the class of claimants is so large that individual suits would be impractical;
  • there are legal or factual claims in common;
  • the claims are typical of the claimants;
  • the filing plaintiff adequately protects the interests of the class.

Court of Appeals

The U.S. Court of Appeals for the First Circuit disagreed with the district judge's certification of the class. On appeal it ruled that the TiLA rescission process is intended to be private, in part because not all borrowers who suspect or know that they have been subjected to a TiLA violation will choose to rescind. The reason for this, added the court, is in large part because rescission entails the return of the loan proceeds.

Congress did not intend rescission suits to receive class action treatment. "Class actions are specifically addressed in the section of the TILA relating to damages . . . There is, however, no comparable mention of the class-action mechanism in the section that deals with rescission." It concluded that this variation in treatment suggests Congress' intention of excluding class action rescission suits.


© 2007 Goldman Antonetti & Cordova, LLC