The First Circuit noted that borrowers have to make individual decisions in pursuing rescission, including an evaluation of their ability to return loan principal. The Wisconsin court emphasized the consequences to the public of circumscribing rescission actions, writing, "Denial of class action status would reward defendants who may have committed wrongs and leave victims who may have been wronged uncompensated." District Court for the Eastern District of Wisconsin, in a decision handed down just two weeks before the First Circuit ruling, concluded, "It is just as likely that Congress did not intend to limit rescission claims in any way." "The notion that Congress would limit liability to $500,000 with respect to one remedy while allowing the sky to be the limit with respect to another remedy for the same violation strains credulity," Judge Selya wrote.Ĭonversely, the U.S.
The First Circuit held that a cap on class-action damages under Truth-in-Lending - set at $500,000 or 1% of the defendant's net worth - and the legislation's silence on class actions with regard to rescission suggested that Congress intended to provide no rescission class-action mechanism at all.
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In the First Circuit decision, Judge Bruce Selya wrote that even though previous case law, including a 1980 appellate decision, addressed the issue, "the question is not free from doubt."
Case law has been characterized by opinions that have come to contradictory conclusions and have been unclear on key issues.Ī handful of recent district court rulings in favor of rescission classes have renewed the controversy. To date there have been no appellate decisions affirming rescission classes, according to a February review by Kirkpatrick & Lockhart Preston Gates Ellis LLP. The ruling also described some district court decisions that emphasized the fact that "rescission class actions, if permitted, could easily render a creditor insolvent." (The Memphis company would not comment for this story.) For example, a $150,000 mortgage at a 6% rate could generate $27,000 of interest payments over three years if 1,000 borrowers in a class had such loans, the liability tally would be $27 million.įirst Horizon National Corp., the defendant in the First Circuit case, estimated that it was exposed to a $200 million penalty, according to the court's ruling. Rescissions for Truth-in-Lending violations often occur because the borrower is in foreclosure "and they go to a lawyer, and the lawyer picks out, 'Oh, there's this Truth-in-Lending violation,' " he said.ĭamages to creditors could balloon if rescission is applied to seasoned loans on a class basis. Naimon, a partner with Buckley Kolar LLP in Washington, higher rates of foreclosure propel rescission suits. The stakes are particularly high at a time when mortgage credit quality is deteriorating. That court's ruling, which could come this spring, may lend support to the First Circuit's ruling or restore a state of profound uncertainty.
Court of Appeals for the Seventh Circuit in Chicago. A Wisconsin case involving the same issue is now being reviewed in the U.S.
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