The failure of a bank to notify a borrower that the deed of trust was assigned to the bank does not give the borrower a right of rescission under the federal Truth In Lending Act (TILA).  The U.S. Court of Appeals for the Sixth Circuit recently reached this conclusion in Robertson v. U.S. Bank, Nos. 15-6286/16-5116 (6th Cir. Aug. 3, 2016) — the first time a federal appellate court has ruled on the issue.

Homeowners facing foreclosure argued that when they were not notified of the transfer of their deed of trust to the assignee bank immediately before foreclosure, they again had a right of rescission under TILA.  The Sixth Circuit rejected their argument and said that no new right of rescission arose. 

The case arose “from a depressingly familiar scenario: a loan secured before the 2008 recession and defaulted after it.” The Robertsons borrowed nearly $200,000 in 2005 and secured the loan with their house in Memphis, Tennessee.  In 2006, the loan was bundled into a mortgage-backed trust with U.S. Bank designated as the trust’s supervisor.

At that time, the Robertsons’ loan was endorsed to U.S. Bank. MERS (Mortgage Electronic Registration Systems), however, remained the beneficiary of the deed of trust.  After the Robertsons defaulted on the loan in 2011, MERS transferred the deed of trust to U.S. Bank in 2012, so the bank could foreclose.

The day before the foreclosure sale, the Robertsons sued U.S. Bank.  They argued that when MERS transferred the deed of trust to U.S. Bank, U.S. Bank was required to notify them pursuant to a provision of TILA added in 2009.  That provision, 15 U.S.C. § 1641(g), requires the assignee of a mortgage loan to notify the borrower of the transfer within 30 days. 

The Robertsons argued that because they did not receive a notice of the transfer of their deed of trust, they could rescind the loan under TILA’s right-of-rescission provision, 15 U.S.C. § 1635, which is extended for three years if the bank fails to make material disclosures.

The Sixth Circuit first found that § 1641 requires notice of the transfer of mortgage loans but not deeds of trusts.  A deed of trust is automatically transferred with the transfer of a loan, even if the deed of trust is not mentioned, the Sixth Circuit concluded.  U.S. Bank became the legal holder of the deed of trust when it was assigned the loan in 2006.  (And because the loan transfer occurred before § 1641 was added in 2009, U.S. Bank had no obligation in 2006 to notify them of the transfer.)

Next, the Sixth Circuit found that even if the Robertsons had suffered from a violation of § 1641, the remedy would have been monetary damages under that provision, not rescission under § 1635.  Section 1635 applies to “any consumer credit transaction” — typically, the initial loan transaction to the borrower.  Section 1635 does not apply to an assignment transaction from one bank to another, the Sixth Circuit concluded.  Section 1635 confirms that “the failure to notify a borrower of an assignment does not give rise to a right to rescind the entire loan agreement,” the Sixth Circuit said.

In summary, TILA likely did not give the Robertsons the right to be notified of the transfer of their deed of trust, and, in any event, their remedy for any failure to notify them of a transfer was not rescission of the entire loan.

While this Sixth Circuit’s decision is a binding interpretation of TILA only in the federal courts in Michigan, Ohio, Kentucky, and Tennessee, it is a thoughtful and well-reasoned decision.  Other federal appeals courts considering the same issue likely will find little to no room for disagreement.