In a July 15 published decision, the Fourth Circuit reversed a West Virginia District Court’s ruling against a mortgage servicer in a purported class action, holding that merely sending a notice of rescission under the Truth in Lending Act (TILA), 15 U.S.C. 1635, et seq., does not immediately rescind the loan and relieve the borrower of any obligation to tender the loan proceeds. The case is Lavis v. Reverse Mortgage Solutions, Inc., Record No. 18-2180.

In 2013, Reverse Mortgage Solutions (RMS) approved the plaintiff for a reverse mortgage loan — a type of loan that allows borrowers to access the equity in their homes without making mortgage payments but requires the borrower to keep homeowner’s insurance in place and pay real estate taxes. The loan was secured by a deed of trust on the plaintiff’s property located in Beckley, WV. RMS loaned the plaintiff approximately $60,000, providing her with $44,000 in cash and paying off a prior lien on the property. After the closing, the plaintiff defaulted by failing to keep homeowner’s insurance on the property and repeatedly failing to pay real estate taxes. RMS declared a default in September 2015. Facing a foreclosure, in May 2016, the plaintiff mailed a notice of rescission to RMS. RMS received the notice but took no action, having canceled the foreclosure sale.

In November 2016, the plaintiff filed suit against RMS in the Southern District of West Virginia, making a number of claims, including class claims. Among other claims, the plaintiff alleged that RMS failed to provide her with the disclosures required by TILA, including the right to rescind the loan, and sought a declaratory judgment that the loan was rescinded as a matter of law and that she was not liable to RMS for any amount. By the time the case proceeded to trial, only three claims remained for resolution, including the plaintiff’s claim for rescission under 15 U.S.C. § 1692(b) and failure to honor rescission under 15 U.S.C. § 1640. At trial, RMS won a complete defense jury verdict on the remaining claims. In post-trial motions, however, the District Court granted the borrower’s motion for judgment as a matter of law, holding that the borrower’s notice of rescission resulted in an immediate voiding of the loan and that the plaintiff was not required to tender the loan proceeds to effectuate rescission. The District Court also held that RMS’ failure to take action upon receiving the notice of rescission meant it had waived its rights to demand tender.

On appeal, the Fourth Circuit reversed, emphasizing that the text of the statute, U.S. Supreme Court precedent, and case law from the Fourth Circuit and sister courts all demonstrated that the plaintiff was not entitled to the relief sought — namely to keep the property lien-free and avoid any requirement to tender. The Fourth Circuit held that “neither § 1635(b) nor any other provision of TILA provides that the failure of a lender to voluntarily unwind a loan or respond to a notice of intent to rescind allows a borrower to avoid tendering the loan proceeds as part of rescission.” The court observed that “to decide otherwise would bestow a remarkable windfall on a borrower and penalty on the lender divorced from the text of TILA and the entire purpose of rescission,” which is to place the parties in the positions they would have occupied had the loan transaction not occurred.

Troutman Pepper attorneys John Lynch, Jason Manning, and Megan Burns served as defense counsel for mortgage servicer Reverse Mortgage Solutions LLC through trial and appeal.