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David Cocroft and Veynelcia Cocroft v. Hsbc Bank Usa

April 20, 2012


The opinion of the court was delivered by: Matthew F. Kennelly, District Judge


David and Veynelcia Cocroft have sued HSBC Bank USA, N.A. (HSBC), Mortgage Electronic Registration Systems, Inc. (MERS), Bank of America, N.A. (BA), BAC Home Loans Servicing (BAC), RM Appraisal Services, Inc., and Ray Mishal. Plaintiffs assert claims under the Truth in Lending Act (TILA), Real Estate Settlement Procedures Act (RESPA), Fair Credit Reporting Act (FCRA), and Fair Debt Collection Practices Act (FDCPA) as well as supplemental state law claims. Defendants HSBC, MERS, BA, and BAC have moved to dismiss the claims against them. For the reasons stated below, the Court grants the motion in part and denies it in part.


The Court accepts the allegations in plaintiffs' third amended complaint as true for purposes of resolving the motion to dismiss. See Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009).*fn1

In 2007, the Cocrofts obtained a loan for $386,750 from Countrywide Bank, FSB secured by a mortgage on the home they already owned in Country Club Hills, Illinois. The loan closed on April 17, 2007. The Cocrofts allege that at the time of the closing, Countrywide improperly failed to inform them of the real source of funding for their loan. Plaintiffs also contend that Countrywide violated TILA by failing to inform them that they had three days to rescind the loan and by failing to disclose the total sale price and itemize the amount financed, as well as by failing to make unspecified prepayment disclosures. The Cocrofts claim that Countrywide understated the total finance charges for the loan by more than $5,000.

Plaintiffs claim that they learned of Countrywide's misrepresentations in June 2009. They decided to exercise their right under the provisions of TILA to rescind the loan. On July 1, 2009, they mailed notice to that effect to BA, the successor to Countrywide, and to MERS. The Cocrofts do not say what if anything happened as a result of those notices, but on September 29, lawyers working for HSBC contacted them and stated that HSBC was ready to begin foreclosure. HSBC claimed that it was the trustee of a trust that included their loan. The Cocrofts, however, contend that the transfer of their loan into the trust was defective. They sent HSBC's lawyers two cease and desist letters, notifying HSBC that they had rescinded the loan. They allege that after receiving one of the cease and desist letters, HSBC informed them that it had no interest in the loan and that they needed to contact the loan's servicer, Roundpoint Mortgage. Plaintiffs also sent a copy of the rescission documents to BAC, which they identify as the actual servicer of the loan. HSBC brought a foreclosure action in Illinois state court on January 19, 2010.


HSBC, MERS, BA, and BAC have moved to dismiss the Cocrofts' claims against them for failure to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). "When analyzing the sufficiency of a complaint, [the Court] construe[s] it in the light most favorable to the nonmoving party, accept[s] well-pleaded facts as true, and draw[s] all inferences in the nonmoving party's favor." Fednav Int'l Ltd. v. Cont'l Ins. Co., 624 F.3d 834, 837 (7th Cir. 2010). A plaintiff "has stated a claim only if it has alleged enough facts to render the claim facially plausible, not just conceivable." Id.

Plaintiffs assert ten claims, nine of which they bring against the movants.

A. Truth in Lending Act

The Cocrofts allege that they have rescinded their loan under TILA and seek to enforce the rescission and obtain damages and costs for the defendants' failure to recognize the rescission. Under TILA, a borrower who obtains a loan secured by a mortgage on his principal dwelling can rescind the loan for three days after closing or the delivery of the TILA disclosures, whichever is later. 15 U.S.C. § 1635(a); Beach v. Ocwen Fed. Bank, 523 U.S. 410, 412 (1998). If the TILA disclosures and forms are not provided to the borrower, the borrower's "right of rescission shall expire three years after the date of consummation of the transaction." 15 U.S.C. § 1635(f).

Defendants argue that plaintiffs' claim for rescission is untimely. The loan transaction that plaintiffs seek to rescind closed on April 17, 2007. Plaintiffs allege that they did not receive proper TILA disclosures, and if that is so, the time for rescission expired on April 17, 2010. On July 1, 2009, within the three-year period, plaintiffs mailed notice to BA and MERS stating that they were rescinding the loan. They also provided this notice to HSBC and BAC before April 17, 2010. Plaintiffs did not, however, file this suit until June 3, 2010, more than three years after the loan closing. The question, then, is whether it was sufficient for plaintiffs to mail notices of rescission before their right expired or whether they had to bring this suit to enforce their rescission right prior to the end of the three-year period.

In Beach, the Supreme Court considered the three-year rescission period. In that case, defendants in a foreclosure action sought to use their right of rescission as a defense. Beach, 523 U.S. at 413--14. The borrowers conceded that more than three years had passed since closing and thus they could not have brought an action for rescission. They argued, however, that the three-year limitation did not prevent them from using rescission as a defense. Id. at 415. The Supreme Court acknowledged that generally statutes of limitations do not apply to claims asserted as defenses or setoffs, but it held that the limitation period in section 1635(f) was different. Id. at 416--17. The Court ruled that the clear language of TILA provides that the right to rescission expires after three years, not just the ability to commence a lawsuit, and a borrower cannot assert that right in any way beyond the three-year period. Id. at 417.

"Beach addresseswhen the right to rescind expires and whether it can be tolled. It leaves unresolved the question of how a consumer must exercise that right to rescind-suit, or notice via letter." Stewart v. BAC Home Loans Servicing, LP, No. 10 C 2033, 2011 WL 862938, at *6 (N.D. Ill. May 10, 2011) (emphasis in original). TILA provides that a borrower exercises the right to rescission "by notifying the creditor, in accordance with regulations of the [Federal Reserve Board], of his intention to do so." 15 U.S.C. § 1635(a); see Stewart, 2011 WL 862938, at *5. The Federal Reserve's regulations provide that "[t]o exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram or other means of written communication." 12 C.F.R. § 226.23(a)(2). The regulations continue:

(d) Effects of rescission.

(1) When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void and the consumer shall not be liable for any amount, including any finance charge.

(2) Within 20 calendar days after receipt of a notice of rescission, the creditor shall return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest.

Id. § 226.23(d).

Courts defer to the Federal Reserve Board's regulations in interpreting TILA. See Marr v. Bank of Am., N.A., 662 F.3d 963, 964--65, 968 (7th Cir. 2011) (describing Federal Reserve regulations as implementing regulations of TILA and holding that disclosure requirements in regulations had to be applied strictly). See also, e.g., Bonte v. U.S. Bank, N.A., 624 F.3d 461, 463 (7th Cir. 2010); Muro v. Target Corp., 580 F.3d 485, 493 & n.9 (7th Cir. 2009). The regulations indicate that as soon as the consumer notifies the creditor of the rescission, the transaction and its security interest become void. Although the creditor then has additional duties to return money and property, the creditor's failure to do so does not alter the fact that the transaction has been rescinded. The creditor has a duty to take actions to reflect the termination of the security interest, but those actions are not necessary to effect the termination. TILA and the regulations thus establish that rescission is accomplished by mailing notice to the lender. Calvin v. Am. Fid. Mortg. Servs., Inc., 10 C 7213, 2011 WL 1672064, at *3 (May 3, 2011); Stewart, 2011 WL 862938, at *5. A borrower is not required to bring a lawsuit to exercise the right to rescind. Calvin, 2011 WL 1672064, at *3.

Plaintiffs thus exercised their right of rescission, in timely fashion, within the three-year period when they notified defendants that they were rescinding the loan. The fact that defendants did not honor the rescission, forcing plaintiffs to bring this suit to enforce their rescission rights, does not change this fact.

Other courts in this district have decided that, because a lender's failure to honor a rescission gives rise to a cause of action for damages under TILA, a plaintiff who has rescinded need only bring suit to enforce the rescission within one year after rescinding, because TILA establishes a one-year limitations period for damages actions. 15 U.S.C. § 1640(a), (e); Calvin, 2011 WL 1672064, at *3; Stewart, 2011 WL 862938, at *6; Herzog v. Countrywide Home Loans (In re Hunter), 400 B.R. 651, 661 (Bankr. N.D. Ill. 2009). If it is appropriate to adopt this statute of limitations for an enforcement action, then the Cocrofts' suit to enforce their rescission is not subject to dismiss on limitations grounds.

Defendants argue that other courts have interpreted Beach and the requirements of TILA differently and have held that a plaintiff must actually file suit within three years to enforce a rescission, even if he has properly notified the lender of the decision to rescind within the three-year period. See Sobieniak v. BAC Home Loans Servicing, LP, _ F. Supp. 2d _, 2011 WL 6122318, at *4 (D. Minn. 2011) (referring to analysis adopted in Stewart as the minority approach); Rosenfield v. HSBC Bank, USA, Civil Action No. 10-cv-58-MSK-MEH, 2010 WL 3489926, at *6 (D. Colo. Aug. 31, 2010) (calling the reasoning of In re Hunter unpersuasive). These cases, however, fail to recognize that a borrower has exercised his right of rescission at the time he sends notice to the lender. See Geraghty v. BAC Home Loans Servicing LP, Civil No. 11-336 (JNE/TNL), 2011 WL 3920248, at *4 (D. Minn. Sept. 7, 2011); DeCosta v. ...

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