Commercial and Consumer Credit Law - Class Action Remedy Unavailable in First Circuit for Plaintiffs Seeking Rescission under Truth in Lending Act

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Commercial and Consumer Credit Law--Class Action Remedy Unavailable in First Circuit for Plaintiffs Seeking Rescission Under Truth in Lending Act-McKenna v. First Horizon Home Loan Corp., 475 F.3d 418 (1st Cir. 2007)

The Truth in Lending Act (TILA) provides consumers with the right to rescind their loan agreements within three days of the closing of the transactions. (1) Beyond this statutory provision permitting consumer recovery, the federal courts remain split as to the availability of class certification for actions brought under TILA. (2) In McKenna v. First Horizon Home Loan Corp., (3) the United States Court of Appeals for the First Circuit considered, in a case of first impression, the legitimacy of class actions brought under the rescission provisions of TILA. (4) Relying on its interpretation of congressional intent and the personalized remedy provided by the rescission section, the court held that class certification is unavailable in rescission actions under TILA. (5)

Ralph McKenna and Christopher and Laurie Lillie received mortgage loans from First Horizon Home Loan Corporation (First Horizon) in June and August of 2003, respectively. (6) In March 2004, both parties filed a complaint in the United States District Court for the District of Massachusetts claiming the forms they received from First Horizon, which explained their rights of rescission, were defective. (7) Specifically, the plaintiffs argued that the forms violated TILA's disclosure requirements by failing to distinguish between the rescissory rights of those refinancing loans procured from a different lender and those initially received from First Horizon. (8) The plaintiffs also moved to certify a class of plaintiffs who acquired loans with similarly defective disclosures. (9)

The magistrate judge, finding that TILA does not preclude the use of the class action mechanism and that the proposed class met the requirements of Rule 23(b) of the Federal Rules of Civil Procedure, narrowed the class and recommended certification. (10) The district court adopted the magistrate's class certification recommendation and First Horizon sought interlocutory review. (11) The First Circuit reversed and held that class certification is unavailable for rescission claims under TILA. (12) In denying class certification, the court reasoned that Congress did not intend to permit class actions as a judicial vehicle for rescissory relief because such relief would expose lenders to "overwhelming liability." (13)

In 1968, Congress enacted TILA to protect consumers from potentially unfair credit practices by requiring lending institutions to disclose credit terms to consumers and encourage "informed use of credit." (14) Congress modified TILA in 1974 by placing a damages cap on actions brought under [section] 1640, the section of TILA authorizing civil liability. (15) Notably, Congress did not impose a cap on the amended version of [section] 1635, the section of TILA providing the rescission remedy. (16) Twenty-one years later, to alleviate concerns and ambiguity surrounding the legitimacy of class certification for rescission suits under TILA, Congress modified the statute again with the Truth in Lending Act Amendments of 1995 (Amendments). (17) Consistent with the Amendments' emphasis on creditor protection, Congress also imposed a six-month moratorium on class action suits prior to passing the TILA Amendments. (18) As enacted, the Amendments remained silent regarding the class action mechanism in suits brought pursuant to [section] 1635. (19)

Prior to the First Circuit's ruling in McKenna, the Fifth Circuit was the only circuit court to address whether rescission class actions are permissible under TILA. (20) In James v. Home Construction Co. of Mobile, Inc., (21) the Fifth Circuit held that the personalized provisions under [section] 1635(b) illustrated congressional opposition to class action rescission. (22) Subsequent district court decisions also focused on the individuated remedy of [section] 1635 when ruling against the availability of class treatment for rescission suits. …