Sheppard Mullin Financial Institutions Law Blog

Question: Once borrowers refinance their non purchase-money loan secured by a deed of trust against their home, are they barred from bringing claims under the Truth In Lending Act to rescind the original loan?

Answer: No, according to the court in Pacific Shore Funding v. Lozo, 06 C.D.O.S. 3502 (April 27, 2006.)

In August 2000, the Lozos obtained a loan secured by a mortgage against their home. The lender did not make certain disclosures required by TILA. In June 2002, they obtained a second loan and used the proceeds, among other things, to pay off the original loan. In April 2003, they unsuccessfully attempted to rescind the original loan. The Lender sought declaratory relief, and the Lozos cross-complained for rescission. Ruling against them on the basis of the Ninth Circuit's decision in King v. State of California (Ninth Cir. 1986) 784 F.2d 910, the court reasoned that once having refinanced their first loan, the Lozos had nothing left to rescind.

The Second District Court of Appeal reversed, holding there was "no statutory authority for concluding that a refinance terminates the consumer's right to rescind the original loan." Also rejecting the argument that not following King would create "forum shopping opportunities," the court held that since the refinance "operated only as an incomplete rescission," the Lozos could proceed with their rescission claim. However, it held that the Lozos' damages claim was barred by the one-year statute of limitations to recover damages under TILA.

Click here to view an electronic copy of the opinion.