Everything you wanted to know about the Right of Rescission, but were afraid to ask…

Maria Coppinger-Peters, CRCM

Sr. Consultant, Regulatory Advisory Services

What is the Right of Rescission?

The Right of Rescission (12 C.F.R. 1026.15 & 12 C.F.R. 1026.23), also known as the Right to Cancel, allows a borrower to rescind, or cancel, certain mortgage agreements within three business days of signing the promissory note or loan contract.

Generally, the types of loans that  can be rescinded are refinances (with a different lender), home equity loans, home equity lines of credit (HELOC), bridge loans and most reverse mortgages.

The right of rescission doesn’t apply to purchase transactions, only to loans secured by the consumer’s principal dwelling. 

• A consumer can only have one principal dwelling at a time.
• A vacation or other second home would not be a principal dwelling.
• A transaction secured by a second home that is not currently being used as the consumer’s principal dwelling is not rescindable, even if the consumer intends to reside there in the future.

Exception: When a consumer buys or builds a new dwelling that will become the consumer’s principal dwelling within one year, it is considered the principal dwelling if it secures the construction loan.

(Source: https://www.consumerfinance.go... )

Types of Non-rescindable Loans

It should be stated that not all loans are rescindable. Some of the types of loans that do not require the right to rescind are:

• A loan to purchase or build the consumer’s principal dwelling (i.e., a residential mortgage transaction).
• A consolidation or refinance with the same lender who already holds the mortgage, and no additional funds are borrowed.
• A business-purpose loan, even though the loan is secured by the customer’s principal dwelling.
• A transaction in which a state agency is a creditor.
• A mechanic’s lien where the contractor is not a party to the credit transaction.

A special reminder on the Cash-out Refinancing Rules

In a cash-out refi, the consumer is refinancing more than they owe on their current mortgage and taking the difference out in cash. For a cash-out refinancing with the same lender, only the cash-out portion is subject to the right of rescission. For a cash-out refinancing with a different lender, the entire loan amount can be rescinded.

When does the Right of Rescission start?

The right of rescission starts on the next business day after all three of these steps are complete, the period within which the consumer may exercise the right to rescind runs for three business days from the last of these three events:

• Consummation of the transaction.
• Delivery of all material disclosures.
• Delivery to the consumer of the required rescission notice (2 paper copies or 1 electronic copy).

The right of rescission ends at midnight on the third business day.  Sundays and federal holidays are not considered business days, but Saturdays are counted . 

Waiving the Right of Rescission

Borrowers can waive their rights, but on an exception basis only that is, only if they have a “bona fide personal financial emergency”.

This means a financial emergency so serious that waiting an additional three business days for the loan proceeds will be personally or financially devastating to the borrower.  In order to waive the right, the borrower must provide a written explanation of the bona fide personal financial emergency to the lender.  This is not a letter that the lender should draft for the borrower, the borrower should hand write it, sign and date it.

Wait, what? You forgot to provide the Right of Rescission?

If you do not provide the borrower with the copies of the Right to Cancel notice of their right to rescind, the borrower may be able to cancel the loan for up to three years instead of three days. The creditor would have to release the lien on the collateral. The borrower would have to return the money they borrowed, minus any interest or other fees they have been charged. But good luck getting that money back so easily without collateral to foreclose on. A court action, and a costly one, would likely be necessary to enforce reclamation of funds.

You cannot cure the error of failing to provide the right of rescission. To elaborate, when the lender fails to take the action necessary to start the three-business day rescission period running, the right to rescind automatically lapses on the occurrence of the earliest of the following three events:

• The expiration of three years after consummation of the transaction.
• Transfer of all the consumer's interest in the property.
• Sale of the consumer's interest in the property, including a transaction in which the consumer sells the dwelling and takes back a purchase money note and mortgage or retains legal title through a device such as an installment sale contract.

Problems can also arise in the case of foreclosure or bankruptcy on the part of the borrower, then the lender may be on the hook for the loan. We encourage you to speak with competent legal counsel should such a situation arise.

How Capco can help

Capco can provide you with best in class training solutions via Capco Academy. Also, as a member of our Regulatory Advisory Services, you would have access to our compliance experts, our growing library of compliance tools, calculators and quick reference guides. Please contact regulatory.services@capco.com for more information.