What Is the Right of Rescission?
The right of rescission is a legal provision that grants borrowers the ability to cancel certain types of home loans within three days of closing, no questions asked. This right ensures that the lender must release its claim on the property and return all fees within 20 days of the borrower’s cancellation.
Key Takeaways
- The right of rescission allows borrowers to cancel specific home loans within three days, per the Truth in Lending Act (TILA).
- Lenders are obligated to relinquish their claim to the property and refund all associated fees if the borrower rescinds within the designated period.
- Borrowers receive formal notification of their rescission rights during the loan process.
- Rescission requires a written notice sent to the lender within the three-day window.
The Importance of the Right of Rescission
Created to shield consumers from deceptive lending practices, the right of rescission under TILA provides a cooling-off period for borrowers to reconsider certain financing arrangements. This protection generally applies to loans secured by the borrower’s existing home, such as home equity loans, HELOCs (home equity lines of credit), reverse mortgages, and mortgage refinances.
However, it does not cover all transactions; exclusions include new home purchases, constructions, secondary homes, and investment properties. Additionally, refinancing with the same lender sans additional loan proceeds and loans from state agencies are also exempt.
How the Three-Day Rule Protects You
The three-day cancellation rule offers borrowers three business days—including Saturdays but not Sundays—to annul the loan contract without penalty. This period begins after signing the loan agreement, receiving a Truth in Lending disclosure, and obtaining the right to cancel notice. Missing documents or inaccuracies can extend rescission up to three years.
Steps to Exercise Your Right
To invoke your right of rescission, you must provide a written notice to the lender. This can be mailed or delivered but cannot be accomplished via phone call or in-person discussions. Notices sent are considered valid upon mailing, telegraph transmission, or delivery to the lender’s business location.
Duration and Potential Extensions
The right to rescission typically lasts three business days from when you sign the contract, receive the TILA disclosure, and the cancellation notice. If these documents are not received or contain errors, the rescission period may stretch up to three years.
Additional Considerations
Truth in Lending Act and Auto Loans: TILA mandates clear lending terms for auto loans but does not include a rescission right. Borrowers must be informed about loan details prior to signing.
Cooling-Off Rule: The FTC’s cooling-off rule for several types of purchases also stipulates a three-day cancellation period, except for real estate, vehicles, and certain other transactions.
Final Thoughts
The right of rescission offers invaluable protection, providing consumers a limited period to reconsider and cancel specific home loans without penalty. If you’re on the fence about a loan, knowing whether this right applies can offer peace of mind during the loan process.
Related Terms: home equity loans, HELOCs, reverse mortgages, refinancing, investment property
References
- Code of Federal Regulations. “12 CFR §1026.23 Right of Rescission.”
- Consumer Financial Protection Bureau. “Truth in Lending Act”, Page 6.
- Consumer Financial Protection Bureau. “What Is a Reverse Mortgage?”
- Federal Trade Commission, Consumer Advice. “Home Equity Loans and Home Equity Lines of Credit”.
- Consumer Financial Protection Bureau. “What Is a Truth-in-Lending Disclosure for an Auto Loan?”
- Federal Trade Commission Consumer Advice. “Buyer’s Remorse: The FTC’s Cooling-Off Rule May Help”.
