What is a 'Right Of Rescission'

A right of rescission is a right under American federal law set forth by the Truth in Lending Act (TILA) that gives a borrower the right to cancel a home equity loan or line of credit with a new lender, or to cancel a refinance transaction done with another lender other than the current mortgagee within three days of closing. The right is provided on a no-questions-asked basis, and the lender must give up its claim to the property and refund all fees within 20 days of exercising the right of rescission.

The right of rescission applies only to the refinancing of a mortgage. It does not apply to the purchase of a new home. If a borrower wants to cancel a loan, he must do so at the latest on midnight of the third day following the completion of the refinancing, including having received a mandatory Truth in Lending disclosure from the lender and two copies of a notice advising him of his right to rescind.

Historical Context

The TILA protects the public against inaccurate and unfair credit billing and credit card practices. Among other things, it requires lenders to provide borrowers with relevant information about their loans, along with the right to cancel loans.

The right of rescission was created to protect consumers from unscrupulous lenders, giving borrowers a cooling-off period and the time to change their minds. Not all mortgage transactions have the right of rescission. The right of rescission exists only on home equity loans, home equity lines of credit and refinances of existing mortgages in which the refinancing is done with a lender other than the current mortgagee. The right of rescission does not exist on a mortgage for the purchase of a home, a refinance transaction with the existing lender, a state agency mortgage, or a mortgage on a second home or investment property.

In 2010, the Dodd-Frank Wall Street Reform Act expanded the TILA to grant consumers added protections when taking out a high-cost mortgage. It also added provisions for pre-loan counseling. 

How to Exercise the Right of Rescission

The TILA does not provide a formal way for consumers to exercise their right of rescission. However, the lender is obligated to give the borrower a notice advising of the right to rescind, and that notice should include the procedure used by the lender when a borrower wants to cancel a transaction. If it does not, the borrower must ensure that, in the three-day time frame, they make their intention to cancel the loan clear and do so in writing. Borrowers also have the obligation to prove that the notice was given during the right period and should, therefore, make sure that they can document the moment when the notice was sent.

BREAKING DOWN 'Right Of Rescission'

RELATED TERMS
  1. Rescission

    The right of an individual involved in a contract to return to ...
  2. Truth In Lending Act - TILA

    A federal law enacted in 1968 with the intention of protecting ...
  3. Lender

    Someone who makes funds available to another with the expectation ...
  4. Mortgage Broker

    An intermediary who brings mortgage borrowers and mortgage lenders ...
  5. Qualified Mortgage

    A mortgage in which the lender has analyzed the borrower's ability ...
  6. Short Refinance

    The refinancing of a mortgage by a lender for a borrower currently ...
Related Articles
  1. Personal Finance

    9 Things to Know Before You Refinance Your Mortgage

    Whether or not a mortgage refinance is right for you depends more on individual circumstances than this week's mortgage interest rates.
  2. Personal Finance

    How to Find the Best Refinance Companies

    From traditional lenders to online loans, here's everything you need to know about refinancing your mortgage.
  3. Personal Finance

    How to Pick the Right Lender When Refinancing a Mortgage

    Refinancing your mortgage has never been easier with the range of lenders and access to information that are available to you.
  4. Personal Finance

    Mortgage Fees That Can Trash Your Refinance Deal

    Before deciding that refinancing your mortgage at a lower interest rate is a good deal, factor all the fees into your calculations.
  5. Personal Finance

    How to Lower Refinance Closing Costs

    Refinancing a mortgage can save you money but it isn't free. There are closing costs associated with a refinance and how much you pay for them depends on you.
  6. Retirement

    When Are Mortgage Lenders Better Than Banks?

    Individuals seeking a mortgage loan should consider factors or circumstances that may make a mortgage lender a better choice than a traditional bank.
  7. Personal Finance

    How Regulations Protect Reverse Mortgage Borrowers

    They're complex animals, which is why there are government guidelines in place to protect borrowers.
  8. Personal Finance

    How Many Mortgage Lenders Should You Apply to?

    Applying to multiple mortgage lenders can get you a better deal, but it comes with a few drawbacks.
  9. Personal Finance

    Purchasing a Home with Bad Credit Is Possible: Here's How

    A bad credit report can become an obstacle, resulting in denials for credit or higher interest rates, but borrowers with low credit scores can still purchase a home.
  10. Insights

    How To Spot A Predatory Lender

    Remember these signs of unscrupulous lending when shopping for your mortgage.
RELATED FAQS
  1. What’s the Difference Between a Mortgage Lender and a Mortgage Servicer?

    Buying a home is an exciting and confusing process. Once the loan is secured, it's important to know who gets the payment: ... Read Answer >>
  2. What is the key to finding your ideal mortgage?

    Learn what steps you need to take in order to locate the perfect mortgage for your budget, lifestyle and long-term financial ... Read Answer >>
  3. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ... Read Answer >>
  4. What is PMI, and does everyone need to pay it?

    Also known as "Primary Mortgage Insurance," PMI is the lenders (banks) protection in the event that you default on your primary ... Read Answer >>
Hot Definitions
  1. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  2. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  3. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  4. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  5. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
  6. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities ...
Trading Center