What Is the Right of Rescission?
The right of rescission is a right, set forth by the Truth in Lending Act (TILA) under U.S. federal law, of a borrower to cancel a home equity loan or home equity line of credit (HELOC) with a new lender, or to cancel a refinance transaction done with another lender other than the current mortgagee, within three days of closing. This 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.
- Established by the Truth in Lending Act (TILA) under U.S. federal law, the right of rescission allows a borrower to cancel a home equity loan, home equity line of credit (HELOC), or refinance with a new lender, other than with the current mortgagee, within three days of closing.
- The right of rescission is provided on a no-questions-asked basis.
- The lender must give up its claim to the property and refund all fees within 20 days of the borrower exercising the right of rescission.
- Lenders must give borrowers a notice advising them of their right to rescind.
Understanding the Right of Rescission
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 them. 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. This right exists only for home equity loans, home equity lines of credit (HELOCs), 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.
The right of rescission applies only when the borrower’s principal residence is used as collateral. It does not apply to the purchase of a new home, a refinance transaction with the existing lender, a state agency mortgage, or a mortgage on a second home or investment property.
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.
Once this documentation has been received and all the paperwork has been signed, the borrower has three business days to mull over the decision and potentially change their minds. If they do opt to cancel within the time frame, they must make their intention clear using the procedure explained by the lender.
You cannot exercise the three-day cancellation rule by phone or in a face-to-face conversation. Generally speaking, the process must be completed by putting in writing your desire to renege on the contract.
If a borrower wants to cancel a loan, they must do so by midnight of the third day following the completion of the refinancing and after having received a mandatory Truth in Lending disclosure from the lender and two copies of a notice advising them of their right to rescind. The clock starts ticking only after all of these events have occurred.
Borrowers also have the obligation to prove that the notice was given during the right period and should thus make sure that they can document the moment when the notice was sent.
How long is the right of rescission?
The right of recission lasts three business days and commences the moment when all of the following events occur:
- The mortgage contract is signed
- You receive from the lender the Truth in Lending Act (TILA) disclosure that provides key information about the terms of the loan and two copies of a TILA notice explaining your right to rescind the contract
What happens if I don’t receive the TILA disclosure or notice of my right to rescind?
If you can prove that you never received these documents or that they contain inaccurate information, then the three-business-day cooling-off period could be extended up to three years.
How do I cancel my loan agreement?
The right of recission procedure should be explained to you in the paperwork that the lender is obligated to send you as part of the loan. Generally, you will need to reveal your intention to cancel the loan in writing and then send it off to the lender or the closing agent before the deadline passes.