What Is a Right of Rescission and How Do You Exercise It?

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.

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.

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.

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.