What is a 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 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 of 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 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.