Three-Day Cancellation Rule

What Is the Three-Day Cancellation Rule?

The three-day cancellation rule, also known as the “right of rescission,” is a legal right guaranteed by the Truth in Lending Act (TILA) that enables borrowers to renege on a home equity loan, a home equity line of credit (HELOC), the refinancing of an existing mortgage with a different lender, and some reverse mortgages within three days without financial penalty. This allowance applies only when the borrower’s principal residence is used as collateral and is provided on a no-questions-asked basis, meaning you don’t need to give a reason to exercise it.

Key Takeaways

  • The three-day cancellation rule permits borrowers to renege on certain mortgage agreements within three days without financial penalty.
  • This right applies when the borrower’s principal residence is used as collateral and is provided on a no-questions-asked basis.
  • The clock starts ticking once the mortgage contract is signed and the TILA disclosure and notice explaining the right to cancel have been received by the borrower.
  • Sundays and legal public holidays don’t count toward the three days.
  • To exercise the right to cancel, the borrower must send the lender a letter or a signed copy of the notice they received.

How the Three-Day Cancellation Rule Works

If you take out a mortgage using the home you live in as collateral, federal law also gives you a three-day window to reconsider and cancel without penalty.

When Does the Clock Start Ticking?

The three-day clock starts ticking as soon as all three of the following events occur:

  • You sign the mortgage contract.
  • You receive the TILA disclosure that provides key information about the terms of the loan, including the annual percentage rate (APR) and payment schedule.
  • You receive two copies of a TILA notice explaining your right to rescind the contract.

These things normally happen simultaneously, although it is possible in some circumstances for the disclosure form and the two copies of the notice to arrive before or after the contract is signed. Should that be the case, day one would start when the last of the three events takes place.

Once the clock starts, you have until midnight on the third business day to change your mind and cancel the agreement. Remember, business days don’t include Sundays or legal public holidays, so you could end up having more time if the deal closes on, say, a Friday or just prior to a federal holiday.

If you didn’t receive the TILA disclosure or notice of your right to rescind, or if either of these documents is inaccurate, the cooling-off period may be extended to up to three years.

During the waiting period the lender cannot deliver the loan to you or take any other action, aside from accruing finance charges. If you rescind the agreement in time, however, you won’t pay a cent and will be refunded any money you paid, including for application, appraisal, and title search fees sent to a third party.

Exercising the Right to Cancel

The three-day cancellation procedure should be explained in the paperwork the lender is supposed to give you. As mentioned above, the lender is obligated to give you a notice advising them of your right to rescind. The easiest way to cancel is for you to sign this notice and then send it to either your lender or the closing agent. Alternatively, it’s possible to send a letter.

Notice is considered given “when mailed, when filed for telegraphic transmission, or, if sent by other means, when delivered to the creditor’s designated place of business.”

To play it safe and avoid any potential disputes, it’s advisable to get proof of the time you delivered the notice or letter. It’s also wise to document when you received all the paperwork the lender is obligated to send you, just in case it questions the deadline you used.

Once the lender receives your request to cancel, it has 20 days to return any money owed to you as part of the transaction and release its interest in your home as collateral.

You cannot exercise the three-day cancellation rule by phone or in a face-to-face conversation with the lender.

Limitations of the Three-Day Cancellation Rule

Using your principal residence as collateral doesn’t guarantee that your loan qualifies for the three-day cancellation rule. There are some exceptions, including when:

  • You apply for a loan to buy or build your principal residence.
  • You refinance your mortgage with the same lender as before and don’t borrow more funds.
  • A state agency is the lender.

Special Considerations

Not everyone appreciates a three-day cooling-off period. Sometimes money is needed urgently and being forced to wait just in case you have a change of heart is a nuisance.

In such cases it is possible to waive your right to cancel. This can be achieved by providing the lender with a written statement signed and dated by you that describes your financial emergency and articulates your desire to forgo the right to cancel.

To What Does the Three-Day Cancellation Rule Apply?

This federal law mainly applies to home equity loans, home equity lines of credit (HELOC), refinances of existing mortgages with a different lender, and federally insured reverse mortgages, known as “home equity conversion mortgages (HECMs).” To qualify, your principal residence must be used as collateral and the lender must not be a state agency.

Can a Right of Rescission Be Waived?

Yes. There are instances when a borrower might want to waive their right of rescission so that they can receive their money sooner. You must have a “bona fide personal financial emergency” and communicate this in writing to the lender.

What Happens if I Don’t Receive the Truth in Lending Disclosure or the Notice of My Right to Rescind?

Should these documents somehow be missing or incorrect, you may be able to rescind your loan in as long as up to three years from the date of closing. If you find yourself in this unlikely situation, speak to an attorney.

Article Sources

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  1. Consumer Finance Protection Bureau. "CFPB Laws and Regulations TILA Truth in Lending Act." Page 6.

  2. Experian. "What Is the Right of Rescission on Home Loans?"

  3. Federal Trade Commission. “Home Equity Loans and Home Equity Lines of Credit.”

  4. Code of Federal Regulations. "12 CFR §1026.23."

  5. Consumer Financial Protection Bureau. “How Long Do I Have to Rescind? When Does the Right of Rescission Start?

  6. Federal Trade Commission. "Reverse Mortgages."

  7. Consumer Financial Protection Bureau. “Can I Ever Waive My Right to Rescind on My Mortgage Loan?