Right of rescission

Key Takeaways

• The right of rescission lets a borrower cancel certain loans secured by a principal dwelling until midnight of the third business day after the latest of consummation, delivery of the rescission notice, and delivery of all material disclosures (12 CFR 1026.23).
• The right does not reach a purchase loan. Regulation Z exempts a residential mortgage transaction, so a buyer financing a home purchase gets no three day cancel window.
• Refinances with a different lender, home equity loans, and home equity lines of credit on a primary residence are the transactions the right normally covers.
• Washington adds a separate three business day rescission on the buyer's side of a sale: after receiving the seller disclosure statement, the buyer may rescind the purchase agreement and get the deposits back (RCW 64.06.030).

What It Means

The right of rescission is a borrower's short window to walk away from a loan after signing it. Regulation Z, the rule that carries out the federal Truth in Lending Act, grants the right when a consumer credit transaction puts a security interest on the borrower's principal dwelling. The borrower may cancel until midnight of the third business day after the last of three events: the loan is consummated, the lender delivers the required notice of the right to rescind, and the lender delivers all material disclosures. If the notice or the disclosures never arrive, the window can stretch to three years.

The limits are what students miss. This is not a general cooling off period for real estate. It does not apply to a purchase loan, because Regulation Z exempts a residential mortgage transaction, and it does not apply to a refinance with the same lender except for new money advanced above the old balance. What is left is the equity borrowing the rule was written for: a refinance with a different lender, a Home Equity Loan, and a home equity line of credit. The security also has to be the borrower's principal dwelling, so a vacation cabin or a rental house does not qualify.

How It Works in Washington

The rescission right itself is federal, so a Washington broker's job is mostly knowing when it is not in play. A buyer who signs a purchase and sale agreement and a purchase loan gets no three day cancel window on either one, and telling a nervous buyer otherwise is an expensive mistake.

Washington does supply its own three business day rescission, and it sits on the disclosure side rather than the loan side. Under RCW 64.06.030, once the seller delivers the completed real property transfer disclosure statement, the buyer has three business days, or another period the parties agree to, to either approve and accept the statement or rescind the purchase agreement. The statute puts that decision in the buyer's sole discretion. The buyer must deliver written notice of rescission inside the window, and on delivery is entitled to the immediate return of all deposits and other considerations, less any agreed disbursements. If no notice arrives, the disclosure statement is deemed approved and accepted. The clock on the other side comes from the same chapter: the seller owes the disclosure statement, Form 17, no later than five business days after mutual acceptance unless the parties agree otherwise.

Example

Dana Whitaker owns a house in Olympia and refinances it with a new lender, Sound Federal Bank, taking $290,000 at a Tuesday closing. The bank hands her the notice of the right to rescind and all of her Truth in Lending disclosures the same day, so her three business days run Wednesday, Thursday, and Friday, and her deadline is midnight Friday. On Thursday her credit union offers her a rate a quarter point lower. Dana signs the rescission notice and delivers it Thursday afternoon. The loan is cancelled, Sound Federal releases its lien, and the money goes back.

Two months later Dana buys a second house for $605,000 with a purchase loan from the same bank. She calls the Wednesday after closing wanting to unwind it because she found something she likes better. This time there is no right to rescind at all. 12 CFR 1026.23(f) exempts a residential mortgage transaction, so the purchase loan closed for good the day she signed.

Common Mistakes and Exam Traps

• The right of rescission does not apply to a purchase loan, because Regulation Z exempts a residential mortgage transaction.
• The count is three business days, and it runs from the latest of consummation, delivery of the rescission notice, and delivery of all material disclosures, not simply from the signing date.
• A refinance with the same lender is exempt except for new money advanced above the existing balance. A refinance with a different lender is rescindable.
• Do not confuse the TILA right of rescission with Washington's seller disclosure rescission. RCW 64.06.030 gives the buyer three business days to rescind the purchase agreement after receiving the disclosure statement, and it has nothing to do with a loan.