What Is Right of Rescission?
The right of rescission is a legal provision that grants a borrower the right to cancel certain types of credit transactions, particularly those secured by their principal dwelling, within a specified timeframe without penalty. This fundamental aspect of consumer protection law aims to provide consumers with a "cooling-off period," allowing them to reconsider a significant financial commitment after signing a contract. The right of rescission ensures that individuals are not pressured into agreements and have adequate time to review the terms and conditions of their loan.
History and Origin
The right of rescission primarily originates from the federal Truth in Lending Act (TILA) of 1968, a landmark piece of legislation enacted to promote the informed use of consumer credit by requiring disclosures about its terms and cost. TILA mandates that lenders provide clear and consistent information about loan costs, including the annual percentage rate (APR) and other charges, to enable consumers to compare credit offers. For certain transactions, particularly those involving a security interest in a consumer's principal dwelling, TILA established the right of rescission to protect homeowners from abusive lending practices and high-pressure sales tactics14. The provisions governing the right of rescission are primarily implemented through Regulation Z, issued by the Consumer Financial Protection Bureau (CFPB)13.
Key Takeaways
- The right of rescission allows consumers to cancel certain credit transactions secured by their principal dwelling within a short, defined period.
- This right typically provides a three-business-day "cooling-off period" for specific types of home-secured loans.
- It primarily applies to mortgage refinancing, home equity loans, and home equity lines of credit (HELOCs), but generally not to original home purchase mortgages.
- To exercise the right of rescission, the consumer must provide written notice to the lender.
- If the right is properly exercised, the security interest becomes void, and the borrower is not liable for any finance charges or fees.
Interpreting the Right of Rescission
The right of rescission is interpreted as an unconditional right for eligible transactions. It provides a specific window, typically three business days, during which the borrower can cancel the transaction for any reason, or no reason at all. This period begins after the transaction is consummated, the borrower receives all required material disclosure documents, and two copies of the notice of the right to rescind. Saturdays are generally counted as business days, but Sundays and federal holidays are not12. The purpose is to allow consumers to fully understand the implications of the financial obligation, particularly when their real estate serves as collateral. The rescission period is crucial for consumers to verify all terms, including the interest rate and associated fees, before the transaction becomes final.
Hypothetical Example
Imagine Sarah decides to refinance her home mortgage to get a lower interest rate. On a Friday, she signs all the necessary documents at the settlement table, receives her Truth in Lending disclosures, and two copies of the notice of her right of rescission.
According to the rules, her three-business-day rescission period would begin on the next business day, which is Saturday. Day one is Saturday, day two is Monday (assuming Sunday is not a business day and there are no holidays), and day three is Tuesday. Sarah would have until midnight on Tuesday to exercise her right of rescission. If she decides on Monday that she found a better deal with another lender or simply changed her mind, she could send a written notice to her current lender before Tuesday midnight to cancel the refinancing, and the security interest on her home would be voided.
Practical Applications
The right of rescission is most frequently applied in the context of residential real estate loans that involve existing property. This includes:
- Mortgage Refinancing: When a homeowner takes out a new mortgage loan to replace an existing one on their primary residence, the right of rescission applies. This gives borrowers a window to reconsider the terms of their new loan or if they found a better interest rate elsewhere11.
- Home Equity Loans and HELOCs: Transactions where a homeowner borrows against the equity in their primary dwelling, such as a home equity loan or a home equity line of credit, are subject to the right of rescission. This protects consumers from immediately binding themselves to a new debt secured by their home10.
- Certain Home Improvement Loans: If a loan for home improvements is secured by the consumer's principal dwelling, the right of rescission typically applies.
The right to rescind serves as a critical safeguard, ensuring consumers have an opportunity to review complex financial agreements thoroughly, especially those that place their primary residence at risk9.
Limitations and Criticisms
While a crucial consumer protection, the right of rescission has specific limitations and has faced legal interpretations that have occasionally led to confusion. Firstly, it generally does not apply to transactions for the original purchase or construction of a home, as these are considered "residential mortgage transactions" and are exempt8. This means buyers cannot back out of a signed purchase agreement and mortgage on a new home using this right.
A significant point of contention has been the method by which a consumer must exercise the right of rescission, particularly when a lender fails to provide proper disclosures. In the past, there was a legal debate over whether simply notifying the creditor in writing was sufficient, or if a lawsuit had to be filed within the three-year extended period (if disclosures were faulty). The U.S. Supreme Court clarified this in Jesinoski v. Countrywide Home Loans, Inc. (2015), ruling that written notice to the creditor within the statutory period is sufficient to exercise the right of rescission, even if a lawsuit is filed later7.
Another limitation arises when consumers waive their right of rescission due to a "bona fide personal financial emergency." While permissible, this waiver must be genuinely initiated by the consumer and not coerced by the lender6. Improper or premature disbursement of funds by the lender before the rescission period expires can also lead to legal issues and potential penalties for the lender5. Furthermore, while the right protects a borrower from the immediate financial consequences, it does not guarantee a successful alternative loan or prevent the need to find one quickly if the original transaction is cancelled.
Right of Rescission vs. Cooling-off Period
The terms "right of rescission" and "cooling-off period" are often used interchangeably, but the right of rescission is a specific type of cooling-off period enshrined in federal law for particular credit transactions.
The broader concept of a cooling-off period refers to a statutory or contractual provision that allows consumers a specified amount of time to cancel certain types of contracts without penalty. This can apply to various consumer agreements, such as door-to-door sales, health club memberships, or timeshare purchases, and is often governed by state laws or Federal Trade Commission (FTC) rules.
In contrast, the right of rescission is specifically mandated by the Truth in Lending Act (TILA) for transactions where a security interest is taken in a consumer's principal dwelling, primarily refinancing or home equity loans. It provides a precise three-business-day window during which the borrower can cancel the transaction by providing written notice. While it is indeed a cooling-off period, its scope, duration, and legal implications are narrowly defined by federal financial regulation, making it a distinct and powerful consumer protection tool specifically in the realm of mortgage and home equity credit.
FAQs
Q: How long is the right of rescission period?
A: Typically, the right of rescission period is three business days. This period begins after the last of these events has occurred: the transaction is consummated, the consumer receives all required material Truth in Lending disclosures, and the consumer receives two copies of the notice explaining their right to rescind4. Saturdays count as a business day, but Sundays and federal legal holidays do not.
Q: Does the right of rescission apply to buying a new home?
A: No, the right of rescission generally does not apply to transactions for the original purchase or construction of a new home. It primarily applies to refinancing an existing mortgage, home equity loans, or home equity lines of credit where a security interest is placed on your principal dwelling3.
Q: What happens if I exercise my right of rescission?
A: If you properly exercise your right of rescission, the security interest in your home becomes void, and you are no longer liable for any amount, including any finance charges or fees. The lender has 20 calendar days to return any money or property received in connection with the transaction and must take steps to terminate the mortgage or other security interest2. You would then typically be required to return any funds or property you received from the lender.
Q: Can I waive my right of rescission?
A: Yes, in cases of a bona fide personal financial emergency, a consumer may modify or waive the right of rescission. However, this must be a genuine emergency that requires funds immediately, and the waiver must be provided in writing by the consumer, not forced by the lender1.