What is the Right of Rescission?
The Right of Rescission is a legal safeguard provided by the Truth in Lending Act (TILA) and detailed in Regulation Z. It grants borrowers a three-business-day period after closing certain home-secured loan transactions to cancel the agreement without financial penalty. This protection helps homeowners avoid being locked into costly loans without fully understanding the terms.
Why Was the Right of Rescission Created?
Before the enactment of TILA, many consumers felt pressured to sign loan documents tied to their homes without sufficient time to review or reconsider important financial obligations. To prevent predatory lending and promote transparency, Congress introduced this “undo” option so borrowers could reflect on their decisions.
How Does the Three-Day Cancellation Period Work?
The rescission period begins the day after the borrower receives all required loan disclosures, signs the credit contract, and gets two copies of the “Notice of Right to Rescind” form. Business days include Saturdays but exclude Sundays and federal holidays. To cancel the loan, borrowers must notify the lender in writing before midnight of the third business day.
Once exercised, the loan is void, and lenders must return any payments received within 20 calendar days. Borrowers must then return any funds advanced by the lender, but only after the lender makes timely refunds.
Loans Covered by the Right of Rescission
The right applies primarily to credit transactions secured by the borrower’s principal residence, such as:
- Mortgage Refinances: When replacing an existing home loan.
- Home Equity Loans (Second Mortgages): Lump-sum loans secured by your primary residence.
- Home Equity Lines of Credit (HELOCs): Revolving credit secured by your home.
- Certain Home Improvement Loans: When structured as second mortgages or refinancing your primary residence.
Loans Not Covered
- New Home Purchase Mortgages: No prior loan exists to rescind.
- Commercial Loans: Loans for business purposes are excluded.
- Investment Property Loans: Properties other than your main home are excluded.
- Refinances Without New Money from Same Lender: Certain exceptions apply.
How to Exercise Your Right of Rescission
- Carefully read all disclosures, including your “Notice of Right to Rescind.”
- Mark your calendar to calculate the rescission deadline correctly.
- Submit a written rescission notice by certified mail or deliver in person, keeping proof of submission.
- Delay spending funds from the loan until after the rescission period ends.
Common Mistakes to Avoid
- Assuming the right applies to all loans.
- Missing the strict three-business-day deadline.
- Providing only oral notice instead of written.
- Misunderstanding that Saturdays count as business days in this context.
Additional Resources
For more detailed information about home equity loans and mortgage refinancing, visit Home Equity Line of Credit (HELOC), Mortgage Refinance, and Home Equity Loan Interest Deduction.
References
- Truth in Lending Act (TILA), Regulation Z, Consumer Financial Protection Bureau: https://www.consumerfinance.gov/policy-compliance/rulemaking/regulations/1026/
- IRS Publication 936: Home Mortgage Interest Deduction
- Investopedia: Right of Rescission https://www.investopedia.com/terms/r/right-of-rescission.asp
Understanding your Right of Rescission is essential for protecting your largest asset—your home—and ensuring informed decisions about home-secured credit transactions.
