The right of rescission is a legal right to cancel a contract (aka rescind) certain types of loans within a specified period of time without being financially penalized. There are three types of loans that are eligible for the right of rescission:
- Home equity loan.
- Home equity line of credit (HELOC).
- Refinanced mortgage.
In addition to a traditional mortgage refinance, the rescission period also applies to a cash-out refinance. But you can only rescind the amount you cashed out, not the rest of the new mortgage in this scenario.
All of these eligible loans should come with advance notices from the lender clarifying the rescission period. Details can be found in the two Truth in Lending disclosures you receive. The first comes when you initially apply for the loan and the second is sent prior to closing. If you exercise your right of rescission within the eligible three-day period, you’ll be able to refund the loan funds without having to pay any penalty fees.
Having that extra time is meant to help you make sure you really want to borrow the money and that you’re getting the best deal possible. The right of rescission is a federal protection for consumers, making it mandatory for all lenders to comply when it’s an eligible type of loan.
What’s Ahead:
What is the right of rescission period?
The right of rescission is valid for a three-day period starting when you sign the loan contract. You’ll need to have received the Truth in Lending disclosure from your lender, as well as two notices of your right to rescind. Once all of these conditions have been met, your three days begins on the following day and you’ll be able to rescind any time until midnight of the third business day.
Days that don’t count towards the three-day rescission period are Sundays and federal holidays. Here’s an example of how the rescission period would break down if you sign your loan agreement on the Friday before Memorial Day:
- Day 1 – Saturday.
- Sunday doesn’t count.
- Monday doesn’t count because it’s a federal holiday.
- Day 2 – Tuesday.
- Day 3 – Wednesday (must rescind by midnight).
If you’re unsure of your rescission period, reach out to the notary who witnessed your contract signing. They should have a clear idea of what counts as a holiday or other non-business day. That way you can comfortably take your time to review the responsibility of the loan without getting nervous about your actual deadline.
How to rescind your loan
There’s no set process on what to do in order to rescind your loan. Check your Truth in Lending disclosure for specific details from your lender. Since the rescission period is limited to business days, you should be able to directly call your lender if you have any questions. Typically, you’ll need to notify the lender in writing that you’re exercising your right to rescind the loan. Consider sending it either via fax or certified mail so that you can track and verify the letter. Once the lender receives the notice, they typically have up to 20 days to refund any fees related to the loan.
Purpose of the right of rescission
The right to rescind a loan was born out of the Truth in Lending Act (TILA) in 1968. This federal law includes a set of regulations that is now executed by the Consumer Financial Protection Board, or CFPB.
The right of rescission is one of many elements aimed at protecting consumers from predatory lenders in the law. TILA is responsible for a lot of the consumer rights that are now considered commonplace. For instance, the rule that lenders have to disclose things like loan terms and APR before the borrower signs a loan agreement is all because of TILA.
The right of rescission serves a few different purposes in consumer protections. The first is that it makes it easier for borrowers to shop around for better loan terms. Or if they simply agreed to the loan because of a high-pressure salesperson, they can go home, collect themselves, and rescind the loan. Many home equity and refinanced loans happen online today with easier comparison tools available. But the right of rescission still gives you an additional layer of confidence and security when exploring all of your financing options.
Limitations to rescission rights
It’s important to remember that the right of rescission does not apply to all types of loans. Only refinanced mortgages, home equity loans, and home equity lines of credit are eligible. That means you cannot rescind the following items:
- Mortgage for a new home purchase.
- Refinanced mortgage with the same lender, unless the new loan amount is larger than the previous balance.
- Any loan from a state agency lender.
- Insurance premium renewals.
If you’re not sure if your loan is eligible for the rescission period, check your disclosure documents before you close. You can also call your lender and ask about any details you’re unsure of, even if you don’t know if you want to rescind the loan or not. Simply being aware of your options is a great confidence booster.
Rescission period extensions
In most cases, the rescission period only lasts those three business days after signing the contract. However, there is a scenario in which you can turn that into a three-year rescission period.
The way to qualify for this extension is to show that your lender did not give you a copy of the Truth in Lending disclosure, or if any of the right of rescission details were incorrect. For instance, if the lender doesn’t explicitly outline the deadline for your original three-day rescission period, or doesn’t explain how to rescind the loan, then you could get that three-year extension.
Avoid predatory lenders
Remember that the Truth in Lending Act is meant to protect you from predatory lenders, including those that don’t give you all of the information you’re legally supposed to have. It’s important to work with a reputable lender so you’re confident that the loan process is being meticulously followed.
Refinances, HELOCs, and home equity loans are major loans that use your home as collateral. You should know exactly what your rights are and feel like your lender has your best interests at heart, including giving you all the details you’re entitled to about your rescission rights.
Summary
The right of rescission is a powerful tool in retaining full control of your finances. If at any point you have borrower’s remorse during your rescission period, you can simply notify your lender and call the whole deal off. You don’t have to worry about losing any money you paid in fees; instead, rest easy knowing that every penny will be returned and you won’t owe any type of new cancellation fee. That’s the power of the right of rescission.
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