If you’re reading this, you’re probably making a significant financial decision. Luckily, lawmakers turned the adage “sleep on it” into codified policy for homeowners. The law grants borrowers the ability to cancel a contract for certain loans, without penalty, when done within the right of rescission period.
Before you sign your name on the dotted line, understand that you don’t have the right to rescind on all loans. Here’s what you need to know.
What Is The Right of Rescission?
The right of rescission is the right of a borrower to cancel a home equity loan, line of credit or refinancing agreement within a 3-day period without financial penalty. It was born out of the Truth in Lending Act (TILA).
If the creditor has lent any money or property, the borrower has the right to retain it until they’ve received a complete refund. The lender must comply with the refund request within 20 days from rescission, no questions asked.
The Federal Reserve Board implemented TILA in 1968 to protect consumers from predatory lenders. The purpose of the right of rescission is to allow borrowers time and space to reflect on an agreement with a lender who may have been coercive or dishonest. Today, a borrower may just use that time to shop around and change their mind.
TILA mandates that lenders give two notices of the right to rescind. You should know if a loan includes a rescission period. The right of rescission is limited to refinances, HELOCs and home equity loans. Rescission rights do not extend to the following:
- A residential mortgage agreement or the sale of a new home.
- Refinancing or consolidation with the same mortgage lender unless the new amount financed exceeds the unpaid principal balance.
- Any contract that stipulates a state agency as the lender.
- A renewal of optional insurance premiums.
When Does the 3-Day Right of Rescission Period Start and End?
Whether you’re refinancing or taking out another line of credit, the rescission period will begin when the following three events occur:
- You have signed the Promissory Note (i.e., the contract).
- You have received the Truth in Lending disclosure, often included in a Closing Disclosure form.
- You have received two copies of the notice of right to rescind, as mandated by TILA.
Once these three things have happened, the clock starts on your 3-day rescission period. It will end at midnight on the third business day after closing. Business days include every day except Sunday and federal holidays.
For example, if you signed your contract and received necessary documentation on Wednesday, November 25, 2020, the first day of the rescission period would be Friday, November 27, because Thursday is the Thanksgiving holiday. The second day would be Saturday, November 28. This means you would have until 12 a.m. on Tuesday, December 1 to cancel the agreement.
The notice of right to rescind must stipulate the date that the rescission period expires. If you have a financial plan to schedule the rescission period to your advantage, the National Notary Association’s annual rescission calendar might make your life a little easier.
How Do I Exercise My Right to Rescind?
Let’s say you’ve thought it over and you’ve changed your mind on that home equity loan. While TILA doesn’t set out a specific process, it requires your notice of rescission contain information on “how to exercise the right to rescind, with a form for that purpose, designating the address of the creditor's place of business.”
Review the notice of the right of rescission and be sure that the process is spelled out clearly. If you decided to cancel the loan tomorrow, would you know what to do?
If you’re in the middle of your rescission period and don’t know how to exercise your rights, contact your lender. Do everything you can to get a written statement to the lender with your clear intent to cancel the loan.
If any of the documentation was wrong, you may be entitled to a 3-year rescission period. Be sure to consult with an attorney if you feel your lender broke the law.
Consumers can waive their right to rescind with a dated written statement that describes the extenuating circumstances and a waiver of right to rescind. All owners of the property must sign the waiver of rights.
The right of rescission is meant to protect you, the borrower, from predatory lending. It gives you a 3-day cooling off period to change your mind about a HELOC, home equity loan or refinance. You can use the 3-day right of rescission period to your advantage to shop around for more attractive loans, such as a mortgage refinance with no closing costs.
Understand your rights. If a lender fails to provide you with a Truth in Lending Disclosure or if your notice of right of rescission is missing crucial information, such as the final date of rescission or a procedure to exercise your rights, you may qualify for a 3-year rescission period.
To learn more about refinancing, visit the Rocket Mortgage® Learning Center.