As compliance advisors, we answer a substantial number of questions on a variety of subjects. We can usually predict the hot topics based on the current regulatory environment; so it has been no surprise that we have seen an increase in the number of HMDA, TRID, and even FCRA questions due to recent amendments. In the last few weeks, however, we have begun to see an increase in questions related to rescission. Nothing has changed with Regulation Z’s requirements when it comes to rescission; however, it seems as though there is some confusion about these requirements. Let’s take a fresh look at Regulation Z’s rescission rules.
First, in order for rescission to apply, Regulation Z must apply so your loan must be a consumer purpose loan. Business purpose loans are exempt from Regulation Z, which makes them automatically exempt from rescission, even if the borrower is a consumer and even if they are securing the loan with his or her principal residence.
Second, in order for an individual to have rescission rights, he or she must be a “consumer,” which is defined by Regulation Z as “a natural person in whose principal dwelling a security interest is or will be retained or acquired, if that person’s ownership interest in the dwelling is or will be subject to the security interest.” (TILA defines this a bit differently, but since institutions are examined based on Regulation Z, that will be our focus.) In simple terms, a consumer must have both ownership and residence in the home which is securing the loan in order to have rescission rights. Notice, I did not say that the consumer must be a borrower. Let’s look at an example. My daughter and future son-in-law both live in Florida and I live in Alabama. They want to purchase a new home. I’m going to allow them to use my home as collateral on their loan, but I will not be a borrower on the loan. Do I have rescission rights? Do they have rescission rights? The answers are yes, I do, but no, they do not. I have rescission rights because I have both ownership and residence in the home being used to secure the loan. It does not matter that I am not a borrower. I will sign the mortgage/deed of trust, but not the promissory note. I will be entitled to the material disclosures (copy of the Closing Disclosure and HOEPA disclosure, if applicable) and two copies of the rescission notice. They do not have rescission rights because neither of them has an ownership interest in my home nor does either of them live in the home as their principal residence. They will sign the promissory note, not the mortgage/deed of trust, and only the primary borrower must receive a copy of the Closing Disclosure, though you may provide one to the co-borrower as well.
Third, there is no regulatory requirement that the rescission forms be signed to acknowledge the consumer received the form, or that the consumer does not wish to rescind the transaction. The model forms contain signature lines in the event the consumer wishes to rescind only. We advise you either use forms that mirror the model forms provided in Appendix G for open-end or Appendix H for closed-end in Regulation Z. Remove any other signature lines, or you will consistently have the consumer sign the signature lines to acknowledge that he or she does not wish to rescind, meaning he or she will have to come back into your institution for you to obtain the signature in a timely manner.
Fourth, and last in our refresher, in order for consumers to waive their rescission rights, they must present a dated, written statement that describes the “bona fide personal financial emergency” they are experiencing which requires rescission to be waived. You, the creditor, cannot use a pre-printed form of any kind and all consumers, who have rescission rights, must sign the written waiver request. We are often asked, “What qualifies as a ‘bona fide personal financial emergency’?” There is no definite answer to this one. We can only say that creditors must be very cautious in allowing consumers to waive their rescission rights. Losing a contract on a potential new home may look like a “bona fide personal financial emergency” to the consumer, but this one does not seem to pass the test with examiners. Medical emergencies and destruction from storms are two reasons that typically will pass as “bona fide personal financial emergencies.” When in doubt, ask “Could the consumer have planned better to have avoided this situation?” If yes, then it’s not likely going to be seen by an examiner as a “bona fide personal financial emergency.”