After publishing the last “Refresher on Rescission” it occurred to me that there were still quite a number of questions left unanswered when it comes to rescission so let’s take a look at more areas that might need some refreshing.
We seem to get a lot of questions related to ownership, so I’ll start there. If there is a transfer of ownership to one of the borrowers in conjunction with a rescindable transaction, does the new owner get copies of the right to rescind? No, that borrower does not automatically assume rescission rights even if he already resides in the home as his principal dwelling. He must have had ownership prior to the transaction in order to have the right to rescind the transaction.
If two married borrowers occupy the home as their principal dwelling, but one is not an owner of the property, do both have rescission rights? According to Regulation Z, only the owner has the right to rescind. While community property laws may be different, the regulation only gives rights to a consumer who has both occupancy and ownership prior to the loan.
If a borrower is using the equity in her current home to obtain a HELOC to purchase a new home, is the HELOC exempt from rescission? No, even though the HELOC is a residential mortgage transaction, because the borrower is using her current home as collateral, the HELOC is subject to rescission. What if the new home secures the HELOC instead? These are a little trickier. While it is true that the initial purchase “draw” will be exempt, each subsequent draw will be rescindable. How will you manage these subsequent draws? You will not be able to give your borrower any means to access the account without going through the rescission process first. We advise that, instead, you go ahead and treat the entire purchase transaction as rescindable; handling the transaction with your borrower and providing the rescission notice BEFORE the transaction with the seller so that the seller is not left waiting four days to receive their check.
We also get many questions about the effects of giving rescission when not required. Regulation Z is a regulation that allows for “over-disclosing” but not “under-disclosing.” There is no violation for giving rescission rights when not required. However, not disclosing will definitely earn you a violation AND it will open a three year window in which the borrower may rescind the transaction. How do you cure if you forget to give rescission on a transaction? There’s not really a “cure.” You will always have the violation for not giving the disclosure as required and disbursing funds too early. However, you have not triggered the rescission period until you have given all appropriate disclosures. So, you should give the rescission notice, and the material disclosures if you have not done so, as soon as you find the error and this will start the three day period. Remember that the material disclosures for closed-end are the Closing Disclosure, two copies of the rescission notice, and the HOEPA notice, if applicable, and, if you have a prepayment penalty, you must offer an alternative transaction. For open-end, you need only give the HELOC Account Opening Agreement and two copies of the rescission notice. Once the three business days have passed, if the borrower does not rescind, then the rescission window closes, and all is well. Again, it doesn’t remove the violation, but it closes the three year rescission window that would have remained open had you not given the rights.
Lastly, are refinance loans exempt from the rescission requirements? The closed-end rules do provide an exemption for a refinance by the same creditor; however, rescission will apply to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing or consolidation. For open-end credit, the entire line amount is rescindable when you refinance a HELOC, as there is no exemption for funds that were drawn on the previous line. The only time you would have a “partial” rescission would be if you were simply increasing the credit limit on an existing plan by way of modification. In that case, only the new amount of credit would be rescindable. If you renew the plan, you are using a modification agreement to extend the maturity date and all the terms and conditions of the plan remain the same. If this is the method you use for renewal, where you are not satisfying and replacing the underlying obligation and you are simply extending the maturity date PRIOR to maturity, then rescission only applies to the amount of the increased credit. Once the loan has matured, any modification of the loan is considered a refinance and would be subject to rescission. If the customer signs a new promissory note then the entire new plan would be subject to rescission.