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Thursday, September 10, 2015

Right of Rescission for Multiple Borrowers

QUESTION
We have some questions about rescission that seem to come up all the time. First, on which transactions are rescissions permitted? Second, when there are multiple borrowers, does each one have a right to rescind? And, third, do all the borrowers on a transaction have to exercise the right to rescind for the rescission to be valid?

ANSWER
These questions do seem to come up often. With certain exceptions, rescission does not affect a “residential mortgage transaction,” which is a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract or equivalent consensual security interest is created or retained in a consumer’s principal dwelling to finance the acquisition or construction of the dwelling. [12 CFR § 226.2(a)(24)]

The “residential mortgage transaction” is exempt from the right to rescind. Also exempt are refinancings or consolidations by the same creditor of an extension of credit already secured by the consumer’s principal dwelling – except to the extent that the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and any amounts attributed solely to the costs of the refinancing or consolidation. In other words, this means that the right to rescind, in such situations, applies only to the extent by which the new amount financed exceeds the sum of the items noted.) [12 CFR §§ 226.23(a)(1), (f), (l)]

If there are multiple consumers to a transaction, each consumer whose ownership interest in the property is or will be subject to the security interest has the fight to rescind. But, when more than one consumer has the right to rescind, any one of them may exercise that right and cancel the transaction, which is effective for all the consumers. [12 CFR § 226.23(a)(4)]

Jonathan Foxx
President & Managing Director 
Lenders Compliance Group