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
