Questions are frequently raised regarding the right of rescission under Regulation Z. The consequences of making a mistake are significant whether measured in dollars or by customer relations. Unfortunately, the rescission rules are confusing and somewhat difficult to comprehend.
A. Basic Rules/Right of Rescission
Whether a customer has the right to rescind is dependent upon a number of factors including the status of the borrower, the nature of ownership or title to the property, and the relationship of the property to the loan. Each of these issues must be carefully analyzed to make a proper determination regarding the applicability of the right to rescission.
For Regulation Z to apply, the borrower must be a “consumer” and be borrowing for consumer purposes, with the loan secured in whole or in part by the consumer’s principal dwelling. Regulation Z does not apply to business purpose loans. If the borrower is not a “consumer,” the loan is not subject to Regulation Z. For example, a business borrower, using the businesses owner’s dwelling as security, is a business purpose loan, not a consumer loan. The fact that the business has offered the dwelling as security does not convert the loan to a consumer purpose loan. Since the loan is not subject to Regulation Z, no right to rescind exists.
If a loan is to be secured (in whole or in part) by the consumer’s principal dwelling, the right to rescind applies. However, the Regulation Z right to rescind does not apply to purchase money loans. As a result, a loan extended to purchase the consumer’s dwelling does not trigger the right to rescind. NOTE: An exception for which the right to rescind would apply involves situations in which any part of the loan is secured by the consumer’s current home rather than or in addition to the home the customer is purchasing. The most typical example of this exception is a “bridge loan.” Under a bridge loan, the borrower obtains interim financing based upon the equity of the current dwelling until the sale of the current dwelling is completed. The bridge loan secured by the current dwelling is subject to the right to rescind. The purchase money loan is not rescindable.