TILA right of rescission for home-equity loans and refinances

Under Regulation Z, a consumer generally has three business days to rescind certain non-purchase credit secured by the consumer’s principal dwelling. The clock begins after the last of consummation, delivery of material disclosures, and delivery of the rescission notice.

What transactions give a right to rescind

The right of rescission under TILA applies to certain consumer credit transactions in which a security interest is or will be retained or acquired in the consumer’s principal dwelling. Common examples include a home-equity loan or a refinance with a new creditor. It generally does not apply to a residential mortgage transaction used to acquire or construct the principal dwelling. The consumer whose ownership interest is subject to the security interest may have the right even if that person is not the borrower who signed the note. Determine whether the property is the consumer’s principal dwelling and whether the transaction falls within an exemption before calculating a deadline.

The three-business-day clock

For a covered transaction, the rescission period runs for three business days from the last of three events: consummation, delivery of all material disclosures, and delivery of the required notice of the right to rescind. If any required event occurs later than the others, that later event starts the clock. “Business day” for this rule generally includes Saturdays but excludes Sundays and specified legal public holidays, subject to the regulation’s definition. The consumer exercises rescission by notifying the creditor in writing by the permitted method within the period. A creditor should provide the proper model notice, identify the expiration date, and retain evidence of when each disclosure and notice was delivered.

Purchase mortgages and same-creditor refinances

A residential mortgage transaction used to acquire or construct the consumer’s principal dwelling is exempt from rescission. A refinancing or consolidation by the same creditor of an existing obligation already secured by the same dwelling is also generally exempt, but the right applies to any new amount financed that exceeds the unpaid principal balance, earned unpaid finance charge, and costs of refinancing. In other words, a same-creditor rate-and-term refinance may be exempt while additional cash-out can be rescindable to the extent of the new advance. If a different creditor refinances the existing loan, the same-creditor exception generally does not apply. Read § 1026.23(f) carefully.

Notice requirements and copies

The creditor must provide the required notice to each consumer entitled to rescind, generally in two copies for each consumer in a transaction subject to the right. The notice states the security interest, the right to cancel, how to exercise it, the effects of rescission, and the expiration date. Use the appropriate model form or a substantially similar notice. If multiple owners have interests subject to the lien, ensure each receives the required notice even if only one is obligated on the note. A missing or inaccurate notice can affect when the period begins and may create an extended rescission right. Keep proof of delivery and signed acknowledgements, but do not treat an acknowledgement as proof that required content was actually correct.

What happens after valid rescission

When rescission is exercised, the security interest becomes void and the creditor must return money or property given in connection with the transaction, subject to the regulation’s procedures. The consumer must tender money or property received under the transaction, but the creditor generally must first take the steps the rule requires to terminate the security interest and return amounts. Courts can modify the tender sequence in appropriate cases. The consumer may use any written communication that clearly expresses the intent to rescind; a creditor cannot insist only on a proprietary form if a valid written notice is delivered as allowed by the rule.

Extended rescission period

If the creditor fails to deliver the required notice or material disclosures, the right may continue until the earliest of three years after consummation, sale of the property, or transfer of all the consumer’s interest in the property, subject to statutory limits and exceptions. A creditor should correct disclosure errors promptly, but a later correction does not always erase an already-accrued right. If a borrower raises rescission years later, do not dismiss it based only on the ordinary three-day period; determine whether the required documents were delivered and whether the extended deadline has expired. Escalate complex cases to legal counsel.

Common timing mistakes

A common error is counting from the signing date alone. The last-of-three-events rule can extend the period if material disclosures or the notice arrive later. Another error is counting Sunday or a legal holiday as a business day. Firms also mistakenly assume every refinance is exempt; creditor identity and additional funds matter. A third-party vendor’s failure to mail copies does not necessarily mean the creditor complied. Use a closing checklist that captures all consumers with ownership interests, the correct version of disclosures, the delivery dates, the expiration date, and any waiver request for a bona fide personal financial emergency.

Exam sequence

Identify consumer-purpose credit and a security interest in the principal dwelling. Decide whether the transaction is a purchase-money transaction, same-creditor refinance, or other covered credit. For a covered loan, identify each consumer with an ownership interest subject to the lien, then start the clock from the latest of consummation, material disclosures, and notice. Count three business days under the rule, then analyze any valid written rescission. If required notices or disclosures were missing, assess the potential extended period.

How to solve the exam scenario

Identify the loan, property, actor, triggering event, and controlling regulation. Work through each condition in order, use the applicable date and current primary rule text, and distinguish a required notice from an optional best practice. Record the calculation and any exception. Do not substitute a familiar label or a memorized historical amount for the rule that applies to the facts.