The right of rescission gives consumers the right to rescind, or cancel, certain transactions involving a consumer’s principal dwelling. The rule is nuanced and detailed though, which can make it confusing to apply in some situations.
Here’s a scenario to look at the right of rescission rules: Tenant A owns 50% of a property, and Tenant B owns the other 50%. Tenant A dies, and now Tenant B wishes to purchase the other 50% interest in the property from Tenant A’s estate, and at the same time refinance the original existing mortgage. How does the right of rescission apply to this transaction?
The right of rescission applies in a credit transaction where the consumer acquires or retains a security interest in a principal dwelling, subject to some exemptions. Generally, the right of rescission doesn’t apply to the initial purchase of the property. (The rule exempts “residential mortgage transactions” which is defined as the financing of the “acquisition or initial construction” of a dwelling.)
However, the right of rescission applies to “the addition to an existing obligation of a security interest in a consumer’s principal dwelling,” but it is limited to “only the addition of the security interest and not the existing obligation.” This applies here, where the borrower already has an existing interest in the property and is looking to just add to that interest. Therefore the right of rescission applies to the new credit to acquire the new 50% interest.
But it’s not just the purchase of the other half interest that is involved here; the borrower also wants to refinance the existing loan. How does the right of rescission rule affect that part?
One exemption to the right of rescission rules goes to the refinancing or consolidation of credit already extended by the same creditor and already secured by the consumer’s principal dwelling. But this only applies to the extent it covers the outstanding principal balance, and it doesn’t cover any new credit extended beyond the outstanding balance. Or, in other words, the portion of the loan that is being refinanced is not subject to the right of rescission rule, but the new credit being extended to purchase the new interest in the property is subject to the right of rescission.
So if Tenant B’s remaining balance on his loan to secure his 50% property interest was $150,000, and he now wants a $350,000 loan to purchase the other 50% interest for $200,000 and refinance his $150,000 loan, then the right of rescission applies to the $200,000 new credit and not the $150,000 loan. Note this exemption only applies if the borrower is attempting to refinance with the original creditor though. If the borrower is getting a loan from a new creditor which would pay off the existing obligation, then the whole loan is subject to the right of rescission rule again.
What are the effects of a consumer exercising their rescission rights? The full effects could take their own post, but one thing to remember is that the right of rescission rules focus heavily on the security interest a creditor takes in property and the creditor’s ability to encumber a consumer’s interest in property.
Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA 02184