Pursuant to the Truth in Lending (TIL) Act, a borrower has the right to rescind consumer credit transactions, which create a non-purchase lien on the consumer's principal dwelling.1 If the important TIL disclosures are given at the time of the original credit transaction, the rescission right is three days.2 However, improper disclosure may extend this rescission period up to three years.3 Accordingly, a creditor has significant motivation to ensure that the proper notice of right to cancel is provided to the consumer at the requisite time.

For open-end (HELOC) loans, the model rescission forms are set forth in Appendix G of 12 CFR §226. These forms address scenarios in which a consumer opens a HELOC account, increases the HELOC credit limit, adds a security interest, or increases the security. Unfortunately, the model forms make no provisions for an open-end loan the proceeds of which are used, in part, for a purchase transaction. In such a case, the purchase money funds are not subject to the right of rescission, but the remaining non-purchase money funds are subject to the three-day right to rescind. Use of the model forms could arguably subject the entire credit limit, including any purchase funds advanced prior to the expiration of the three-day right of rescission, to this cancellation right.

To protect the lender in this scenario, the DocMagic compliance department has created a modified version of Model Form G-5 (the model form for opening an account) so that the Purchase and Non-purchase funds are separately addressed. The pertinent verbiage in this modified form states: "If any portion of your account is used to finance the purchase of the property identified above ("Purchase Amount"), we are permitted to disburse the Purchase Amount of your Account prior to the expiration of the date indicated below. You have a legal right under federal law to cancel the security interest applicable to the remainder of the funds in your account ("Non-purchase Amount"), without cost, within three business days from whichever of the following events occurs last:…"

Within the DocMagic software, we include two copies per borrower of this modified model form in HELOC packages when the loan purpose indicated is either (i) purchase or (ii) purchase money junior. Otherwise, the appropriate model form will be included in the loan package depending upon the loan purpose selected. Please note, however, that some investors may have their own rescission forms or give us differing instructions. In those cases, we will default to the investor's wishes.

If you have any questions about this form or any other notices of right to cancel, please contact Renee Smith at renee@docmagic.com .

Renee M. Smith is Assistant General Counsel of Document Systems, Inc. and a member of its Compliance Department.