The Truth in Lending Act (TILA) provides consumers with the right to rescind certain consumer credit transactions.1  This rescission right (which is spelled out both in TILA and in its implementing regulation, Regulation Z (12 CFR §226.15 for open-end credit and §226.23 for closed-end credit)) applies to all borrowers and any consumer whose ownership interest in his or her principal dwelling is subject to a security interest. The following transactions are exempt from the right to rescind:

1. Residential mortgage transactions, defined as transactions "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 the consumer's principal dwelling to finance the acquisition or initial construction of that dwelling."2 (applies to both closed-end and open-end loans)
2. Refinances of a creditor's own existing loan, so long as the new amount financed does not exceed the unpaid principal balance, any earned unpaid finance charge, and the costs of the refinancing. (applies to closed-end loans only)
3. Transactions in which a state agency is a creditor. (applies to both closed-end and open-end loans)
4. Any advance, other than an initial advance, in a series of advances or in a series of single-payment obligations that is treated as a single transaction, if the notice of right to cancel and all material disclosures have been given to the consumer. (applies to open-end loans only)

A borrower and any consumer whose ownership interest in his or her principal dwelling is subject to a security interest has the right to rescind the consumer credit transaction until midnight of the third business day after the last to occur of: (i) consummation of the transaction, (ii) delivery of notice of right to rescind, or (iii) delivery of all material TILA disclosures.3  For example, if consummation, rescission notice and delivery of material disclosures all occur on a Thursday, the three-day rescission period would consist of Friday, Saturday, and Monday, with the rescission period ending at midnight on Monday.  For purposes of calculating business days, do not count Sundays or legal public holidays.4  Assuming that all of the above requirements are met on the day the closing documents are signed, the following is a helpful chart in determining the three day right of rescission:

*If a legal public holiday falls within these time periods, add one day.

A creditor must provide two (2) completed copies of the notice of right to cancel to each consumer entitled to rescind, as well as a copy of the TILA material disclosure statements.  If these disclosures are not delivered or not delivered properly (e.g., dates are missing or incorrect), the rescission right may extend for a period up to three (3) years.5  Accordingly, a creditor has significant motivation to ensure that the proper notice of right to cancel is provided to the consumer at the appropriate time.

A consumer may waive his or her right to rescind, "if the consumer can determine that the extension of credit is needed to meet a bona fide personal financial emergency."6  To exercise this waiver, the consumer must provide creditor a written statement that describes the personal financial emergency, specifically modifies or waives the right to cancel, and contains the signature of each person entitled to cancel.  However, creditors should beware because the mere existence of a consumer's waiver does not, of itself, automatically insulate the creditor from liability for failing to provide the right of rescission.  What types of situations qualify as personal financial emergencies are not specifically identified and, accordingly, waivers are used sparingly.

DSI's Compliance Department invites you to review our other articles on the Notice of Right to Cancel:

Please look out for the following related articles on the right to rescind, which will be published in the June, 2007 issue of The Compliance Wizard:

• Closed-End Loan Forms & Form Selection Logic
• Open-End Loan Forms & Form Selection Logic
• Instructions for Completing a Notice of Right to Cancel Form

1 15 U.S.C § 1635
2 12 CFR § 226.2(a)(24)
3 12 CFR § 226.23(a)(3) and 12 CFR § 226.15(a)(3)
4 12 CFR § 226.2(a)(6)
5 15 U.S.C § 1635(f)
6 12 CFR § 226.23(e) and 12 CFR § 226.15(e)