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Right of Rescission (Truth in Lending Act) Definition
The Right of Rescission is a contract term. It grants the holder the right to rescind or undo a contract. The Right of Rescission is a right guaranteed by the Truth in Lending Act (TILA) under the federal law of the United States. It is a very important provision for protecting the borrowers against the high-pressure sales tactics of real estate dealers.
A Little More on What is the Right of Rescission
According to this provision under TILA, a borrower has the right to cancel a financial transaction related to a home equity loan or home equity line of credit or a refinance transaction done with a lender who is not the current mortgagee. The borrowers are allowed to change their mind and cancel the transaction within 3 business days of signing the contract. They can cancel the financial contract until the midnight of the third business day and are entitled to get back the entire fund upon the cancelation. They are not answerable to any questions asked regarding the cancellation.
Saturdays are considered to be business days while Sundays and all other legal holidays are not.
A lender must leave all the claim to the property and repay the fees within 20 days of cancellation of the contract.
The Right of Rescission is not applicable to the purchases of new homes, it only applies to the refinancing of a mortgage, home equity loan, and home equity lines of credit. The Right of Rescission does not apply to original home loans, refinancing mortgages with the current lender, refinancing with state agency mortgages or mortgages on a second home or investment property.
The Truth in Lending Act was passed in 1968 to protect the consumers from predatory lenders and their unfair credit practices. The Act enables the borrowers to make an informed decision while obtaining a credit. It mandates the disclosure of all relevant information about the loan including the terms and cost. The Act also ensures that a consumer gets a minimum time to reconsider his or her decision and change their mind if desired.
The Dodd-Frank Wall Street Reform Act has expanded the rights provided by TILA for further protection and has made the pre-loan counseling mandatory.
The Truth in Lending Act makes it mandatory that a borrower is notified of their right to rescind and the procedure to follow for exercising this right. The borrower needs to make sure, if they change their minds, to communicate that to the lender within the time period of three business days. The communication should be in writing and the time of sending the document needs to be recorded. If a lender refuses to accept the cancellation, keeping proper documentation helps the borrower to prove that he or she has communicated their intention within the time period prescribed under the law.
References for Right of Rescission
Academic Research on Right of Rescission
It’s All About the Principal: Preserving Consumers’ Right of Rescission Under the Truth in Lending Act, Shepard, L. K. (2010). NCL Rev., 89, 171. This article investigates an essential market-based threat to the Truth in Lending Act’s (TILA) right of rescission which is a remedy that tries to prevent lender overreaching and fraud during a very complicated financial transaction by a consumer. It also explores an aspect of TILA’s rescission remedy that has not been sufficiently studied in academic literature even though courts and commentators tacitly acknowledge it.
Truth in Lending-The Right of Rescission, Disclosure of the Finance Charge, and Itemization of the Amount Financed in Closed-End Transactions, Griffith, E. (1997). Geo. Mason L. Rev., 6, 191. This paper shows how the passing of the Truth in Lending Act revolutionized the life of consumers. This is because before then, consumers had very little knowledge about the cost of credit and they had no power to compare the terms that were being offered by different creditors in the market place.
Truth-in-Lending: Judicial Modification of the Right of Rescission, Mann, T. N. (1975). Duke Law Journal, 1974(6), 1227-1251. This paper investigates various decisions that have judicially changed the Truth in Lending Act to such an extent that the court has the power to require a consumer to tender the consideration before rescission of the contract is deemed as sufficient. However, this conditional rescission is only ordered when the consumer wants both rescission and a civil penalty, but the combination of these two is deemed to result in an unduly harsh punishment to the creditor.
The Right of Rescission: A Continuing Concern for Mortgage Lenders, Richards, B. P. (1994). Banking LJ, 111, 557. This study investigates two recent federal court rulings which hold that lenders fail to make material TILA disclosures and also discusses the concerns they raise for lenders in various aspects such as the itemization and classification of charges, incorrect fee amounts, taxes on loan transactions among many others.
Truth in Lending: Is Notice Enough to Exercise the Right of Rescission, Schlussel, E. (2014). Brook. J. Corp. Fin. & Com. L., 9, 362. This research argues that the borrower is only supposed to send notice within the three-year period, consistent with the holdings of the Third, Fourth and Eleventh Circuits. However, it only deals with closed-end credit loans. The research also introduces TILA and Regulation Z, which is the regulation tasked with implementing the TILA.
On the Owners’ Right of Rescission——Theories and Applications of the Property Law, Qing-chuan, S. H. E. N. G. (2010). Journal of Jiangsu Polytechnic University (Social Science Edition), 1, 005. This paper presents property law which establishes the owners’ right to rescind which was formed to fill up for the limitations of the Assembly of Owners. When exercising the right of rescission, the legality of the process of decision making by the Assembly of Owners or Commission of Owners must be considered.
On the Application and Perfection of Creditor’s Right of Rescission System, Xiao-ping, X. S. Q. Z. (2009). Journal of Hunan University of Science and Engineering, 6, 049. This paper explains that the judicial interpretation of Article 74 of Contract law needs to be expanded, the defendant in the rescission action correctly identified, the burden of proof properly distributed in action and finally, the scope of the right of rescission and other provisions needs to be consummated. This is because the creditor’s right of rescission system has become an obstacle in judicial practice.
On Legislation Perfecting of the Creditor’s Right of Rescission, Shao-qi, X. I. A. O. (2009). Journal of Maoming University, 2, 017. This article argues that the creditor’s right of rescission system is an essential part of the security of obligation system and also the expansion of the impacts of debt. This system has been crucial in ensuring the ultimate realization of claims as well as stabilization of economic order. However, various scholars have differing opinions about the system, and this has been a complicated issue in Judicial Practice.
Truth in Lending-Right of Rescission, Bliss, R. J. (1975). Wis. L. Rev., 192. This paper presents the proceedings of a case between a group of plaintiffs who signed a note of a substantial amount and also a deed of trust that secured the note in favor of the defendant. The Homeowners Loan Corporation. Some months later after the proceeds of the loan had been disbursed, the plaintiffs informed the defendants that were going to exercise their right to rescind as stipulated by a provision of the Truth in Lending Act.
Recent Developments Affecting the Right of Rescission, Hanekamp, T. K. (2007). FDCC Quarterly, 57(2), 171. This article reviews some cases of criminal investigations involving corporate fraud and scandal and finds that they are instructive to issues about which underwriters, claim handlers, as well as coverage counsel, should be informed on when the corporate entities or their officers and directors attempt to look for coverage for claims involving alleged financial wrongdoing.
Truth-in-Lending: Judicial Modification of the Right of Rescission, REV, T. DUKE LAW JOURNAL, 1974, 1227. This paper explains how Congress passed the Truth in Lending Act to assure a meaningful disclosure of credit terms to the consumer obligor. It employed a method of achieving this objective which involved giving the consumer the power to rescind a credit agreement as long as the creditor fails to present the information that is required by the act openly.