The right of rescission runs until midnight of the third business day after the last of three events: consummation of the transaction, delivery of the notice of the right to rescind, and delivery of all material disclosures. Miss any one of the three and the clock has not started. For rescission, a business day is every calendar day except Sundays and the federal legal public holidays, so Saturday counts. The rule is 12 CFR s. 1026.23(a)(3) and the statute behind it is 15 USC s. 1635(a).
Who gets the right
Section 1026.23(a)(1) gives the right to each consumer whose ownership interest in the principal dwelling is or will be subject to the security interest, not only the borrower on the note. Adding a security interest to an existing obligation is itself a transaction for this purpose, and the right attaches to the new security interest alone. Where more than one consumer can rescind, s. 1026.23(a)(4) makes one consumer’s exercise effective for all of them.
Rescinding takes a written communication. Under s. 1026.23(a)(2) the consumer notifies the creditor by mail, telegram or other written means, and notice counts as given when mailed, when filed for telegraphic transmission, or when delivered to the creditor’s designated place of business.
The last of three events starts the clock
“Material disclosures” is a defined term at s. 1026.23(a)(3)(ii): the annual percentage rate, the finance charge, the amount financed, the total of payments, the payment schedule, and the disclosures and limitations in ss. 1026.32(c) and (d) and 1026.43(g). Every consumer entitled to rescind gets two copies of the notice of the right to rescind under s. 1026.23(b)(1), on a separate document, stating the security interest, the right, how to exercise it with a form and the creditor’s address, the effects of rescission, and the date the period expires.
The official interpretations work the counting through twice (Supplement I, comment 23(a)(3)-1). Where a transaction is consummated on Friday, June 1 and the disclosures and notice went out the day before, the period expires at midnight on Tuesday, June 5: Saturday, Monday and Tuesday are the three business days, and Sunday is skipped. Where the disclosures are given and the transaction consummated on Friday, June 1 but the rescission notice arrives on Monday, June 4, the period runs from June 4 and expires at midnight on Thursday, June 7.
If the notice or the material disclosures never arrive, the right does not run forever. Under s. 1026.23(a)(3)(i) it expires three years after consummation, on transfer of all the consumer’s interest in the property, or on sale of the property, whichever comes first.
The precise business day
Regulation Z carries two definitions of “business day” at s. 1026.2(a)(6). The general one is a day the creditor’s offices are open to the public for carrying on substantially all of its business functions. The precise one, which rescission uses, is all calendar days except Sundays and “the legal public holidays specified in 5 U.S.C. 6103(a), such as New Year’s Day, the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day”. The regulation gives those as examples rather than as the closed set, and the statute it points to is where the full list lives. The same precise definition governs several disclosure timing rules under ss. 1026.19 and 1026.31. Which of the two definitions a disclosure deadline takes is its own question.
Transactions with no right to rescind
Section 1026.23(f) lists them:
- A residential mortgage transaction. Defined at s. 1026.2(a)(24) as a transaction creating or retaining a security interest in the consumer’s principal dwelling to finance the acquisition or initial construction of that dwelling. In plain terms, a purchase money loan.
- A refinancing or consolidation by the same creditor of credit already secured by the principal dwelling. The right does apply to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing.
- A transaction in which a state agency is a creditor.
- An advance other than the initial advance in a series treated as a single transaction under s. 1026.17(c)(6), where the notice and all material disclosures were given.
- A renewal of optional insurance premiums that is not a refinancing under s. 1026.20(a)(5).
A refinance with a different creditor on a dwelling the consumer already owns falls outside paragraph (f)(2), so the right applies to it in full.
What happens while the clock runs, and after
Under s. 1026.23(c) no money may be disbursed other than into escrow, no services performed and no materials delivered until the rescission period has expired and the creditor is reasonably satisfied that the consumer has not rescinded, unless the consumer has waived the right.
Rescission voids the security interest and clears the consumer of any amount, including any finance charge (s. 1026.23(d)(1)). Within 20 calendar days of receiving the notice of rescission the creditor must return any money or property given to anyone in connection with the transaction and act to reflect the termination of the security interest. The consumer may keep what the creditor delivered until the creditor has done that, and then tenders it back, or tenders its reasonable value where returning it would be impracticable or inequitable. If the creditor does not take possession within 20 calendar days of the consumer’s tender, the consumer keeps it with no further obligation.
The emergency waiver
Section 1026.23(e) lets a consumer modify or waive the right where the consumer determines that the credit is needed to meet a bona fide personal financial emergency. The waiver is a dated written statement describing the emergency, specifically modifying or waiving the right, signed by every consumer entitled to rescind. The section adds one sentence that rules out the pre-printed version: “Printed forms for this purpose are prohibited.”
The SAFE Mortgage Loan Originator Test, National Component with Uniform State Content is closed book, so the three-day count, the three starting events and the exemption list have to be carried in. So does one detail in s. 1026.23(a)(3) and (a)(2) together: the period ends at midnight of the third business day, and because notice counts as given when mailed, a notice mailed on the fourth day is late however quickly the creditor receives it.
Sources
- Regulation Z, 12 CFR Part 1026, s. 1026.23 in full and ss. 1026.2(a)(6) and 1026.2(a)(24)
- Regulation Z, Supplement I, official interpretations of s. 1026.23, comment 23(a)(3)-1
- Truth in Lending Act, 15 USC s. 1635, US Code release point 119-102