By Scott Birrenkott
One of the consumer protection rights afforded by Truth in Lending is the right of rescission. While there are no changes to this rule, it is a frequent topic for questions received through the Wisconsin Bankers Association’s (WBA) Legal Call Program. It is important that bankers understand and consider various aspects of this rule.
The right of rescission can be found under Regulation Z for both closed-end and open-end credit. Generally speaking, rescission applies in a credit transaction secured by a consumer’s principal dwelling. For purposes of rescission, each consumer whose ownership interest is subject to the security interest shall have the right to rescind the transaction, unless exempt.
One of the most common questions WBA receives is: who gets rescission?
All consumers receive the right of rescission. Reg Z defines consumer as a natural person to whom consumer credit is offered or extended. However, for purposes of rescission, the term also includes a natural person in whose principal dwelling a security interest is, or will be, retained or acquired, if that person’s ownership interest in the dwelling is or will be subject to the security interest. In short, any consumer with an ownership interest in the dwelling taken as security receives the right of rescission. This could include a non-borrower.
For example, consider a situation where a borrower’s parents pledge their house as security for a covered transaction. The parents are not borrowers and thus, not obligated to the transaction. However, because their ownership interest in the house is subject to the security interest, they must be provided with the right of rescission.
It is also worth noting that sometimes a trust can be considered a consumer for purposes of rescission. Credit extended to trusts established for tax or estate planning purposes or to land trusts is considered to be extended to a natural person for purposes of the definition of consumer. In the case where the property is held by a trust, lenders should make sure to review Reg Z to see whether the trust might be a consumer for purposes of rescission.
Another common question WBA receives is whether a consumer can waive the right to rescind. In certain rare circumstances this is possible, but only in the case of a bona fide personal financial emergency.
The rule does not provide examples, but the situation must present a true emergency. For example, during the COVID pandemic, there may have been truly bona fide personal financial emergencies which warranted a need to receive credit without a waiting period. As a result, whether such an emergency exists is a fact-specific question. WBA has heard of situations where the borrowers are going on vacation and want to close without a waiting period, or where the seller is growing anxious and does not want to wait any longer. Such situations are not emergencies. A true, bona fide financial emergency must exist for it to be possible to waive rescission.
While rescission is not a new rule nor have there been any changes, the above article covers some of the more frequently asked questions.
For reference, also consider the following citations to Regulation Z:
- Rescission for open-end-credit: 1026.15
- Rescission for closed-end-credit: 1026.23
- Definition of consumer: 1026.2(a)(11)
- Discussion of trusts, which may be a consumer, for purposes of rescission: 1026.3(a)-10