Question:

What is important about the rescission right of the Truth in Lending Act (TILA) of 1968?

Answer:

Enacted by the Congress, the Truth in Lending Act (TILA) of 1968 has the purpose to protect borrowers by ensuring that lenders provide enough loan disclosure details and consumers are aware of the terms and conditions of their credit. The most important rights given to consumers are:

  • the right to rescind a mortgage transaction under certain circumstances within 3 business days after mortgage papers are signed;
  • the right to cancel certain transactions ensuing from default on a lien on the borrower's property.

The Truth in Lending Act (TILA) of 1968, also called the Regulation Z, or Reg Z, has been reviewed and updated on an ongoing basis.

Right of Rescission Period within the TILA

When a loan is closed with the borrower's dwelling serving as the collateral, the lender is required to provide notice of the right to rescind to anybody with ownership interest in the transaction. After loan papers are signed, the clock starts ticking - if a borrower decides that they want to exercise their right to rescind they have 3 business days after mortgage loan consummation to do that.

For example, if the home loan was scheduled to close on Friday 6th, 2008 and all loan disclosures and materials have been provided to all parties with security interest in the home mortgage transaction, your right to rescind expires on June 11th at midnight. Saturday and Sunday do not count as they are not official business days.

What happens after TILA Regulation Z rescission period is over?

Lenders are expected to disburse funds after the rescind time is over. However, before they do that they should make sure the borrower rescission decision has not been mailed. Borrowers are allowed to rescind via post on the third day and a rescission arriving on the 4th or 5th day after closing is still valid.

To avoid potential problems, Regulation Z advises that lenders make sure the loan has not been rescinded by requesting a Notice of Rescission form from all owners with interest in the transaction.

At the same time, borrowers are advised not to sign a Notice of Rescission before the 3rd day after closing so that they don't give away their right to rescind.

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