Right of Cancellation Matrix
General Scope of Right of Cancellation:
Credit transaction in which a security interest is or will be retained or acquired
in a consumer's principal dwelling.
Save and except:
1. Residential Mortgage Transaction. Any transaction to construct (initial
construction not subsequent improvement) or acquire a principal dwelling. The lien
status of the mortgage is irrelevant for purposes of the exemption; the fact that
a loan has junior lien status does not by itself preclude application of this exemption.
For example, a homebuyer may assume the existing first mortgage and create a second
mortgage to finance the balance of the purchase price. Such a transaction would
not be rescindable. TILA § 103, § 125, Commentary 226.23(f)(1).
2. Combined-Purpose Transaction. A loan to acquire a principal dwelling and
make improvements to that dwelling is exempt if treated as one transaction. If,
on the other hand, the loan for the acquisition of the principal dwelling and the
subsequent advances for improvements are treated as more than one transaction, then
only the transaction that finances the acquisition of that dwelling is exempt. Commentary
226.23(f)(3).
3. Multiple Purpose Transactions. If any part of the loan proceeds will be
used to finance the acquisition or initial construction of the consumer's principal
dwelling. For example, a transaction to finance the initial construction of the
consumer's principal dwelling is a residential mortgage transaction even if a portion
of the funds will be disbursed directly to the consumer or used to satisfy a loan
for the purchase of the land on which the dwelling will be built. Commentary 226.2(a)(24)(6).
4. Same/Original Lender Refinance. "Original Lender" means the
lender on the original note or the lender who acquired the note thru merger, consolidation
or acquisition of the original lender. In a refinancing or consolidation by the
"original" creditor of an extension of credit already secured by the consumer's
principal dwelling, the right of rescission shall apply, however, to the extent
the new amount financed exceeds the sum of (1) the unpaid principal balance plus
(2) any earned unpaid finance charge on the existing debt, plus (3) any amounts
attributed solely to the costs of the refinancing or consolidation. TILA § 125(e),
Commentary 226.23(f)(4).
5. Construction to Perm. If the initial loan is a construction loan that
meets the definition of a residential mortgage transaction (i.e. for initial improvements),
the permanent financing, even from a different lender, is also exempt as a residential
mortgage transaction. Commentary 226.2(a)(24)(4).
6. Other. There are additional exemptions regarding New Advances, State Creditors,
Multiple Advances, Spreader Clauses and Conversion of Open-End to Close-End credit.
See PPDocs, Inc. for details.
SCENARIOS
|
Principal Residence Transactions |
Description |
Give Right to Cancel |
Authority |
Form |
|
Pure purchase (land & existing improvements) |
All proceeds of loan used to "acquire". (A "Residential Mortgage
Transaction") |
No |
TILA § 103, § 125, & Commentary 226.23(f)(1) |
N/A |
|
Purchase Land & Existing Improvements Plus Make Additional Improvements |
Part of proceeds used to "acquire" existing improvements and remainder
used for improvements. (A "Combined Purpose Transaction".) |
No - Non-Texas
Yes - Texas |
Commentary 226.23(f)(3) |
N/A
RR - Mech. Lien |
|
Purchase Land and Make Initial Improvements |
Part of proceeds used to "acquire" lot and remainder used for improvements.
(A "Multiple Purpose Transaction".) |
No |
Commentary 226.2(a)(24)(6) |
N/A |
|
Subsequent Improvements |
Part of proceeds of loan used to make subsequent home improvement. |
Yes |
Sect. 226.23(a) and TILA § 103 |
RR-Regular |
|
Home Equity |
All proceeds of loan not used for exempt purpose. |
Yes |
Reg. Z 226.23(a) |
RR-Regular |
|
Bridge Loan |
All proceeds of loan used to acquire "a principal residence". Collateral
is property borrower is moving out of. Condition lien in Deed of Trust becoming
effective when no longer homestead of Borrower. |
Yes |
Commentary 226.23(a)(1)(4) |
RR-Regular |
|
Owelty |
Proceeds of loan used to acquire outstanding interest in Borrower's existing "principal
residence" with or without renewing existing balance, if any. |
Yes |
Commentary 226.2(a)(24)(5) |
RR |
|
Refi - R&E Lot Loan & Make Initial Improvements |
Part of proceeds used to refinance lot and remainder used for initial improvements.
(A "Multiple purpose transaction"). |
No |
Commentary 226.2(a)(24)6 |
N/A |
|
Refi - Lot is free & clear & Initial Improvements |
All proceeds of loan used for initial improvements. (Exempt because a Residential
Mortgage Transaction.) |
No |
TILA § 103 and Commentary 226.23(f)(1) |
N/A |
|
Refi - Regular |
Regular refinance. (Not "Const. to Perm." or "Same Lender Refi.") |
Yes |
TILA § 125 |
RR-Regular |
Refi - Same (original)
Lender - Refinance |
If same lender Refinance $ + "amounts attributed solely to the costs of refinancing
or consolidation" are exempt. |
No |
Commentary 226.23(f)4 & TILA § 125(e)(2) |
N/A |
|
Refi - Construction to Permanent |
If loan being paid off was for initial construction then subsequent refinance is
exempt. Loan being paid off must be for initial construction, i.e. Home improvement
loan being refinanced is not initial construction, thus refi loan not exempt from
rescission. |
No |
Commentary 226.2(a)(24)-4 |
N/A |
|
Refi - Refi. plus Rehab. |
Refinance existing loan plus $ for subsequent improvements |
Yes |
TILA § 125 |
RR-Regular |
|
Modification Only |
Excluded because security interest has already been given. No new lien or security
interest. Also, similar to "Same Lender" exception. However, no new money
except closing costs. |
No |
TILA § 125(a) & (e)(2) & Commentary 226.23(f)4 |
N/A |
|
Modification with Simultaneous Assignment |
Because Modification with simultaneous assignment has similar effect as a different
lender refinance, the safer practice is to allow Borrower(s) to rescind the Modification
(not original loan). Use special P&P Cancellation of Modification form. |
Yes |
|
RR-Modification |
Cosigner
(Non Owner) |
If cosigner only on note and no ownership interest then no right to rescind. Must
own interest and be their principal dwelling. |
In re Cox |
|
N/A |
Non-signing Owner
(spouse or otherwise) |
Give notice to each owner whether or not they sign Note. Non-signing spouse may
be "owner" even if not vested in title (i.e. in a community property state
(TX) property bought during husband and wife's marriage but vested only in husband's
and wife.) When in doubt give notice to non-signing spouse. He/She might have "ownership
interest". (Each owner should sign mortgage/deed of trust.) |
Yes |
Commentary 226.23(a)(2) |
RR-Regular |
Stay connected
