Residential Real Estate Article

Right of Rescission Test Answer Key

1. For each of the following statements, indicate whether the statement is true or false.
   
   
   1. The right of rescission is a consumer protection concept that allows borrowers who pledge their homes as collateral on a loan to rescind or cancel the loan within a three business day “cooling-off period” after closing.
      
      The correct answer is True.
      
      
   2. The right of rescission rules are part of the Real Estate Settlement and Procedures Act (RESPA) and therefore will only apply to loans covered by RESPA.
      
      False. The right of rescission rules are part of Regulation Z, not RESPA. They are found at 12 CFR 226.23
      
      
   3. Although the right of rescission normally would not apply to a business loan, it WILL APPLY to a business loan ONLY if one of the borrowers is pledging their principal dwelling as collateral for the loan.
      
      False. This is a common misconception. Under the law, if the loan is not subject to Reg Z, then the right of rescission will NEVER apply. Since business loans are exempt from Reg Z coverage, they will not be subject to the right of rescission even though principal dwellings are taken as collateral. [12 CFR 226.3(a)]
      
      
   4. The right of rescission applies to loans secured by principal dwellings and secondary residences such as vacation homes, cabins, etc.
      
      False. The right of rescission only applies to principal dwellings. This is defined by Reg Z as the borrower’s “primary residence.” Vacation homes and other recreational dwellings are not considered “principal dwellings” unless they are where the borrower primarily resides. [Reg Z Commentary, 226.23(a)(1), note 3.]
      
      
   5. Loans made for the purpose of purchasing a principal dwelling are exempt from the right of rescission rules and therefore NOT rescindable.
      
      True. Reg Z excludes residential mortgage transactions (purchase-money) from the right of rescission. [12 CFR 226.23(f)(1)]
      
      
2. Which statement best describes “who” is entitled to rescission rights?
   
   
   1. Any borrower with an ownership interest in the property securing the loan.
      
      
   2. A guarantor with an ownership interest in the property securing the loan.
      
      
   3. The spouse of a borrower who has an has an ownership interest in the property securing the loan, but is not obligated on the note.
      
      
   4. All of the above.
      
      
   5. Letters “a” and “c” only
      
      The correct answer is “d.” The right of rescission applies to any person who has an ownership interest in the principal dwelling being pledged--whether or not that person is a named borrower, or a party to the transaction.
      
      
3. All persons with the right to rescind must receive special information in order to begin the 3-day rescission period. According to Reg Z, which of the following items must be given to each owner of the principal dwelling?
   
   
   1. A copy of the material disclosures under Reg Z, including the finance charge, the APR, the amount financed, the total of payments and the payment schedule.
      
      
   2. A copy of all the closing documents, including the note, mortgage, and HUD forms.
      
      
   3. Two copies of the Notice of Right to Rescind.
      
      
   4. All of the above.
      
      
   5. Letters “a” and “c” only.
      
      The correct answer is “e.” All persons must receive a copy of the material disclosures as well as 2 copies of the Notice of Right to Rescind. There is no requirement under the law that these people receive a copy of any other closing documents. [12 CFR 226.23(a)(3), fn 48, and (b)]
      
      
4. When calculating the 3-day rescission period, you should:
   
   
   1. Only count the days your financial institution is open for substantially all retail transactions. Saturday would be included, but only if you’re open for business.
      
      
   2. Count all days (Monday through Saturday) but not Sundays and federal legal holidays, since the mail is not delivered on these days.
      
      
   3. Count Monday through Friday and NOT weekends, since weekends are not business days for financial institutions.
      
      
   4. Count out an extra day or two just to be safe and to prevent compliance problems with these rules.
      
      The correct answer is “b.” Under Reg Z, you must calculate a rescission period that lasts 3 business days. Under the law, a “business day” is defined as Monday though Saturday, and excluding Sundays and federal legal holidays. The rule hinges more on when mail is delivered than on your financial institution’s business hours. Therefore, it is irrelevant if your offices are open or closed on the weekends. The other options are incorrect descriptions of the rule. Letter “d” is inappropriate since it extends the rescission period longer than what the law requires.
      [12 CFR 226.2(6)]--link to RRE Res Page
      
      
5. Reg Z permits lenders to waive the right of rescission and disburse the funds immediately in the event a borrower is experiencing a “bona fide personal financial emergency.” Which of the following circumstances would warrant a waiver of the borrower’s right to rescind?
   
   
   1. A life-threatening illness which requires funds for immediate medical treatment.
      
      
   2. A “cash only” sale on appliances and light fixtures which, if purchased today, could save the borrowers 25% on these items.
      
      
   3. A cash down payment needed immediately to hold two spots on a Caribbean vacation cruise.
      
      
   4. A septic system failure which, if not repaired within 48 hours, could result in a loss of the entire home and the spread of contaminants throughout the neighborhood.
      
      Letters “a” and “d” present the most persuasive cases for waiver of the right to rescind. The circumstances must be dire, and must be hinged to substantial further losses to the borrower. Letters “b” and “c” do not warrant a waiver, and to do so could invalidate the rescission period and extend it to three years. [12 CFR 226.23(e) and Commentary]
      
      
6. For each of the following statements, indicate whether the statement is true or false.
   
   
   1. Once the 3-day rescission period has run, a lender is free to disburse the funds to the borrower if satisfied that no rescission has occurred.
      
      The correct answer is True.
      
      
   2. It is a good idea to obtain a confirmation from those with rescission rights in order to verify that they have not taken any steps to rescind the transaction.
      
      True. Though not required by Reg Z, this is a common practice to protect lenders from any “surprises” in the mail. [12 CFR 226.23(c) and Commentary, note 4.]
      
      
   3. During the 3-day rescission period, lenders may give a portion of the funds to the borrower, as long as it is not more than 50 percent of the proceeds of the loan.
      
      False. No portion of the funds may be disbursed during the rescission period. However, the lender may engage in other conduct such as record the mortgage, prepare the check, and even begin to charge interest on the loan. [12 CFR 226.23(c)]
      
      
   4. When dealing with a borrower who can be trusted, it is okay to distribute the loan proceeds at closing and just post-date the rescission notices and other documents so that the loan file is in compliance.
      
      False. This is a bad idea and could again invalidate the rescission period and extend it to threes years. A borrower's circumstances can change and one who is trusted today may change his or her tune tomorrow.

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