Right of Cancellation Matrix



General Scope of Right of Cancellation:


Under TILA, a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling is subject to the right to cancel.

There are several exceptions to this rule:

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. Commentary Reg. Z § 1026.23(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 Reg. Z § 1026.23(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 Reg. Z § 1026.2(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. Commentary Reg. Z § 1026.23(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 Reg. Z § 1026.2(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. Contact 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 Reg. Z § 1026.23(f)(1) and Commentary 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 Reg. Z § 1026.23(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 Reg. Z § 1026.2(a)(24)(6) N/A
Initial Construction With Existing Improvements All proceeds to be used for initial construction of primary dwelling, with existing improvements on property. No – Non-Texas

Yes – Texas
Commentary Reg. Z § 1026.23(f) – 1

TX Admin. Code § 152.11
N/A

RR – Mech. Lien
Initial Construction With No Existing Improvements All proceeds to be used for initial construction of primary dwelling, with no existing improvements on property. No Commentary Reg. Z § 1026.23(f) – 1 N/A
Home Improvement Part of proceeds of loan used to make subsequent home improvement. Yes Reg. Z § 1026.23(a) RR-Regular
Home Equity All proceeds of loan not used for exempt purpose and does not involve the refinance of an existing lien to the same creditor (See below Refi - Same (original) Lender – Refinance with additional advance). Yes Reg. Z § 1026.23(a)

TX Admin. Code § 153.25
RR-Regular
or
RR-Home Equity (if collateral is Texas homestead but not primary dwelling)
HELOC (Open-end) Establishment of a home equity line of credit. Yes Reg. Z § 1026.15(a)(1) RR-HELOC
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 Reg. Z § 1026.23(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 Reg. Z § 1026.2(a)(24)(5) RR-Regular
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 Reg. Z § 1026.2(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 Commentary Reg. Z § 1026.23(f)(1) N/A
Refi - Regular Regular refinance. (Not "Const. to Perm." or "Same Lender Refi.") Yes Reg. Z § 1026.23(f) RR-Regular
Refi - Same (original)
Lender - Refinance
If same lender Refinance – current loan $ + "amounts attributed solely to the costs of refinancing or consolidation" are exempt. No Commentary Reg. Z § 1026.23(f)4 N/A
Refi - Same (original)
Lender – Refinance with additional advance
If same lender Refinance - advancing additional monies above current loan $ + "amounts attributed solely to the costs of refinancing or consolidation" are exempt. Yes Commentary Reg. Z § 1026.23(f)4 RR-Refinance
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 unless transaction falls under same creditor classification shown above. No Commentary Reg. Z § 1026.2(a)(24)-4 N/A
Refi - Refi. plus Rehab. Refinance existing loan plus $ for subsequent improvements Yes Reg. Z § 1026.23(f) RR-Refinance
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 Commentary Reg. Z § 1026.23(f)4 N/A
Modification of HELOC (Open-end) When increasing a home equity line of credit Yes Reg. Z § 1026.15 RR-HELOC increase
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. No Commentary Reg. Z § 1026.23(a)1 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 Reg. Z § 1026.23(a)(2) RR-Regular or RR-Refinance as appropriate


RR-Regular = H-8 Federal Right of Rescission notice
RR-Modification = Modification Federal Right of Rescission notice
RR-Mech. Lien = State Construction Right of Rescission notice
RR-Home Equity = State Home Equity Right of Rescission notice
RR-Refinance = H-9 Federal Right of Rescission notice
RR-HELOC = G-5 Federal Open-End Right of Rescission Notice
RR-HELOC increase = G-7 Federal Open-End Right of Rescission Notice


Last revised: February 5, 2019



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