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Question & Answer
Question: We occasionally make bridge loans to customers that are purchasing a new principal residence but obtaining their new mortgage with a different lender. Our bridge loan is I secured by the home they are trying I to sell. The customer usually moves
I on the same day that we make the bridge loan. Thus, their primary residence changes that day and the dwelling securing our loan is their primary residence when we make the loan but no longer is by the end
I of the day. Is our bridge loan subject to rescission?
Answer: Yes. The bridge Answer loan is subject to rescission, while the loan to purchase the new home and secured by the new home is a residential mortgage transaction exempt from rescission. The Official Staff Commentary to §226.23(a) explains that bridge loans are subject to rescission. The specific example used in the commentary is that of a bridge loan when security is taken on the property being sold (hopefully). The commentary does not specify any sort of timing rule for the property being sold. What operates to make this bridge loan subject to rescission is that at the moment the loan is made, the property securing the loan is the borrower's principle dwelling.
These bridge loan situations do sometimes provide one of the circumstances where rescission can legitimately be waived, however. When the bridge loan is made the same day as the new home purchase, there may be a bona fide personal emergency that is sufficient to justify a waiver of rescission. For example, if the rescission period would cause the borrower to be in breach of contract under the new home purchase agreement, the cost of the penalties under the purchase agreement may be sufficient to justify a bona fide personal emergency. It is a matter of timing and amount.
Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 11, 9/97
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