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Question & Answer
Question: We are making a construction loan to a customer and will also be making the permanent loan. They are building on a very tight schedule and may have to move in to the house before it is quite finished. If that happens, do we give them the right of rescission on the permanent loan?
Answer: This is the one situation where our rule of "roof over the head" doesn't work. Generally, any situation in which you are taking security in the roof over the borrower's head is a rescindable transaction. The idea behind rescission is that the consumer has time to think about the consequences and costs of the loan and decide whether to cancel or go forward.
When a customer is buying a new primary residence, the rescission rule doesn't apply. There is no cooling off period for buying a new home, only for putting up your current one as collateral.
Construction situations can be complicated and confusing when it comes to who is living where relative to the financing. However, the commentary clears up this confusion for you. When the consumer is building a new primary residence, both the construction loan and the permanent financing are loans to acquire the dwelling.
In addition, the definition of "residential mortgage transaction" or "rmt" turns on the transfer of title. The permanent financing transaction when construction is complete is the time when title is transferred or acquired. Thus, the permanent loan is an "rmt" for purposes of the exemption from rescission. If the customers are already living in the house, they have moved in before acquiring title. Thus, even though the new house is already the roof over their heads, they don't own it yet.
This rule makes sense if you also think about another aspect of rescission - you can only rescind what you didn't already owe. The consumer already owed the construction loan. The permanent loan is simply a refinancing or repackaging of the construction loan. So being able to rescind the permanent financing wouldn't get the consumers very far - they'd still owe the construction loan.
Copyright © 2000 Compliance Action. Originally appeared in Compliance Action, Vol. 5, No. 1, 2/00
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