Short Term Loan
Question: If we are making a temporary loan, such as a bridge loan, is it subject to rescission? We are taking a security interest in the borrower's home but the loan is only short term - less than a year.
Answer: Rescission definitely applies whenever you make a loan secured by the borrower's principal residence. The term of the loan does not matter. Even if the loan is a 15-day loan, it would be subject to the rescission rule.
When working with specific requirements such as rescission, it is important to keep coverage issues clear. There are no loan term limits or exemptions for rescission. However, it is tempting to confuse this Truth in Lending requirement with others, such as what constitutes an ARM. In order to trigger the ARM rules, the loan must be for more than one year. Similarly under RESPA there are exemptions for short-term loans. The result of these different rules is that a short-term variable rate bridge loan for six months would not be an ARM, would be exempt from RESPA, but would be subject to rescission.
Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 8, 8/04
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