Rescission and Security Interest
Question: We are making a short-term loan for a lot purchase. As an abundance of caution, we are also taking a security interest in the borrower's principle dwelling. Does rescission apply even if we are only taking the security interest as an abundance of caution?
Answer: Yes. Rescission definitely applies. Truth in Lending makes no distinction on the purpose for taking the security interest in the borrower's dwelling. Truth in Lending is concerned with the fact that the consumer's dwelling is at risk to support the loan. This means that your purpose in taking the security interest in the dwelling is irrelevant. The fact that you are taking the security interest triggers rescission.
Some lenders might try to elude the rescission requirement by placing the security interest after the loan is closed. While technically this does dodge the impact of rescission at closing - the three-day delay - it carries two concerns. One is whether the lender is acting in good faith. The other is that, if the security interest is added later, the rescission right applies to the addition of the security interest. Although the customer would still owe the principle amount of the loan, the customer could rescind the security interest. By delaying the placement of the security interest to post-closing, you are giving the borrower an opportunity to prevent you from having access to the principle dwelling.
Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 10, 10/04
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