Question & Answer

Question: We have a customer who requested an increase on their home equity line of credit. We have approved the increase but in the process, found that when the original loan was made two years ago, the bank did not give the consumer a rescission notice. What should we do now?

Answer: What you have here is a problem! The original loan is still rescindable because without the notice at closing, that right will run for three years. So far, the loan is only two years old. So the borrowers still have a year to think about it.

However, they clearly like the loan and want the credit. Presumably they are paying as agreed since you have quickly agreed to increase their line. So here's what we would do.

First, the amount of the increase is subject to rescission, no question about it. Ordinarily, in these circumstances you would provide a rescission notice for the amount of the increase and be done with it. But here, the original amount is still rescindable. You need to take care of that. If you only provide rescission on the amount of the increase, they can always walk away from the original line. You probably don't want that to happen.

A properly prepared rescission notice should cover the entire loan. Nothing in Regulation Z specifically says that you can stop the three-year right of rescission by providing a notice - but nothing says you can't either. That's why we suggest that you try to provide the notice for the entire amount. You might consider using two separate notices - for the original and for the increases. Talk to your lawyers about it. They should be familiar with litigation in your state.

Copyright © 2000 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 17 & 18, 1/00