Loan Rescission Guidelines

Question: One of our lenders is making a loan to a dentist and his son to purchase a house for his son. The loan officer wants to set up the loan as a commercial loan (the dentist is a commercial customer) secured by the house with an assignment of rents and leases (since the Dr. intended to rent to his son). The refinance was also secured by the dentist's home with $30,000 new money to pay off the mother for the down payment. Is the refinance subject to rescission?

Answer: While a variety of arguments can be made, we conclude that the loan is rescindable. First, the loan is not a commercial loan. It is for a consumer purpose. The father and son are purchasing a house in which the son will live. The fact that the father is an investor and that the son will pay rent does not overshadow the fact that the son is an obligor on the note (undermining the business loan idea) and the son will live in the house. The rent looks more like an internal family arrangement for payment of the loan on which the son is an obligor.

Second, although supported by business income, this loan is not consistent with the business. It is instead consistent with a consumer purpose, a father helping a son buy a house. To the extent that business receipts are pledged, the father is simply pledging his income.

Third, security is being taken in one of the borrower's primary residences - the father's home. This means that all consumers with an ownership interest in the home - presumably the father and the mother - have the right to rescind.

Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 1, 1/05