Let me preface this with the situation I am presenting has not occurred; it was something said by my Chief Lending Officer that sparked a question. I am new to the compliance world and am a grunt at my company so I can't correct my CLO or confirm what my CLO said without backup.

All that being said, during training, my CLO said if rescission is done wrong, the rescission period goes from 3 days to 3 years. In the case of a "mess Up" and they rescind in that 3 years, they get everything back except for the principle. My understanding was they got everything back, except for what was paid to a third party...unless modified by a court order.

I am sure this doesn't happen often and would possibly involve courts, but I really thought we had to give everything back…am I completely wrong? If we mess up, do we get to keep the principle?

Well, I would first clarify what the CLO meant. In general, his statement is correct. All interest and fees and required third party charges with be refundable from day one until the day of rescission and the borrower would in turn be responsible for paying off the remaining principal of the note.

Thank you; I was afraid I was reading the reg incorrectly.

There remains the (unlikely) possibility that the bank could sustain a 100% loss.

Section 1026.23(d) lays out a series of steps that begin the moment the creditor receives a borrower's notice of rescission.
1. the security interest giving rise to the right of rescission becomes void,
2. the lender must refund all fees and FCs to the consumer,
3. the lender must remove the deed of trust from the public record (and take any other action necessary to reflect the termination of the security interest),
4. IF the lender has completed steps 2 and 3 within 20 calendar days after receiving the borrower's rescission notice, the consumer must "tender the (principal) to the creditor",
5. if the creditor does not take possession of the money within 20 calendar days after the consumer's tender, the consumer may keep the money without further obligation.

Notice that the lender will sustain a 100% loss if it drags its feet in steps 4 or 5.