Paying Off Construction Loans and the Right of Rescission

Question:

We are financing a customer's real estate loan which will be paying off another institution. However, the loan we will be paying off is the initial construction loan for the home.Does rescission apply?

Answer:

No, the right of rescission would not apply to this situation.

The right of rescission does not apply to "residential mortgage transactions. See Reg Z 226.23(a), (f) and 226.2(a)(24). To generalize, a "residential mortgage transaction" is a purchase money transaction.

The key question is whether the loan you are making is a "residential mortgage transaction."You are not providing the construction financing, but you are providing the first permanent financing. Does this make your loan exempt from the rescission rules?

Vendor:

Bankers Systems Inc.