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Right of Rescission-Loan Effective Date

Question: 
A borrower signs the Note and receives the rescission disclosure and all the other disclosures on the Note date. After the rescission period passes and the funds are disbursed, can the effective date of the loan that interest begins accruing be the Note date or the date the funds were actually disbursed?
Answer: 

by Randy Carey:

This is a State law issue on when interest can begin to accrue on the transaction and not a Federal issue. The only thing impacting the disclosures would be accounting for the proper accrual of interest during the rescission period.

Answer: 

by Richard Insley:

Reg. Z allows you to handle interest accruals any way you want...but it's not the only set of rules that might apply.

State laws control how and when interest is charged, so you must determine what (if anything) your state law says about this practice for loans to consumers.

If you sell loans of this type to investors, then you will be expected to comply with the investor's rules.

Now, back to Reg. Z. Even though the regulation leaves this business decision to the bank, you're still subject to an enforcement order (including reimbursement) if you misstate the FC or APR. If you decide to charge interest on the loan proceeds before they are advanced, the TIL calculations and disclosure must reflect the additional interest AND the delay in funding. Both of these practices affect the APR.

Finally, you must decide whether this practice is unethical, unfair, or deceptive in consumer transactions. My former employer considered it to be abusive to charge interest in a consumer loan before the funds were advanced. It's up to each bank to set its own ethical standard, but consumers do not expect the interest clock to start running until they receive the proceeds of a loan.

First published on 04/22/2018

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