Right of Rescission: The money has been disbursed and the customer wants out. Now what?

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Question:

If a bank provides a right of rescission but disburses a loan before the 3-day cooling off period ends, what are the consequences to the bank if the customer then rescinds within the 3-day cooling off period (after disbursement and assuming no special emergency waiver)? Does this represent the cancellation of the contract itself or just the cancellation of the security interest? If the contract is still valid, though unsecured, can the bank charge interest on the loan while trying to collect? (Basically, what is the bank's legal recourse in regards to the improper disbursement?) Also, what are the possible regulatory penalties for such a violation?

Answer:

Refer to section 226.23(d) concerning the Effects of Rescission.
Right of rescission.
(d) Effects of rescission. (1) When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void and the consumer shall not beliable for any amount, including any finance charge.

(2) Within 20 calendar days after receipt of a notice of rescission, the creditor shall return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest.

(3) If the creditor has delivered any money or property, the consumer may retain possession until the creditor has met its obligation under paragraph (d)(2) of this section. When the creditor has complied with that paragraph, the consumer shall tender the money or property to the creditor or, where the latter would be impracticable or inequitable, tender its reasonable value. At the consumer’s option, tender of property may be made at the location of the property or at the consumer’s residence. Tender of money must be made at the creditor’s designated place of business. If the creditor does not take possession of the moneyor property within 20 calendar days after the consumer’s tender, the consumer may keep it without further obligation.

First published on BankersOnline.com 7/15/02