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Is This Transaction Rescindable?

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Does a right to rescind apply on a refinance of a construction loan with a new 1st and 2nd mortgage loan? The property has never been occupied.

If both loans meets the definition of a Residential Mortgage Transaction, no.

Section 226.2(a)

(24) Residential mortgage transaction means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in the consumer's principal dwelling to finance the acquisition or initial construction of that dwelling.

OSC Section 226.2(a)(24)

4. Construction financing. If a transaction meets the definition of a residential mortgage transaction and the creditor chooses to disclose it as several transactions under Section 226.17(c)(6), each one is considered to be a residential mortgage transaction, even if different creditors are involved. For example:

• The creditor makes a construction loan to finance the initial construction of the consumer's principal dwelling, and the loan will be disbursed in 5 advances. The creditor gives 6 sets of disclosures (5 for the construction phase and 1 for the permanent phase). Each one is a residential mortgage transaction.

• One creditor finances the initial construction of the consumer's principal dwelling and another creditor makes a loan to satisfy the construction loan and provide permanent financing. Both transactions are residential mortgage transactions.

OSC Section 226.23(f) Exempt transactions.

1. Residential mortgage transaction. Any transaction to construct or acquire a principal dwelling, whether considered real or personal property, is exempt. (See the commentary to Section 226.23(a).) For example, a credit transaction to acquire a mobile home or houseboat to be used as the consumer's principal dwelling would not be rescindable.

2. Lien status. The lien status of the mortgage is irrelevant for purposes of the exemption in Section 226.23(f); the fact that a loan has junior lien status does not by itself preclude application of this exemption. For example, a home buyer may assume the existing first mortgage and create a second mortgage to finance the balance of the purchase price. Such a transaction would not be rescindable.

First published on 10/03/05

First published on 10/03/2005

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