We recently received an interesting question about whether the right of rescission applies to the following scenario:
A bank received application to purchase a dwelling. The applicant currently lives in the dwelling as their primary residence but is renting it from a realtor. The applicant wants to secure financing to purchase the dwelling. Does the right of rescission apply?
Under the Truth in Lending Act (Regulation Z), the right of rescission does not apply to a “residential mortgage transaction”, which is:
…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. [§1026.2(a)(24)].
Essentially, the right of rescission does not apply to a loan to purchase a consumer’s principal dwelling and, therefore, would not apply to this scenario. The fact that the applicant already lives in the dwelling really doesn’t change anything because Regulation Z also says:
In a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind… [§1026.23(a)(1) and §1026.15(a)(1)].
In other words, a consumer is only entitled to the right of rescission if they have both an ownership interest in the dwelling AND the dwelling is their primary residence.
So, while the applicant does currently occupy the property as their primary residence, the rental agreement with the realtor does not provide them any ownership interest in the property. Again, the right of rescission would not apply.
Published
2025/05/08