Right to Rescind a Refinance Loan

Last Updated: June 26, 2021 by Melanie Hanson

Federal law gives borrowers the right to a 3-day rescission period during which they may rescind or cancel their acceptance of a new student refinance loan.

What is Right to Rescind?

In simple terms, you, the borrower, have three (3) business days to cancel your student refinance loan even after you’ve signed the promissory note. This 3-day rescission period is a legal requirement, meaning lenders are obligated to observe the rescission period or risk federal investigation and fines.

The Right to Rescind is part of the Truth in Lending Act (TILA), specifically Regulation Z that regulates student loan credit and lenders, including refinance loans. The law applies in every U.S. state and territory, to all student refinance lenders and borrowers.

A rescission period may only begin if the borrower has:

  • Signed the credit contract or Promissory Note.
  • Received a Truth in Lending Disclosure.
  • Received the Notice of Right to Rescind.

Right to Rescind Notice

Refinance lenders must supply two (2) copies of a Notice of the Right to Rescind to each and every borrower or one copy to each if the notice is delivered in electronic form in accordance with the consumer consent and other applicable provisions of the E-Sign Act.

The Notice must be its own separate document and must clearly identify its corresponding transaction. The Notice must also conspicuously disclose several items, including:

  • The date the rescission period expires.
  • The effects of rescission, including any nonrefundable amounts and how termination will appear in the borrower’s credit report.
  • How the borrower may exercise the right to rescind, including a form for that purpose, as well as instructions for submission and the address for the creditor’s place of business.

How Long Do I Have the Right to Rescind?

The rescission period begins when the refinance lender delivers the legally required Notice of Rescission. This document must include the date the rescission period is set to expire.

Under TILA, the Right of Rescission gives you three (3) business days to cancel your student refinance loan. This rescission period ends at midnight on the third business day. You must submit your order for cancellation before midnight on the third business day after you have received the Notice of Right to Rescind.

Lenders are legally prohibited from disbursing any loan funds during the rescission period. If you do not receive a Truth in Lending disclosure or Notice of Right to Rescind, or if the documentation was incorrect, your right to rescind may extend for up to three years from the date of closing. Consult an attorney if you think this may apply to you.

How Do I Invoke My Right to Rescind?

Lenders are obligated to supply each borrower with a Notice of Right to Rescind. This Notice not only marks the onset of the rescission period but also includes instructions for cancellation.

If the lender does not supply a form or a form is otherwise unavailable, you may write a letter to the lender that explicitly cancels the loan. Keep a copy of the letter and any evidence that it was mailed or delivered on time.

Regulation Z

TILA is enforced by multiple regulating agencies, including the Federal Trade Commission, the U.S. Department of Treasury Office of the Comptroller of Currency, and the Consumer Financial Protection Agency.

Title XII or Title 12 regulates banks and banking under the United States Code of Federal Regulations. The Truth in Lending Act (TILA) is a federal regulation designed to protect consumers from predatory lenders and creditors. TILA applies to most forms of consumer credit, including student refinance loans. Despite this, consumer guides often give the impression that certain aspects of TILA – including Right to Rescind – apply only to home loans and mortgages.

Among TILA protections are laws prohibiting “inaccurate and unfair credit billing and credit card practices. It requires lenders to provide you with loan cost information so that you can comparison shop for certain types of loans.”[1]

State-Level Regulations

State laws regulating refinance lenders often reinforce or supplement federal laws. In some cases, a particular state law may be considered an interpretation of specific federal law.

Pennsylvania’s Unfair Trade Practices and Consumer Protection Law includes a Right to Rescind. The Virginia Consumer Protection Act of 1977 reinforces federal law while Texas legal codes contain multiple provisions for cancellation of consumer contracts. Your State Attorney General

Sources

  1. U.S. Department of the Treasury Office of the Comptroller of the Currency, Truth in Lending
  2. Federal Trade Commission, Truth in Lending Act
  3. Consumer Financial Protection Bureau, Title XII: Code of Federal Regulations Part 1026 Regulation Z (Truth in Lending) Subpart C – Closed-End Credit, Subsection 1026.23: Right of Recission
  4. Connecticut Judicial Branch Law Libraries, Connecticut Law About Three Day Rigth of Rescission for Certain Types of Consumer Contracts
  5. Office of the Attorney General of the Commonwealth of Pennsylvania, Your Right to Rescind
  6. Texas State Law Library, Cancellation of Consumer Contracts
  7. Virginia’s Legislative Information System, Code of Virginia