Compliance Blog

So, your credit union just opened up a HELOC for a member and now they want to rescind. What happened to no takebacks? Well, under Regulation Z a consumer has the right to rescind a HELOC. So, what is this right to rescind and what requirements does your credit union have to meet under Regulation Z?

The Right

Regulation Z, section 1026.15(a) provides a right to rescind an open-end credit plan where the consumer grants a security interest in their “principal” dwelling. Section 1026.15 grants the consumer the right to rescind under the following occurrences:

1.       Opening a plan;

2.       Each extension of credit;

3.       An increase in the credit limit;

4.       Adding a security interest in the consumer’s “principal” dwelling to an existing account; and

5.       Increasing the dollar amount of a security interest.

In order to exercise this right, a consumer must notify the credit union by “mail, telegram, or other means of written communication.” Credit unions should note that there is a time limit for the consumer to provide notification that they are exercising their right of rescission. Section 1026.15(a)(3) provides that a consumer must exercise their right before midnight of the third business day following the latter of:

1.       The event that gave rise to the right of rescission (as discussed above);

2.        The credit union’s delivery of notice of the consumer’s right to rescind; or

3.       The delivery of all material disclosures.

The commentary provides the following example:

“For example, an account is opened on Friday, June 1, and the disclosures and notice of the right to rescind were given on Thursday, May 31; the rescission period will expire at midnight of the third business day after June 1 - that is, Tuesday June 5.”

Credit unions should be careful, as failure to deliver the notice of a consumer’s right to rescind and the material disclosures extends the consumer’s right to rescind by three years. Section 1026.15(a)(3) defines material disclosures as information required by section 1026.6 that deals with determining the finance charge and the balance subject to the finance charge, the APR, membership or participation fees, and payment information described under section 1026.40(d)(5)(i) and (ii).

The Notice

Section 1026.15(b) discusses a credit union’s notification requirements to the consumer. Under the section, a credit union must deliver two copies of the notice of the right to rescind to every consumer that has the right to rescind the transaction. If the credit union is delivering the notices electronically, pursuant to the E-Sign Act, the credit union is only required to provide one copy of the notice. The notice must identify the transaction/occurrence giving rise to the right to rescind and must disclose:

1.       The security interest in the consumer’s “principal” dwelling;

2.       That the consumer has the right to rescind;

3.       An explanation of how the consumer can exercise their right to rescind along with a form for that purpose that designates the credit union’s address;

4.       The effect of rescinding the transaction; and

5.       The date that the rescission period expires.

For model notices, credit unions can review sample forms G-5 through G-9 in Appendix G to Regulation Z.

During the rescission period

Under section 1026.15(c), until the rescission period has ended, credit unions may not disburse funds, perform services or deliver materials. Credit unions may want to note that a consumer may waive the rescission period under section 1026.15(e) if the extension of credit is required to meet a “bona fide personal financial emergency.” However, credit unions may want to note that the waiver is limited in scope and according to the commentary, “[t]he existence of the consumer's waiver will not, of itself, automatically insulate the creditor from liability for failing to provide the right of rescission.”

Effect of Rescission

Section 1026.15(d) discusses the effects of rescission. First, any security interest that gave rise to the right of rescission becomes void and the consumer is not liable for any amount (including any finance charge). Credit unions should note that the security interest is void to the extent that it is related to the occurrence that gave rise to the right of rescission. The commentary provides the following examples:

“i. If the consumer's right to rescind is activated by the opening of a plan, any security interest in the principal dwelling is void.

ii. If the right arises due to an increase in the credit limit, the security interest is void as to the amount of credit extensions over the prior limit, but the security interest in amounts up to the original credit limit is unaffected.

iii. If the right arises with each individual credit extension, then the interest is void as to that extension, and other extensions are unaffected.”

Second, within 20 days of receipt of a consumer’s notice of rescission, the credit union is required to return any money/property given to anyone in connection with the transaction and shall take action to reflect the termination of the security interest. Third and finally, the consumer may retain possession of any money or property delivered by the creditor until the creditor has returned all money/property to the consumer.

Credit union’s should note that this blog is merely an overview of a consumer’s right to rescind. For more information, credit unions should refer to Section 1026.15 and its commentary. Furthermore, NAFCU members may also contact compliance@nafcu.org for any compliance related questions.