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Three-Day Cancellation Rule

You may be considering applying for a personal loan and using your home to guarantee repayment. You should know that a federal credit law gives you three days to:

  • Reconsider a signed credit agreement
  • Cancel the deal without penalty

Your "right of rescission" or "right to cancel" is guaranteed by the Truth In Lending Act. You can rescind for any reason but only if the collateral you're using is your principal residence. It can be a house, a condominium, a mobile home, or a houseboat as long as it's your primary residence. You cannot use a vacation home, second home, or a place of business for these purposes.

Under the right to rescind, you have until midnight of the third business day to cancel the credit transaction. Day one begins after all three of the following occur:

  • You sign the credit contract
  • You receive a Truth in Lending disclosure form containing certain key information about the credit contract, including the annual percentage rate; finance charge; amount financed; and payment schedule
  • You receive two copies of a Truth in Lending notice explaining your right to rescind

For rescission purposes, business days include Saturdays but not Sundays or legal public holidays. For example, if the events listed above take place on a Friday, you have until midnight on the next Tuesday to rescind.

The Waiting Period

During the waiting period, activity related to the contract cannot take place. The creditor may not deliver the money for the loan. If you're dealing with a home improvement loan, the contractor may not have any materials delivered or start working during this time.

If you decide to rescind, you must notify the creditor in writing. You may not rescind by telephone or in a face-to-face conversation with the creditor. Your written notice must be mailed, filed for telegraphic transmission, or delivered if by other written means, before midnight of the third business day.

Effect of Cancellation

If you cancel the contract within the three-day period, the security interest in your home is also canceled. You are not liable for any amount, including the finance charge. The creditor has 20 days to return all money or property you paid as part of the transaction and release any security interest in your home.

If you received money or property from the creditor, you may retain it until the creditor:

  • Shows that your home is no longer being used as collateral
  • Returns any money you have paid

Once those have occurred, you must offer to return the creditor's money or property. If the creditor does not claim the money or property within 20 days, you may keep it.

Waiver of Your Right to Cancellation

If you have a bona fide personal financial emergency such as damage to your home from a storm or other natural disaster, the law allows you to waive your right to rescind and eliminate the three-day period.

To waive your right, you must give the creditor your written statement describing the emergency and stating that you are waiving your right to rescind. The statement must be dated and signed by you and anyone else who shares ownership of the home. If you waive your right to rescind, you must go ahead with the transaction.

The right to rescind does not apply in all situations when you are using your home for collateral. Among the exceptions are:

  • When you apply for a loan to buy or build your principal residence
  • When you refinance your loan with the same creditor who holds your loan and you don't borrow any additional funds
  • When a state agency is the creditor for a loan

In these situations, you may have other cancellation rights under state law or local law. Your state attorney general may also extend cancellation rights protections to other kinds of sales.

The FTC’s Three-Day Cooling-off Rule

The Federal Trade Commission (FTC) has a three-day cooling-off period similar to the one above. It creates a three-day right to cancel certain agreements or sales. The FTC’s three-day right extends to certain types of sales made at:

  • Your house or place of business
  • A seller’s temporary locations, such as hotels, trade fares, or dining areas

For example, some businesses use sales tactics that involve door-to-door sales for home improvements or club memberships. These high-pressure home solicitation sales aren’t necessarily scams, but they often feature skilled and aggressive salespersons. If you cancel in time, you’ll be entitled to a full refund as long as the goods or services are mainly for personal, family, or household use.

Since the FTC’s cooling-off rule sounds too easy to be true, you might be wondering how it works. If you’ve changed your mind on a transaction, you don’t need to provide a reason. There are still responsibilities on your end. Things you'll need to do include:

  • Send a signed cancellation form or your own written notice of cancellation letter via certified mail within the time limit
  • Keep proof, such as receipts and other photographic documentation, for evidence that you mailed it out
  • Make sure your envelope is postmarked before midnight of the third business day after a sale

The Exceptions to the FTC Rule

The cooling-off rule doesn't cover every transaction. It doesn't apply if, at the time of the sale:

  • You paid less than $25 for the item at your home
  • You paid less than $130 for the item at a temporary location
  • The goods or services were for commercial use, or the sale was for insurance, securities, or real estate
  • The goods or services were bought entirely by phone, mail, or via the internet
  • The goods or services were purchased for an emergency
  • You had asked the seller to come to your house to fix or maintain your personal property

There are other state laws and federal laws that might protect you outside of the FTC rule. Knowing these protections can help you when there are issues.

Let’s say you have a construction loan issue not covered by the FTC. Lenders are beholden to borrowers in a myriad of other consumer protection laws in real estate.

The Home Equity Loan Consumer Protection Act of 1988, for example, amends the Truth in Lending Act to expand consumer protection. It prohibits nonrefundable fees that lenders might attempt to charge before the end of the three-day right to cancel.

Consult an Attorney

If you have questions about the various three-day cancellation rules, you may want to speak with a lawyer. A real estate attorney can give you advice about your right to cancel a loan contract. They can also represent you in court if someone has violated your cancellation rights.

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