Consumers have 3 days to rescind home equity loans

Credit organizations are constantly trying to convince consumers to borrow money against equity they have accumulated on their homes. Consumers, especially those experiencing financial difficulty, sometimes seize on these offers as a quick fix to their credit problems. Then, often after signing an agreement, they slap their head and say, “What have I done?”

If you’re considering applying for a personal loan and using your home to guarantee repayment, you should know that federal credit law gives you three days to reconsider a credit agreement and cancel the deal without penalty. Your “right to rescind or cancel” is guaranteed by the Truth In Lending Act. You can rescind for any reason but only if you are using your primary residence as collateral, whether it is a condominium, mobile home, or house boat. The law does not apply to a vacation or second home.

Under law, you have until midnight of the third business day to cancel. Day one begins after all three of the following occur: 1) you sign the credit contract; 2) you receive a Truth in Lending disclosure form containing information including the annual percentage rate, finance charge, amount financed, and payment schedule; and 3) you receive two copies of a Truth in Lending notice explaining your rights.

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

During this 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 deliver materials or start work.

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

If you cancel the contract, the security interest in your home is also cancelled, and 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 and returns any money you have paid. Then, 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.

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 own 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 in ownership of the home. But remember, 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 using your home for collateral. Among the exceptions: 1) when you apply for a loan to buy or build your principal residence; 2) when you refinance your loan with the same creditor who holds your loan and you don’t borrow any additional funds; or 3) when a state agency is the creditor for a loan.

Consumer Forum is a collaboration of the Bangor Daily News and Northeast COMBAT-Maine Center for the Public Interest, Maine’s membership-funded nonprofit consumer organization. Individual membership costs $25; business rates start at $125 (0-10 employees). For help and information write: Consumer Forum, Bangor Daily News, P.O. Box 1329, Bangor 04402-1329.