Notice of the Right to Cancel (Right to Rescind)

Before Congress enacted TILA, consumers could not rescind a lending transaction without facing significant legal hurdles and attorneys’ fees. Under the common law, a borrower had to return any property that he or she obtained as a result of a lending agreement before the agreement could be considered void. Next, the borrower had to file an action to make the lender return any payments or earnest money and void any security interest in the borrower’s property. TILA eliminates each of these requirements for the rescission of a contract and simply requires that consumers provide notification of their rescission on a form provided by the lender.

Rescission is a legal remedy that voids a contract between two parties, restoring each to the position held prior to the transaction. No right to rescind exists for purchase money mortgages. Home Equity Lines of Credit or refinancing of credit already secured by the borrower’s principal dwelling are the types of loans that are subject to a right of rescission.

Creditors must provide the notice of right to rescind on a document that is separate from other TILA disclosures, and two copies of the notice to each party who has a right to rescind. The notice must “clearly and conspicuously” disclose the following:

• The creditor’s retention or acquisition of a security interest in the borrower’s principal dwelling
• The borrower’s right to rescind
• Instructions on how to exercise the right to rescind, including a form the borrower can use, stating the creditor’s business address

• The date that the right of rescission expires
• Disclosure outlining the effects of rescission for the consumer

Regulation Z includes model forms that creditors can use to ensure compliance with the requisite form and content of the notice. The regulations instruct creditors to use the model form “or a substantially similar notice.” Copies of the model where notices are included at the end of this section. The forms include a general notice form and a notice for use in refinances with the original creditor.