VIDEO: Right of Rescission on Bridge Loans
In this Compliance Clip (video), Adam answers the question on whether or not a rescission is required on a bridge loan. Specifically, the question is about purchasing a new home that is secured by a current home, and if the right of rescission will apply.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about the right of rescission on bridge loans. This is a question that I actually received today at the time I'm recording this and the question I received over the years, quite a bit. So I figured I would share this with you as a Compliance Clip.
The question I received, specifically today, was this: Our borrower currently owns a home with a first mortgage. They're buying a new primary residence and the loan officer is doing a six-month interest only loan for the purchase. He's doing one loan, taking the first mortgage on the home being purchased and a second mortgage on the current home. The seller and title company are saying a rescission isn't necessary as this is a purchase transaction and Regulation Z specifically says that the borrower can only have one principal residence at a time, and the home that they're purchasing is that principal residence. That's the question we have. Basically, our question is, is rescission required on a bridge loan when they're purchasing a new home they're planning on living in within the next 12 months?
The answer to this, of course, comes from Regulation Z and from the commentary, more specifically the commentary. So let's look at Comment 3 to 1026.23(a)(1) of Regulation Z, which says this, “Principal dwelling. A consumer can only have one principal dwelling at a time. But see comments 23(a)(1-4).” It goes on, talking about there can only be one principal dwelling. And if there's a loan to purchase secured by the loan, the home to be moved into within the next, I believe it's 12 months, certain amount of time, then that is considered a purchase, even though they don't live in it today, but they plan to live in it over a short period of time.
But Comment 3 specifically talks about a single home as collateral. The home being purchased. Comment 4 talks about two homes as collateral. It's a little bit different because Comment 4 specifically talks about when you're building a home. So let's take a look at this. It's not to purchase an existing home, but to build a home. Comment 4 says this. Special rule for principal dwelling. Notwithstanding the general rule that consumers may only have one principal dwelling, which was discussed at Comment 3, Comment 4 says when the consumer is acquiring or constructing a new principal dwelling, any loan subject to Regulation Z and secured by the equity and the consumer's current principal dwelling, for example, a bridge loan, is subject to the right of rescission, regardless of the purpose of that loan. So in this case, they're saying even if it's considered a purchase, because they're building a new dwelling, then it still needs the right of rescission because you are taking an equity interest in their existing home that they live in.
They give an example. They say, for example, if a consumer whose principal dwelling is currently A builds dwelling B to be occupied by the consumer upon completion of construction, a construction loan to finance B, the new home, and secured by A, the current home, is subject to the right of rescission. A loan secured by both A and B is likewise rescindable. That last sentence, a loan is secured by both A and B is likewise rescindable.
For our question in purchasing an existing home that is secured by a prior home, you've got a loan that's secured by both A and B, it is likewise rescindable. The bottom line is anytime you're taking equity interest in somebody's current home, then it needs to be rescindable. So rescission would apply in this case.
That is all I have for you for this Compliance Clip.