# What Is the Right of Rescission and How Do You Exercise It?

## What Is the Right of Rescission?

The right of rescission is a legal right outlined in the federal [Truth in Lending Act (TILA)](https://www.investopedia.com/terms/t/tila.asp) that allows a borrower to cancel (or rescind) certain types of home loans within three days of closing on the loan. This right is provided on a no-questions-asked basis, and the lender must give up its claim to the property and refund all fees within 20 days of the borrower exercising their right of rescission.

### Key Takeaways

*   Established by the federal Truth in Lending Act (TILA), the right of rescission allows a borrower to cancel certain types of home loans within three days of closing.
*   The right of rescission is provided on a no-questions-asked basis.
*   The lender must give up its claim to the property and refund all fees within 20 days of the borrower exercising the right of rescission.
*   Lenders must give borrowers a notice advising them of their right to rescind as part of the loan process.
*   Borrowers who wish to exercise their right to rescind must provide the lender with written notice within the three-day window.

## Understanding the Right of Rescission

The TILA, enacted in 1968 and amended over the years, is intended to curtail unfair and deceptive credit billing and credit card practices. Among other things, it requires lenders to provide borrowers with relevant information about home loans and [the right to cancel them](https://www.investopedia.com/cancel-home-equity-loan-5270342) in some instances. The right of rescission was created to protect consumers from unscrupulous lenders, giving borrowers at least a brief cooling-off period and time to change their minds.

Not all loan transactions come with the right of rescission. It applies only to loans that use the person's existing home as collateral, including certain [home equity loans](https://www.investopedia.com/terms/h/homeequityloan.asp), [home equity lines of credit (HELOCs)](https://www.investopedia.com/home-equity-line-of-credit-heloc-definition-5217473), [reverse mortgages](https://www.investopedia.com/mortgage/reverse-mortgage/), and [refinances](https://www.investopedia.com/terms/r/refinance.asp) of mortgages. It does not apply to mortgages used to buy or build a home or to purchase a second home or an [investment property](https://www.investopedia.com/terms/i/investment-property.asp).

In addition, the right does not apply if you are [refinancing your mortgage](https://www.investopedia.com/best-mortgage-refinance-companies-5092956) with the same lender and aren't borrowing additional money as part of the refinance. Nor does it apply if your lender is a state agency. However, the Federal Trade Commission (FTC) says, "You may have other cancellation rights under state or local law."

An eligible home can include a house, condominium, mobile home, or houseboat.

## How the Three-Day Cancellation Rule Works

The provision in the law allowing borrowers three days to change their mind and back out of a loan contract is known as the [three-day cancellation rule](https://www.investopedia.com/three-day-cancellation-rule-5225911).

Specifically, the rule allows borrowers three business days, including Saturdays but not Sundays, to cancel the contract without penalty and for any reason. 

The clock starts ticking only after you have signed the loan contract at closing, received a Truth in Lending disclosure form from the lender, and also received two copies of a Truth in Lending notice explaining your right to cancel. According to the FTC, "If you didn't get the disclosure form or the two copies of the notice—or if the disclosure or notice was incorrect—you may have up to three years to cancel."

Otherwise, once all three of those things have happened, you have until midnight of the third business day to cancel.

> **Important**
>
> When buying a home with a mortgage loan, you don't have a right to cancel the mortgage once the closing documents have been signed. However, with refinancing a mortgage, you have until midnight of the third business day after the transaction to cancel or rescind the mortgage contract.

## How to Exercise the Right of Rescission

As mentioned, the lender is required to provide you with a notice explaining your right to cancel and how to go about it.

Basically, you must mail or deliver a written notice to the lender that you are exercising your right to rescission and cancelling the loan. The law, written decades ago, also allows for delivery by telegram. You cannot cancel by other means, such as a phone call or in-person conversation with the lender.

As the law explains, "Notice is considered given when mailed, when filed for telegraphic transmission or, if sent by other means, when delivered to the creditor's designated place of business."

## How Long Is the Right of Rescission?

The right of rescission lasts for just three business days, starting from the point that all of the following have occurred:

*   You have signed the mortgage contract.
*   You have received from the lender the Truth in Lending Act (TILA) disclosure that provides key information about the terms of the loan.
*   You have also received two copies of a TILA notice explaining your right to rescind the contract.

## What Happens if I Don't Receive the TILA Disclosure or the Notice of My Right to Rescind?

If you can prove that you never received these documents or that they contain inaccurate information, then the three-business-day cooling-off period could be extended for up to three years.

## How Do I Cancel My Loan Agreement?

The right of rescission procedure should be explained in the paperwork the lender must provide you as part of the loan process. Generally, you will need to indicate your intention to cancel the loan in writing and send it to the lender before the deadline passes.

## Does the Truth in Lending Act Apply to Auto Loans?

The Truth in Lending Act doesn't provide a right to rescission for auto loans. It does, however, require lenders to provide borrowers with certain information regarding the terms of the loan before they sign, such as the annual percentage rate (APR) and other costs and fees, the amount of the monthly payment, and the total projected cost over the life of the loan.

## What Is the Cooling-Off Rule?

The cooling-off rule is an FTC rule that applies to certain types of purchases but not to real estate, vehicles, or many other things. In applicable situations, sellers are required to explain your right to cancel and to provide you with forms for that purpose. As with the right of rescission, the cooling-off period is three days.

## The Bottom Line

The right of rescission allows consumers a brief period of time to cancel certain types of home loans if they change their mind. If you are planning to sign a loan contract and have any doubts about whether you will want to proceed with the arrangement, it's a good idea to find out beforehand whether the right of rescission applies.

> **Article Sources**
>
> 1.  Code of Federal Regulations. "[12 CFR §1026.23 Right of Rescission.](https://www.ecfr.gov/cgi-bin/text-idx?SID=9c627c83aaf95474141f674c635b9c9d&mc=true&node=se12.9.1026_123&rgn=div8)"
>     
> 2.  Consumer Financial Protection Bureau. "[Truth in Lending Act](https://files.consumerfinance.gov/f/201503_cfpb_truth-in-lending-act.pdf)," Page 6.
>     
> 3.  Consumer Financial Protection Bureau. "[What Is a Reverse Mortgage?](https://www.consumerfinance.gov/ask-cfpb/what-is-a-reverse-mortgage-en-224/)"
>     
> 4.  Federal Trade Commission, Consumer Advice. "[Home Equity Loans and Home Equity Lines of Credit](https://consumer.ftc.gov/articles/home-equity-loans-home-equity-lines-credit)."
>     
> 5.  Consumer Financial Protection Bureau (CFPB). "[How long do I have to rescind? When does the right of rescission start?](https://www.consumerfinance.gov/ask-cfpb/how-long-do-i-have-to-rescind-when-does-the-right-of-rescission-start-en-187/)"
>     
> 6.  Consumer Financial Protection Bureau. "[What Is a Truth-in-Lending Disclosure for an Auto Loan?](https://www.consumerfinance.gov/ask-cfpb/what-is-a-truth-in-lending-disclosure-for-an-auto-loan-en-787/)"
>     
> 7.  Federal Trade Commission Consumer Advice. "[Buyer's Remorse: The FTC's Cooling-Off Rule May Help](https://consumer.ftc.gov/articles/buyers-remorse-ftcs-cooling-rule-may-help)."