We extended a purchase money bridge loan secured by the borrower’s current dwelling and the new dwelling being acquired. The promissory note and mortgage on the current dwelling were signed and dated three days before we disbursed the loan proceeds to allow for the three-business-day right-of-rescission (ROR) period to pass. The mortgage on the new dwelling was signed and dated on the date of disbursement, when the borrower acquired the new dwelling. However, our auditors told us the ROR documents were invalid since the borrower was not provided with the mortgage on the new dwelling to sign and date three days before the closing, as the borrower must review all documents related to the transaction three days before the purchase closing. If the auditors are correct, how can these types of mortgage transactions be properly executed?

Sep 20, 2021

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We do not believe the right of rescission requirements in Regulation Z require you to provide and have the borrower sign “all documents related to the transaction” three days before the closing or that the failure to have the borrower sign the mortgage on the new dwelling three days before the closing invalidated your ROR notice.

First, we believe that a mortgage signed before the purchase closing would be invalid. It is well-established that a borrower cannot mortgage a property they do not own, because they can only grant a lien on the interest they hold in a property. Since the borrower did not own the new dwelling three days before the closing, it would not have been appropriate for them to sign the mortgage on the new dwelling at that time.

Second, we do not believe that an ROR notice would be invalid because you did not provide the mortgage three days before the purchase closing. Under Regulation Z, a loan transaction secured by both the borrower’s current and future principal dwellings is rescindable, and the borrower may exercise their right to rescind until midnight of the third business day following: (1) consummation, (2) delivery of the ROR notice, or (3) delivery of all material disclosures — whichever occurs last.

Under Regulation Z, “material disclosures” include the annual percentage rate, finance charge, amount financed, total of payment, payment schedule, and the disclosures and limitations required for high-cost mortgages as well as any prepayment penalties. We do not believe that the mortgage on the new dwelling by itself was a material disclosure, unless it was the sole source of any of the information considered a “material disclosure.” We do recommend reviewing the Closing Disclosure and other disclosures provided when the borrower signed the promissory note and mortgage on the current dwelling to confirm that you included all of the material disclosures required by Regulation Z.

Additionally, we believe “consummation” occurred in this case when the borrower signed the note and mortgage on their current dwelling, since Regulation Z defines “consummation” as “the time a consumer becomes contractually obligated on a credit transaction” (and “not, for example, when the consumer becomes contractually obligated to a seller on a real estate transaction”). Assuming that you provided all of the required material disclosures with the Closing Disclosure and other disclosures provided when the borrower signed the promissory note and mortgage on the current dwelling, we believe the borrower’s right to rescind expired at midnight before the date of disbursement.

For resources related to our guidance, please see:

In re Wirth, 355 B.R. 60, 62–63 (N.D. Ill. 2005) (“It is well-established that a mortgagor may grant a lien only on the interest he holds in property. See, e.g., Klein v. DeVries, 309 Ill.App.3d 271, 273, 243 Ill.Dec. 18, 722 N.E.2d 784, 787 (2d Dist.1999) (‘In general, a mortgagee can have no greater rights than his mortgagor.’)”)

Regulation Z, 12 CFR 1026.23(a)(1) (“In a credit transaction in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section. . . .”)

Regulation Z, Official Interpretations, Paragraph 23(a)(1), Comment 4 (“Special rule for principal dwelling. Notwithstanding the general rule that consumers may have only one principal dwelling, when the consumer is acquiring or constructing a new principal dwelling, any loan subject to Regulation Z and secured by the equity in 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. For example, if a consumer whose principal dwelling is currently A builds B, to be occupied by the consumer upon completion of construction, a construction loan to finance B and secured by A is subject to the right of rescission. A loan secured by both A and B is, likewise, rescindable.”)

Regulation Z, 12 CFR 1026.23(b)(1) (“In a transaction subject to rescission, a creditor shall deliver two copies of the notice of the right to rescind to each consumer entitled to rescind (one copy to each if the notice is delivered in electronic form in accordance with the consumer consent and other applicable provisions of the E-Sign Act). The notice shall be on a separate document that identifies the transaction and shall clearly and conspicuously disclose the following . . .”)

Regulation Z, 12 CFR 1026.23(a)(3)(i) (“The consumer may exercise the right to rescind until midnight of the third business day following consummation, delivery of the notice required by paragraph (b) of this section, or delivery of all material disclosures, whichever occurs last. If the required notice or material disclosures are not delivered, the right to rescind shall expire 3 years after consummation, upon transfer of all of the consumer’s interest in the property, or upon sale of the property, whichever occurs first. In the case of certain administrative proceedings, the rescission period shall be extended in accordance with section 125(f) of the Act.”)

Regulation Z, 12 CFR 1026.2(a)(13) (“Consummation means the time that a consumer becomes contractually obligated on a credit transaction.”)

Regulation Z, Official Interpretations, Paragraph 2(a)(13), Comment 1 (“When a contractual obligation on the consumer’s part is created is a matter to be determined under applicable law; Regulation Z does not make this determination. A contractual commitment agreement, for example, that under applicable law binds the consumer to the credit terms would be consummation. Consummation, however, does not occur merely because the consumer has made some financial investment in the transaction (for example, by paying a nonrefundable fee) unless, of course, applicable law holds otherwise.”)

CFPB, TILA-RESPA Integrated Disclosure Rule: Small Entity Compliance Guide, Section 10.2, page 75 (May 2018) (“The rule requires creditors to provide the Closing Disclosure three business days before consummation. Is ‘consummation’ the same thing as closing or settlement? . . . No, consummation may commonly occur at the same time as closing or settlement, but it is a legally distinct event. Consummation occurs when the consumer becomes contractually obligated to the creditor on the loan, not, for example, when the consumer becomes contractually obligated to a seller on a real estate transaction.”)

Regulation Z, 12 CFR 1026.23(a)(3)(ii) (“For purposes of this paragraph (a)(3), the term ‘material disclosures’ means the required disclosures of the annual percentage rate, the finance charge, the amount financed, the total of payments, the payment schedule, and the disclosures and limitations referred to in §§ 1026.32(c) and (d) and 1026.43(g).”)

Regulation Z, 12 CFR 1026.32(c) (“In addition to other disclosures required by this part, in a mortgage subject to this section, the creditor shall disclose the following in conspicuous type size: (1) Notices . . . (2) Annual percentage rate . . . (3) Regular payment; minimum periodic payment example; balloon payment . . . (4) Variable-rate . . . (5) Amount borrowed; credit limit.”)

Regulation Z, 12 CFR 1026.32(d) (“A high-cost mortgage shall not include the following terms: (1) (i) Balloon payment . . . (2) Negative amortization . . . (3) Advance payments . . . (4) Increased interest rate . . . Rebates . . . Prepayment penalties . . . (8) Acceleration of debt . . .”)

Regulation Z, 12 CFR 1026.43(g) (“Prepayment penalties . . .”)

Regulation Z, Official Interpretations, Paragraph 23(a)(3), Comment 2 (“Section 1026.23(a)(3)(ii) sets forth the material disclosures that must be provided before the rescission period can begin to run. Failure to provide information regarding the annual percentage rate also includes failure to inform the consumer of the existence of a variable rate feature. Failure to give the other required disclosures does not prevent the running of the rescission period, although that failure may result in civil liability or administrative sanctions.”)