When originating a bridge loan secured by the borrower’s current principal dwelling and a new principal dwelling, when should the mortgages be recorded? Under Regulation Z, a bridge loan is subject to rescission when it is secured by the borrower’s current principal dwelling and the new dwelling being purchased. For example, if a loan closing is scheduled for June 14, the loan documents would have to be dated June 10 to ensure that the three-day rescission period has passed before we disburse the loan funds to purchase the new principal dwelling. But in that scenario, our loan origination system would produce a mortgage for the current dwelling and a mortgage for the new dwelling, each dated June 10. How can a borrower mortgage a property that they do not yet own?

May 7, 2019

—

A borrower cannot mortgage a property they do not own, because they cannot convey its title to a lender when they do not own the property.

We agree in this scenario that the promissory note and the mortgage on the current dwelling both should be dated and signed on June 10, to allow for the three-business-day right-of-rescission period to pass before your bank disburses the loan proceeds. However, the mortgage on the new dwelling should be dated and signed on June 14, which is when the borrower will acquire the new property. The mortgages on the current dwelling and the new dwelling both may be recorded after the loan proceeds have been disbursed and the transaction to acquire the new property has closed.

if you are not able to print these documents with the correct dates in your loan origination system, we recommend contacting your vendor for assistance.

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) (“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(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.”)

Regulation Z, 12 CFR 1026.23(c) (“Unless a consumer waives the right of rescission under paragraph (e) of this section, no money shall be disbursed other than in escrow, no services shall be performed and no materials delivered until the rescission period has expired and the creditor is reasonably satisfied that the consumer has not rescinded.”)