If we did not provide a right of rescission notice to a borrower in connection with a consumer mortgage loan in which the borrower received some cash back at closing, would a refinancing to pay off that cash portion extinguish the borrower’s right of rescission on the original loan?

No, we do not believe that a refinancing of this loan would result in an expiration of the original rescission period (which would be three years if you failed to originally provide a right of rescission notice).

Under Regulation Z, if “the required notice and material disclosures are not delivered,” the borrower’s right to rescind expires three years after the transaction, “or upon transfer of all the consumer’s interest in the property, or upon sale of the property, whichever occurs first.” Neither the rule nor its official interpretations provide any other circumstance under which the three-year right of rescission may expire sooner.

As an aside, we note that if you are the original creditor for a closed-end loan that is secured by the borrower’s principal dwelling prior to a cash-out refinancing, the borrower’s right of rescission would apply only to the cash-out amount — defined as the amount exceeding the original loan’s unpaid principal balance, any unpaid finance charges on the existing debt, and amounts solely related to the costs of the cash-out refinancing.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.15(a)(3) (“If the required notice and material disclosures are not delivered, the right to rescind shall expire 3 years after the occurrence giving rise to the right of rescission, or upon transfer of all of the consumer's interest in the property, or upon sale of the property, whichever occurs first.”)

Regulation Z, Official Commentary, Paragraph 15(a)(3), Comment 4(i) (“When the creditor has failed to take the action necessary to start the three-day rescission period running the right to rescind automatically lapses on the occurrence of the earliest of the following three events:

A. The expiration of three years after the occurrence giving rise to the right of rescission.

B. Transfer of all the consumer's interest in the property.

C. Sale of the consumer's interest in the property, including a transaction in which the consumer sells the dwelling and takes back a purchase money note and mortgage or retains legal title through a device such as an installment sale contract.”)

Regulation Z, 12 CFR 1026.23(f)(2) (“The right to rescind does not apply to. . . . A refinancing or consolidation by the same creditor of an extension of credit already secured by the consumer’s principal dwelling. The right of rescission shall apply, however, to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing or consolidation.”)

Regulation Z, Official Interpretations, 12 CFR 1026, Paragraph 23(f)(2), Comment 4 (“If the refinancing involves a new advance of money, the amount of the new advance is rescindable. . . . For purposes of the right of rescission, a new advance does not include amounts attributed solely to the costs of the refinancing. These amounts would include § 1026.4(c)(7) charges (such as attorneys fees and title examination and insurance fees, if bona fide and reasonable in amount), as well as insurance premiums and other charges that are not finance charges. (Finance charges on the new transaction — points, for example — would not be considered in determining whether there is a new advance of money in a refinancing since finance charges are not part of the amount financed.)”)