Multiple Loans, Disclosures, and Rescission

Question: We are making two loans to a customer who is purchasing a new home. The first loan will be a purchase money mortgage. The second loan will be a home equity line of credit. The customer plans to draw on the full line amount at closing and use the proceeds as a bridge loan until the settlement on the house the customer is selling. What disclosures should we make on the home equity loan? Is it subject to rescission?

Answer: The home equity loan is a purchase money loan. It meets the definition of "residential mortgage transaction" ?226.2(a)(24) because the proceeds of the loan will be used to purchase the borrower's new primary dwelling. So the rules of disclosure triggered in ?226.19 apply. That means early disclosures three days after the date of application and corrected disclosures at closing. For the home equity line, you should give the program disclosures to the borrower at or before taking the application. Other disclosures would follow the open-end credit rules and the special rules for home equity lines of credit. The home equity loan is also subject to RESPA. However, because it is an open-end home equity line of credit, the booklet, GFE and HUD-1 disclosures are replaced by the Truth in Lending required disclosures for home equity lines.

Now for the fun part: rescission. Most home equity loans are subject to rescission because they involve taking a security interest in the consumer's primary dwelling. However, this particular home equity line is being used to purchase the dwelling. As such, it is not subject to rescission. Instead, it falls under the purchase money disclosure rules. Of course, you can always give the consumer the right to rescind if you would like, but chances are pretty good that the consumer wants the loan proceeds now! See Official Staff Commentary to Regulation Z, Paragraph 15(a)(1)-5 for a discussion of this issue.

Copyright © 2001 Compliance Action. Originally appeared in Compliance Action, Vol. 6, No. 5, 5/01