Rescission Rights on Collateral Swap

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Question:

Does the right to rescind apply when we are just "swapping properties"? We currently hold a 2nd mortgage on a property. That property is being sold and we would like to replace the mortgage with the new property, but not refinance the loan. Does Reg Z apply to this transaction? No new money is involved. Original lender.

Answer:

If the new property is the borrower's principal residence, the RofR will apply. Refer to the Commentary to Section 226.23(a)(1) #5:
The addition of a security interest in a consumer’s principal dwelling to an existing obligation is rescindable even if the existing obligation is not satisfied and replaced by a new obligation, and even if the existing obligation was previously exempt (because it was credit over $25,000 not secured by real property or a consumer’s principal dwelling). The right of rescission applies only to the added security interest, however, and not to the original obligation. In those situations only the notice need be delivered, not new material disclosures; the rescission period will begin to run from the delivery of the notice.

First published on BankersOnline.com 01/19/04