[Code of Federal Regulations]
[Title 12, Volume 3, Parts 220 to 299]
[Revised as of January 1, 2001]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR226.23]

[Page 248-251]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 226--TRUTH IN LENDING (REGULATION Z)--Table of Contents
 
                      Subpart C--Closed-End Credit
 
Sec. 226.23  Right of rescission.

    (a) Consumer's right to rescind. (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.\47\
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    \47\ For purposes of this section, the addition to an existing
obligation of a security interest in a consumer's principal dwelling is
a transaction. The right of rescission applies only to the addition of
the security interest and not the existing obligation. The creditor
shall deliver the notice required by paragraph (b) of this section but
need not deliver new material disclosures. Delivery of the required
notice shall begin the rescission period.
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    (2) To exercise the right to rescind, the consumer shall notify the
creditor of the rescission by mail, telegram or other means of written
communication. Notice is considered given when mailed, when filed for
telegraphic transmission or, if sent by other means, when delivered to
the creditor's designated place of business.
    (3) 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,\48\ whichever occurs last. If the required notice or
material disclosures

[[Page 249]]

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.
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    \48\ The term ``material disclosures'' means the required
disclosures of the annual percentage rate, the finance charge, the
amount financed, the total payments, the payment schedule, and the
disclosures and limitations referred to in Sec. 226.32 (c) and (d).
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    (4) When more than one consumer in a transaction has the right to
rescind, the exercise of the right by one consumer shall be effective as
to all consumers.
    (b)(1) Notice of right to rescind. In a transaction subject to
rescission, a creditor shall deliver 2 copies of the notice of the right
to rescind to each consumer entitled to rescind. The notice shall be on
a separate document that identifies the transaction and shall clearly
and conspicuously disclose the following:
    (i) The retention or acquisition of a security interest in the
consumer's principal dwelling.
    (ii) The consumer's right to rescind the transaction.
    (iii) How to exercise the right to rescind, with a form for that
purpose, designating the address of the creditor's place of business.
    (iv) The effects of rescission, as described in paragraph (d) of
this section.
    (v) The date the rescission period expires.
    (2) Proper form of notice. To satisfy the disclosure requirements of
paragraph (b)(1) of this section, the creditor shall provide the
appropriate model form in Appendix H of this part or a substantially
similar notice.
    (c) Delay of creditor's performance. 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.
    (d) Effects of rescission. (1) When a consumer rescinds a
transaction, the security interest giving rise to the right of
rescission becomes void and the consumer shall not be liable for any
amount, including any finance charge.
    (2) Within 20 calendar days after receipt of a notice of rescission,
the creditor shall return any money or property that has been given to
anyone in connection with the transaction and shall take any action
necessary to reflect the termination of the security interest.
    (3) If the creditor has delivered any money or property, the
consumer may retain possession until the creditor has met its obligation
under paragraph (d)(2) of this section. When the creditor has complied
with that paragraph, the consumer shall tender the money or property to the creditor or, where the latter would be impracticable or inequitable,
tender its reasonable value. At the consumer's option, tender of
property may be made at the location of the property or at the
consumer's residence. Tender of money must be made at the creditor's
designated place of business. If the creditor does not take possession
of the money or property within 20 calendar days after the consumer's
tender, the consumer may keep it without further obligation.
    (4) The procedures outlined in paragraphs (d) (2) and (3) of this
section may be modified by court order.
    (e) Consumer's waiver of right to rescind. (1) The consumer may
modify or waive the right to rescind if the consumer determines that the extension of credit is needed to meet a bona fide personal financial
emergency. To modify or waive the right, the consumer shall give the
creditor a dated written statement that describes the emergency,
specifically modifies or waives the right to rescind, and bears the
signature of all the consumers entitled to rescind. Printed forms for
this purpose are prohibited, except as provided in paragraph (e)(2) of
this section.
    (2) The need of the consumer to obtain funds immediately shall be
regarded as a bona fide personal financial emergency provided that the
dwelling securing the extension of credit is located in an area declared
during June through September 1993, pursuant to 42 U.S.C. 5170, to be a major disaster area because of severe storms and flooding in the
Midwest.\48a\ In this instance,

[[Page 250]]

creditors may use printed forms for the consumer to waive the right to
rescind. This exemption to paragraph (e)(1) of this section shall expire
one year from the date an area was declared a major disaster.
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    \48a\ A list of the affected areas will be maintained by the Board.
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    (3) The consumer's need to obtain funds immediately shall be
regarded as a bona fide personal financial emergency provided that the
dwelling securing the extension of credit is located in an area declared
during June through September 1994 to be a major disaster area, pursuant to 42 U.S.C. 5170, because of severe storms and flooding in the South.\48b\ In this instance, creditors may use printed forms for the consumer to waive the right to rescind. This exemption to paragraph (e)(1) of this section shall expire one year from the date an area was declared a major disaster.
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    \48b\ A list of the affected areas will be maintained and published
by the Board. Such areas now include parts of Alabama, Florida, and
Georgia.
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    (4) The consumer's need to obtain funds immediately shall be
regarded as a bona fide personal financial emergency provided that the
dwelling securing the extension of credit is located in an area declared
during October 1994 to be a major disaster area, pursuant to 42 U.S.C.
5170, because of severe storms and flooding in Texas.\48c\ In this
instance, creditors may use printed forms for the consumer to waive the right to rescind. This exemption to paragraph (e)(1) of this section
shall expire one year from the date an area was declared a major
disaster.
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    \48c\ A list of the affected areas will be maintained and published
by the Board. Such areas now include the following counties in Texas:
Angelina, Austin, Bastrop, Brazos, Brazoria, Burleson, Chambers,
Fayette, Fort Bend, Galveston, Grimes, Hardin, Harris, Houston, Jackson, Jasper, Jefferson, Lee, Liberty, Madison, Matagorda, Montgomery, Nacagdoches, Orange, Polk, San Augustine, San Jacinto, Shelby, Trinity, Victoria, Washington, Waller, Walker, and Wharton.
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    (f) Exempt transactions. The right to rescind does not apply to the
following:
    (1) A residential mortgage transaction.
    (2) 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.
    (3) A transaction in which a state agency is a creditor.
    (4) An advance, other than an initial advance, in a series of
advances or in a series of single-payment obligations that is treated as
a single transaction under Sec. 226.17(c)(6), if the notice required by
paragraph (b) of this section and all material disclosures have been
given to the consumer.
    (5) A renewal of optional insurance premiums that is not considered
a refinancing under Sec. 226.20(a)(5).
    (g) Tolerances for accuracy--(1) One-half of 1 percent tolerance.
Except as provided in paragraphs (g)(2) and (h)(2) of this section, the
finance charge and other disclosures affected by the finance charge
(such as the amount financed and the annual percentage rate) shall be
considered accurate for purposes of this section if the disclosed
finance charge:
    (i) is understated by no more than \1/2\ of 1 percent of the face
amount of the note or $100, whichever is greater; or
    (ii) is greater than the amount required to be disclosed.
    (2) One percent tolerance. In a refinancing of a residential
mortgage transaction with a new creditor (other than a transaction
covered by Sec. 226.32), if there is no new advance and no consolidation of existing loans, the finance charge and other disclosures affected by the finance charge (such as the amount financed and the annual percentage rate) shall be considered accurate for purposes of this section if the disclosed finance charge:
    (i) is understated by no more than 1 percent of the face amount of
the note or $100, whichever is greater; or
    (ii) is greater than the amount required to be disclosed.
    (h) Special rules for foreclosures--(1) Right to rescind. After the
initiation of foreclosure on the consumer's principal dwelling that
secures the credit obligation, the consumer shall have the right to
rescind the transaction if:

[[Page 251]]

    (i) A mortgage broker fee that should have been included in the
finance charge was not included; or
    (ii) The creditor did not provide the properly completed appropriate
model form in Appendix H of this part, or a substantially similar notice
of rescission.
    (2) Tolerance for disclosures. After the initiation of foreclosure
on the consumer's principal dwelling that secures the credit obligation,
the finance charge and other disclosures affected by the finance charge
(such as the amount financed and the annual percentage rate) shall be
considered accurate for purposes of this section if the disclosed
finance charge:
    (i) is understated by no more than $35; or
    (ii) is greater than the amount required to be disclosed.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 51 FR 45299, Dec. 18, 1986; 58 FR 40583, July 29, 1993; 59 FR 40204, Aug. 5, 1994; 59 FR 63715, Dec. 9, 1994; 60 FR 15471, Mar. 24, 1995; 61 FR 49247, Sept. 19, 1996]
 

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