What is the Three Day Cancellation Rule?
This federal rule gives you three business days, including Saturdays, but NOT Sundays, to reconsider a signed credit agreement that is secured by your primary residence and allows you to cancel the agreement without penalty or penalty. The Three-Day Cancellation Rule applies to many home equity loans (and also applies to home equity lines of credit, see below).
You can cancel for any reason, but only if you are using your primary residence as collateral. It can be a house, condominium, a mobile home or a boat that you use as a home. The right to cancel does not apply to a vacation home or a secondary residence.
Under the Rule, how much time do I have to cancel?
You have until midnight on the third business day to pay off your loan. The first day starts running after all three of the following events occur:
- You sign the loan at closing.
- You receive an information form required by the Truth in Lending Operations Act that contains key information about the credit agreement, including the APR rate, finance charge, amount financed and payment schedule.
- You receive two copies of a Truth in Lending Act Notice explaining your right to cancel.
If you did not receive the information form or two copies of the notice, or if the information document or notice contained errors, you have up to three years to cancel.
How do I determine the third business day?
You can receive the information document and the two copies of the notice of your right to cancel at the closing of the loan transaction. In that case, the first day starts counting from the closing. But if you receive the information form and both copies of the notice before or after the closing, the first day begins when the last of the three events occurred. For example, the closing occurs on a Friday, and that was the last event, you have time to cancel until the following Tuesday at midnight. But if you received the Truth in Lending Act information form on a Tuesday and you signed for the loan on a Friday, but you did not receive the two copies of the notice of your right to cancel until Saturday, then you have time to cancel until midnight of the following Wednesday.
During this three-day waiting period, the lender cannot take any action related to the loan directly or through another person. The lender cannot deliver the loan money (it can only do so to an escrow account), nor start providing services. If it is a home improvement loan, the contractor cannot deliver any materials or start work. The lender may start charging finance charges during the waiting period.
What steps should I take if I want to cancel?
You must tell the provider in writing that you want to cancel:
- You must deliver or mail your written notice before midnight of the third business day .
- You cannot cancel over the phone or in person with the lender.
Will I owe anything on the contract if I cancel it during the three-day waiting period?
If you cancel the contract, the lender’s title or lien on your property is also cancelled, your home is no longer collateral and cannot be used to pay the lender. You do not have to pay anything, and you should be reimbursed for any amounts you would have paid, including the finance charge and any other fees, such as application, appraisal, or title search fees, whether you paid them to the lender or to another company that was part of the credit transaction. After receiving your notice of cancellation, the lender has a period of 20 days to return all the money or goods that you had given him as payment as part of the transaction and to release any property or pledge interest in your house as warranty; and must do both
If you received money or property from the lender, you can keep it until the lender proves your home is no longer used as collateral and returns any money you paid. Then you must offer to return the lender’s money or property. If the lender doesn’t claim the money or property within 20 days, you can keep it.
Under the Rule, can I waive my right to cancel the contract?
If you have a personal financial emergency, such as home damage from a storm or other natural disaster, you can waive your right to cancel. That waiver eliminates the three-day waiting period so you can get the money sooner. To waive your right:
- You must send the provider a written statement describing the emergency and stating that you waive your right to cancel.
- The statement must be dated and signed by you and anyone else who shares ownership of the home.
Your right of cancellation gives you a little more time to think about putting up your home as collateral and can help you avoid losing your home to foreclosure. If you have a personal financial emergency, you can waive this right, but before you waive, make sure it’s really what you want to do.
Are there exceptions to the Three Day Cancellation Rule?
Yes, the federal rule does not apply in all situations where you use your home as collateral. Exceptions apply when:
- Apply for a loan to initially purchase or build your primary residence.
- You refinance your loan with the same lender and you don’t borrow any additional funds (but if you borrow more funds, the rule applies and you can cancel).
- The provider is a state agency.
In these situations, you may have other cancellation rights under state or local law.
