A consumer obtains a loan from a new creditor to purchase the consumer's principal dwelling, and the loan is secured by that dwelling. Does the federal three-business-day right of rescission generally apply?
Correct Answer
C) No, a residential mortgage transaction used to acquire the dwelling is generally exempt
Why this is correct: Under Regulation Z (TILA), the right of rescission generally applies to refinances and home equity loans but has a key exemption for 'residential mortgage transactions.' This term is defined to include loans used to finance the acquisition or initial construction of the borrower's principal dwelling. Why the other choices are wrong: 'Yes, because every principal-dwelling loan is rescindable' is wrong because the exemption for purchase loans exists. 'Yes, but only if the rate is fixed' is wrong; the right to rescind does not depend on whether the rate is fixed or adjustable. 'No, because purchase loans are never subject to Regulation Z' is wrong; purchase loans are subject to many Regulation Z requirements (like TRID disclosures), just generally not the right of rescission. Exam tip: Remember the rescission exemption: Purchase loans for a principal dwelling = no right to rescind. Refinances (unless also for a principal dwelling acquisition) = right to rescind applies.
Why This Is the Correct Answer
Why this is correct: Under Regulation Z (TILA), the right of rescission generally applies to refinances and home equity loans but has a key exemption for 'residential mortgage transactions.' This term is defined to include loans used to finance the acquisition or initial construction of the borrower's principal dwelling. Why the other choices are wrong: 'Yes, because every principal-dwelling loan is rescindable' is wrong because the exemption for purchase loans exists. 'Yes, but only if the rate is fixed' is wrong; the right to rescind does not depend on whether the rate is fixed or adjustable. 'No, because purchase loans are never subject to Regulation Z' is wrong; purchase loans are subject to many Regulation Z requirements (like TRID disclosures), just generally not the right of rescission. Exam tip: Remember the rescission exemption: Purchase loans for a principal dwelling = no right to rescind. Refinances (unless also for a principal dwelling acquisition) = right to rescind applies.
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