A creditor finances construction of a dwelling that the consumer will occupy as a principal dwelling when complete, and the loan is secured by that property. How is it treated for rescission purposes?
Correct Answer
A) As a residential mortgage transaction generally exempt from rescission when it finances initial construction
Why this is correct: A 'residential mortgage transaction' is defined to include financing to initially construct or acquire a dwelling that will be the consumer's principal dwelling. Regulation Z explicitly exempts residential mortgage transactions from the right of rescission. Therefore, a loan to finance the initial construction of a future principal dwelling, secured by that property, is generally exempt. Why the other choices are wrong: As an unsecured personal loan is wrong because the stem states the loan is secured by the property. As an automatically rescindable home-equity line is wrong; a HELOC is rescindable, but this is construction financing for a future principal dwelling, which is exempt. As a servicing transfer is wrong; a servicing transfer involves the administration of an existing loan, not the origination of new construction financing. Exam tip: Remember the phrase 'residential mortgage transaction'—it's the key to identifying loans exempt from rescission, like purchase or initial construction loans for a principal dwelling.
Why This Is the Correct Answer
Why this is correct: A 'residential mortgage transaction' is defined to include financing to initially construct or acquire a dwelling that will be the consumer's principal dwelling. Regulation Z explicitly exempts residential mortgage transactions from the right of rescission. Therefore, a loan to finance the initial construction of a future principal dwelling, secured by that property, is generally exempt. Why the other choices are wrong: As an unsecured personal loan is wrong because the stem states the loan is secured by the property. As an automatically rescindable home-equity line is wrong; a HELOC is rescindable, but this is construction financing for a future principal dwelling, which is exempt. As a servicing transfer is wrong; a servicing transfer involves the administration of an existing loan, not the origination of new construction financing. Exam tip: Remember the phrase 'residential mortgage transaction'—it's the key to identifying loans exempt from rescission, like purchase or initial construction loans for a principal dwelling.
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