What Is the Three-Day Cancellation Rule?

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DEFINITION

The three-day cancellation rule is a federal law that allows borrowers to cancel certain signed credit agreements that use the borrower’s primary home as collateral. The rule allows eligible contracts to be canceled within three business days for any reason without a financial penalty.

Definition and Example of the Three-Day Cancellation Rule

The three-day cancellation rule is a federal consumer protection law within the Truth in Lending Act (TILA). It gives borrowers three business days, including Saturdays, to rethink their decision and back out of a signed agreement without paying penalties.

However, the three-day cancellation rule does not apply to all signed contracts. It allows you to cancel only agreements that use your principal residence as collateral. This main home can be a house, condominium, mobile home, or houseboat. The three-day rule doesn’t apply to vacation or second homes.

Using your home as collateral means the lender can claim or even sell your property to collect money owed if you can’t repay the loan.

Typically, the three-day cancellation rule applies to agreements such as home equity loans, home equity lines of credit (HELOC), refinancing agreements, and some reverse mortgages.

For example, the three-day cancellation rule might come in handy if you took out a home equity loan on Monday, but had second thoughts. Due to the cancellation rule, you would have until midnight on Thursday to cancel the deal without further obligations or penalties.

How the Three-Day Cancellation Rule Works

The three-day cancellation rule provides you with a bit of legal wiggle room to change your mind for any reason after signing a contract for a loan that uses your home as collateral. As long as you notify the lender within the appropriate time frame, you won’t pay any penalty.

The three-day cancellation rule is designed to protect consumers from high-pressure sales tactics that may be used by unscrupulous lenders. Generally, you have until midnight of the third business day to cancel the deal without facing a financial penalty. In this case, Saturdays count as business days, but Sundays and legal public holidays do not. The clock officially starts ticking once three events have occurred:

  • You sign the loan agreement at closing.
  • You receive a Truth in Lending disclosure form that provides the details of the contract, including the APR, finance charges, amount being financed, and the repayment schedule.
  • You receive two copies of the TILA notice that explains your right to cancel.

Day One starts on the first business day after the last of the three events is complete. Let’s say you receive the disclosure form and two copies of the right to cancel immediately after signing your contract on Friday. In that case, Day One is Saturday, and you have until midnight on Tuesday to cancel without penalty. However, say you receive your TILA form on Thursday and close on Friday, but you don’t receive your two copies of the right to cancel notice until Saturday. In that case, Day One is Monday, and you have until midnight on Wednesday to cancel.

If you do not receive the disclosure form or two copies of the TILA notice, or if any of those documents are incorrect, your time to cancel could be extended up to three years. The Consumer Financial Protection Bureau recommends contacting a lawyer if you think this might apply to you.

During the three-day period, the lender cannot take any action on the loan either directly or through another person. For example, if you applied for a home improvement loan, the lender can’t provide you with the loan amount, and the contractor can’t deliver materials or begin work. The loan can start accruing finance charges, but if you rescind your agreement within three days, you will be refunded any money you paid, including fees for the application, appraisal, and title search. In other words, you will not lose any money if you rescind within three days.

Before using your home as collateral for a loan, speak with an attorney, financial advisor, or someone you trust to help you make decisions and reduce your borrowing risks.

Three-Day Cancellation Rule vs. Cooling-Off Rule

Some people may use the three-day cancellation rule interchangeably with the “cooling-off” rule, and while the two rules share similarities, they also have important differences.

Three-Day Cancellation Rule Cooling-Off Rule
What it is Federal consumer protection law Federal consumer protection law
Applies to Loans that use your primary residence as collateral Certain sales made in your home, workplace, or temporary location
Excludes Vacation or second homes Sales under $25 made at your home; sales under $130 made at temporary locations; online or telephone sales; sales involving real estate, securities, insurance, and more
Time to cancel 3 days 3 days

How To Cancel a Contract Under the Three-Day Rule

If you decide you want to cancel a signed contract under the three-day cancellation rule, you must:

  • Inform the lender in writing of your desire to cancel
  • Deliver or mail your written notice before midnight on the third business day
  • Understand that you can’t cancel an agreement during a conversation over the phone or in person

If you cancel the loan in time, your home is no longer considered collateral and you don’t owe the lender any money. After receiving your written cancellation notice, the lender has 20 days to refund any fees you paid as part of the transaction and release your property as collateral. If you received any money or property from the lender, you may keep it until the lender returns all fees and shows proof that your home is no longer being used as collateral.

Exceptions to the Three-Day Cancellation Rule

Even when you use your primary home as collateral, there are a few situations in which the Three-Day Cancellation Rule may not apply, including if you:

  • Apply for a home loan to either buy or build your primary residence
  • Refinance your mortgage through the lender that holds your current home loan, and you don’t borrow any additional money; however, if you borrow additional money while refinancing, the three-day cancellation rule applies.
  • Obtain a loan through a state agency

 Although the federal three-day cancellation rule may not apply in the above situations, you may have other cancellation rights under state or local laws.

Key Takeaways

  • The three-day cancellation rule allows borrowers to back out of certain agreements that use their primary home as collateral within three business days without facing a financial penalty.
  • For this rule, business days include Saturdays, but not Sundays or legal public holidays.
  • Day One begins after the loan agreement is signed and the borrower receives a TILA disclosure form and two copies of the right-to-cancel notice.
  • To cancel a signed contract under the three-day rule, the borrower must make their request in writing and deliver or mail it to the lender before midnight on the third business day.

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