The federal government and the state of New Jersey have consumer protection rules allowing consumers to cancel certain contracts if they do so within three business days. For example, the federal Truth in Lending Act allows consumers to cancel some mortgage agreements without penalty within that time.
The Federal Trade Commission's “Cooling Off” period allows consumers to cancel a sale within three days if they meet certain requirements, and New Jersey takes this idea a step further through its Division of Consumer Affairs, which applies the rule to health clubs.
What Is the Right of Rescission?
The right of rescission allows consumers to cancel specific loans, per the Truth in Lending Act (TILA). Borrowers can cancel a home equity line of credit with a new lender, a home equity loan or a refinancing transaction with a lender (other than the current mortgagor) within three business days of closing the transaction with no questions asked.
The lender must refund all fees within 20 days of the consumer exercising this right and give up its claim to the property. The three-day clock for cancellation does not start until the consumer:
- Signs the credit contract, such as a promissory note.
- Receives Truth in Lending disclosure statement, typically a closing disclosure form.
- Receives two copies of the notice explaining their right to rescind.
Calculating the Cancellation Time Period
The first business day after the last of these events has taken place is day one – Sundays and legal holidays do not count. The cancellation clock ends on midnight of the third business day. Consumers who do not receive a Truth in Lending disclosure or notice of right of rescission may rescind a loan up to three years from the closing date.
Exercising the Right of Rescission
Consumers who wish to exercise the right of rescission must first notify the lender in writing. This written notice of cancellation must be mailed or delivered before the end of the three-day window. When sending the notice, the consumer should choose a method that proves when it was sent and delivered.
The Federal Trade Commission (FTC) recommends certified mail with return receipt. The consumer should keep a copy of the receipt for their records.
Waiving the Right of Rescission
New Jersey consumers can waive their right of rescission within three days of closing if they have a bona fide financial emergency. However, they may lose their right to rescind the mortgage transaction unless proof of fraud exists. The consumer must give the lender a written statement that describes the emergency and states that they are waiving the right of rescission.
They must sign and date the statement along with anyone else who may share in the property’s ownership. Printed forms cannot be used.
Defining the FTC's Cooling-Off Rule
Under federal law, the FTC's Cooling-Off Rule gives buyers a three-day period to cancel sales made at their home, place of work, or the temporary location of the seller, such as convention centers, fairgrounds, hotels, motels or restaurants. The Cooling-Off Rule also applies when the buyer brings the salesperson into their home to make a presentation, but it doesn’t apply to every type of sale. The types of sales the rule does not cover are:
- Sales made for less than $25 at the home of the buyer.
- Sales made for less than $130 at a temporary location of the seller.
- Sales made for goods or services typically not used for the household, person or family, except instruction or training courses.
- Sales made online, by phone or by mail.
- Sales made after the negotiations are completed at seller’s business location.
- Sales made for an emergency.
- Sales made by the seller when visiting the buyer’s home to repair or maintain their personal property.
- Insurance, real estate or securities sales.
- Vehicle sales made at a temporary location, if the seller has a permanent place of business.
- Arts or crafts sales made at fairs, civic centers, malls or schools.
The seller must tell the buyer about their right to cancel at the time they make the sale and give the buyer:
- Two cancellation form copies
one is for the customer to keep in their records, the other is for the customer to send the seller should they choose to cancel.
- A copy of the buyer’s receipt or contract stating the date, the seller’s name and contact information (with address) explaining their right to cancel. These must be in the language of the sales presentation.
New Jersey’s Cooling-Off Period for Health Clubs
The New Jersey Division of Consumer Affairs takes the FTC’s rule and extends it to health clubs. Before signing a health club contract, the agency suggests that potential patrons should visit the club and note if it is clean and the equipment is in good working order. They should also ask for the club’s registration number to verify if it is registered with the state Division of Consumer Affairs.
If the consumer decides to sign a health club membership contract for longer than three months, they should contact the Division of Consumer Affairs to ask if the club has posted the required security bond. This assures that the club will provide refunds should it go out of business or otherwise violate the contract with the club member.
New Jersey state law requires that all contracts for health clubs must in writing and state the buyer’s total payment obligation on the first page. After signing, the consumer is entitled to a copy of the contract. The consumer can cancel the contract within three business days after receiving it. If they choose to cancel they must do so in writing. The buyer is entitled to a full refund within 30 days of cancellation.
- Consumer Finance: How Long Do I Have to Rescind? When Does the Right of Rescission Start?
- Customs Mobile: Section 1026.23 - Right of Rescission
- FTC.gov: Cooling-off Period for Sales Made at Home or Other Locations
- New Jersey.gov: New Jersey Division of Consumer Affairs Announces Crackdown on 53 Allegedly Noncompliant Health Clubs
- Find Law: Three-Day Cancellation Rule
Michelle Nati is an associate editor and writer who has reported on legal, criminal and government news for PasadenaNow.com and Complex Media. She holds a B.A. in Communications and English from Niagara University.