3-Day Cancellation -- State vs. Federal Notices

“If I give my state’s 3-day cancellation notice, do I also have to give the federal 3-day notice?”

A simple question. And a good one. But the answer gets complex.

Here’s the easy part. The federal 3-day cancellation notice is always required when any improvement to a primary residence will create a lien on that property. Since all states grant mechanics' lien rights for improvements to private property, the federal cancellation notice is always required. But note the word primary. The federal notice is not required on a secondary residence, such as a vacation home.

Now, let’s talk about state cancellation notices. Nearly all states require a 3-day cancellation notice when home improvement services are sold at the project site. That’s a home solicitation sale. But thirty-one states waive their state 3-day home solicitation notice if the contract includes the federal 3-day home improvement notice. So, in those thirty-one states, no state notice is required if you give the federal notice.

Caution: Be careful in these 31 states when work is not on the primary residence of your client. The state notice may be required even if the federal notice is not. Note also that wording of the notice varies from state to state.

Law is different in the remaining 20 states (including the District of Columbia):

Fourteen states (FL, GA, HI, IN, MI, MO, NH, NJ, NY, ND, OK, VT, WV and WY) waive their 3-day home solicitation notice if the deal is signed at the office of the seller or if the sale started with an invitation from the owner. I call this the big box store exception. This is why most Home Depot and Lowes home improvement contracts skip their state cancellation notice but include the federal notice.

Rules vary in the other states:

• Alaska requires a 5-day notice unless the deal was initiated by the owner.
• Connecticut always requires the state notice.
• District of Columbia never requires a home solicitation sales notice.
• Texas waives the state notice if the contract includes the 3-day notice required by the Federal Door-to-Door Sales Act. Since the federal door-to-door notice isn’t required when a federal 3-day home improvement notice is in a contract, Texas home improvement contracts need both the Texas home solicitation notice and the federal home improvement notice.
• Washington requires a state cancellation notice only on roofing and siding jobs.

Now the fine points

Federal law considers Saturdays a business day. So, an owner who signs a home improvement contract on Friday has until midnight the following Tuesday to cancel. Most state laws don’t count either Saturday or Sunday as business days. The same owner would have until midnight the following Wednesday to cancel if the state notice is required. This is an important distinction. Contractors have to write on the cancellation form the last day the contract can be rescinded.

An entirely different set of rules apply if you offer a credit term or recommend a lender. Better to leave the lending to others.

Eighteen states (AL, AZ, GA, IL, IN, KY, LA, MI, MO, MS, NE, OK, SC, SD, TN, UT, WI, WV) have different 3-day cancellation rules if any part of the cost will be covered by insurance.

In an emergency, the owner can waive the right to cancel under federal law. Some states offer the same option. But you still have to deliver the 3-day cancellation notice.

Finally, be aware that the penalty for a faulty 3-day notice is severe. Under federal law, the owner has three years to bring suit for a refund. Many states label it “consumer fraud” when a contractor omits the state cancellation notice.

If all this has your head swimming, don’t worry. Construction Contract Writer sorts out all the details. With CCW, you’ll write letter-perfect contracts that comply with both state and federal law every time. The trial version is free.

Do I Really Have to Give the 3-day Notice?

Arguments for skipping the 3-day notice go something like this.

“I get paid in full when the job is done. I’m not a lender. So why do my jobs need a federal truth-in-lending notice? That notice just bulks up my contracts. Makes it harder to get a signature. Anyhow, my clients know what they want. And that’s NOT waiting three days for me to get started.”

Every home improvement specialist knows about the 3-day notice – an owner’s right to cancel a home improvement contract during the first three days after the agreement is signed. What may not be so clear is how important that notice can be.

I’ve written about the 3-day notice at least 5 times on these pages:

February 2010 -- 3-Day Right to Cancel – Contractors Beware

June 2012 -- Waiving the 3-Day Right to Cancel
April 2013 -- The 3-Day Right to Cancel: A Contractor’s Checklist
March 2014 -- Home Solicitation Sales
November 2017 -- Bad Faith 3-Day Rescission

But I still get asked, “Why bother with the 3-day notice?”

That’s a good question, especially if you understand where the 3-day notice came from. It’s part of the federal Truth-in-Lending Act, a law written to regulate lenders, primarily banks. How did it happen that contractors get the same treatment as mortgage lenders? Most contractors expect to be paid on completion and most don’t arrange financing for their clients. Contractors like that are not lenders in any sense of the word.

A Little History

When T-I-L was written (1968), many assumed contractors would not be affected. Not so the Federal Reserve Board. The Fed has rule-making authority under T-I-L and wanted contractors covered by the law. They wrote regulations, including Regulation Z, that required home improvement contractors to give the same 3-day notice that mortgage lenders give when making a loan. The 3-day notice had to be part of the construction contract even when a lender is required to give their own notice as part of the loan agreement.

Several years after the Fed wrote Regulation Z, A group of home improvement contractors filed suit against the Fed, seeking a declaratory judgment that contractors weren’t covered by T-I-L and didn't have to give the 3-day notice. In district court, the contractors won. The court ruled the Fed Governors had exceeded their authority. In the opinion of the district court, T-I-L was not intended to cover future statutory liens such as mechanics liens. All states grant mechanics liens to tradespeople. But those liens don’t arise until well after completion and may never happen. So the district court enjoined the Fed from enforcing Reg Z against contractors. No more 3-day notice.

Naturally, the Fed appealed. The case was Freed Co. v. Board of Governors, decided in 1973. The appellate court reversed the district court, finding clear congressional intent in T-I-L to protect consumers from loss of their home under security interests granted by state lien law. Once again, the 3-day notice was required on most residential jobs.

The Freed case stands today. It’s never been challenged. And until it is, no attorney is going to advise a client to skip the 3-day notice when doing work on an owner’s primary residence.

But be aware. The 3-day notice isn’t needed on all residential jobs. And there are perfectly legal ways to start work on a job the same day a contract is signed. Construction Contract Writer helps you decide what's right for each job. The trial version is free.

More on Maryland HB 439

Maryland home improvement contractors got some new law last June 1. It’s Maryland Commercial Law Code § 14-302.1, usually referred to as HB 439. The new law revises Maryland’s Door-to-Door Sales Act and the three-day right to cancel. Most owners now get five days to cancel. Any owner 65 or over gets an extra two days to cancel. And every owner has to acknowledge in writing receipt of the right to cancel form. To help answer questions about HB 439, the Maryland Home Improvement Commission sent an explanation of the new law to Maryland contractors on June 3.

All this is routine. It’s the next step that gets sticky.

As pointed out in my May 22, 2016 blog post, there’s something very peculiar about this new law, it almost never applies to any job. That’s because Maryland Commercial Law Code § 14-302(d)(ii) makes it clear: The door-to-door disclosures in HB 439 aren’t required if an owner has the three-day right to cancel under federal Regulation Z. Re-read the May 22 blog post if you don’t recall the details.

But I was curious. So I sent a query to the Maryland Attorney General. If an owner lives in the house being improved, we know that Reg Z applies, not HB 439. If an owner rents out the place, HB 439 doesn’t apply under terms of Maryland law. HB 439 almost never applies.

I got a prompt response from the office of Maryland’s AG:

“[Reg Z] applies when there is ‘a credit plan in which a security interest is or will be retained or acquired in a consumer’s principal dwelling.’  Then the federal act would give a right of rescission.  Not every home improvement contract in which an individual is doing work on a primary residence meets these qualifications, however, and in fact, most, do not.”

The AG’s opinion rests on the definition of “security interest.” If the contractor has a security interest when work starts, then Reg Z applies, the federal three-day notice is required and the HB 439 notice is surplus. The AG says that’s not usually the case, almost certainly because of a quirk in Maryland mechanics lien law.

In most states, contractors, subs and suppliers have an “inchoate” lien (a security interest) from the day work starts. Not so in Maryland. Contractors have to petition the court (file suit) to have a lien in Maryland. So they don’t have a security interest from day one. According to the AG, Reg Z doesn’t apply and the HB 439 notice will be needed on most jobs.

I Don’t Agree, For Three Reasons.

1. True, Maryland prime contractors don’t have lien rights (a security interest) until they petition a court. But Maryland law gives subcontractors and suppliers a lien without filing anything in court. Subs and suppliers have a lien from the day they give written notice to the owner. That sounds like a security interest to me and should trigger a Reg Z three-day notice before work starts.
2. Fortunately, Federal courts settled this issue many years ago. “The possibility of a mechanic's lien is a ‘security interest’ which must be disclosed under TILA and Regulation Z even though a mechanic's lien may never actually be taken.” Rudisell v. Fifth Third Bank, 622 F.2d 243, 251 (6th Cir.1980). 
3. The Federal Reserve Board (the people behind Reg Z) has removed any doubt: The possibility of a lien arising is a “security interest” for purposes of a customer's right to rescission.

My May 22 blog post included a guess that HB 439 was simply a mistake. The explanation from the Maryland AG confirms my opinion. If the AG were correct about no security interest during construction, delivery of the Reg Z three-day cancellation notice would never be required until a contractor filed for an interlocutory lien -- weeks or months after the job was finished. That would both sabotage the purpose of Reg Z and lead to unintended consequences -- giving owners the right to cancel a job and get a refund weeks or months after completion. That’s plain nonsense.

The Maryland AG office goes on to cite Crystal v. West and Callahan, Inc., 328 Md. 318 (1992) for the proposition that “home improvement transactions are not excluded from the Maryland Door-to-Door Sales Act.” I agree. But only if Reg Z doesn’t apply, such as if you’re working on an owner’s second home, not the primary residence of the owner. For work on a second home, HB 439’s door-to-door disclosures are required. For all other home improvement work, give the Reg Z three-day notice. HB 439 disclosures would be surplus.

And there’s another, broader, issue here. In my experience, most contractors prefer to obey the law – especially if the law is clear and makes sense. Writing laws like that is an obligation of every legislature. In my opinion, Maryland’s General Assembly didn’t think very hard before passing HB 439. The June 3 message from the Home Improvement Commission only made it worse – omitting any mention of when the HB 439 notice was required. 

So home improvement contractors in Maryland are left to guess about what the new law requires. Every home improvement crew shouldn’t need a carpenter, an electrician and two lawyers. Construction contractors perform a valuable service. Maryland could support that effort with clear, sensible laws and regulations. HB 439 falls short of that standard.

For clear guidance on drafting construction contracts in any of the 50 states, have a look at

Construction Contract Writer. The trial version is free.

 

The 3-Day Right to Cancel: A Contractor’s Checklist

Every contractor knows about an owner’s 3-day right to cancel: Agree to build or improve your client’s primary residence and the owner has three days to cancel the deal. It’s federal law (12 C.F.R. 226.15) and applies in all states. Make a mistake on this and the owner has three years to cancel. Here’s a checklist to keep you out of trouble.

[  ] Each owner has to receive two copies of the 3-day cancellation form – commonly called the Reg. Z notice. But simply leaving the forms with the owners isn’t enough. You have to fill in some blanks.

[  ] Your company name and address. That’s easy. The owner needs to know where to send the cancellation notice.

[  ] When the three days starts running. That’s not obvious. There are three possibilities. The last to occur starts the three days:

1. The date of the transaction.

2. The date the owner receives the Truth in Lending Disclosures.
3. The date the Reg. Z notice is delivered.

If your contract and the Reg. Z notice are two separate forms, the three days starts running when the Reg. Z notice is delivered, not when the contract is signed (the “date of the transaction”). The best choice: Make the Reg. Z forms part of your contract. Deliver both together. That way, the three days start running when the contract is signed. If you use Craftsman’s Construction Contract Writer, this is automatic.

The second option above doesn’t apply. There aren’t any Truth in Lending Disclosures if payment is due when the job is done.

[  ] The last day to cancel. Write in the last day your client can cancel the contract. Again, this date has to appear on all copies of the Reg. Z form left with your client. 

The last day to cancel is the third business day after the contract was signed. Business days exclude only Sundays and national holidays under federal law. So if the contract was signed on Thursday, the last day to cancel is midnight on Monday. If either Friday or Monday is a national holiday (banks are closed), the last day to cancel would be the following Tuesday.

But be careful. Cancellation is effective when the notice is mailed. The cancellation notice may not be delivered for several days. So it's best to touch base with the owner before scheduling any work or deliveries.

[  ] An owner doesn’t have to use the Reg. Z form. A phone call would be enough to cancel the deal.

[  ] In a true emergency, an owner can waive the 3-day wait. The waiver has to be (1) in the handwriting of the owner, (2) be dated and signed, (3) describe the emergency and (4) specifically waive the right to cancel. For example, “My roof blew off and another storm is due later this week. I give up my right to cancel this contract.”

Click here to see a contract-drafting tool that complies perfectly with the law in your state and for the types of work you handle. The trial version is free.

 

3-Day Right to Cancel – Contractors Beware

Every contractor who does residential work knows about a home owner's three-day right to cancel. But what you may not know is how vicious this innocuous little form can be. Here's a short quiz to test your understanding. Answers are below.

True or false?

1. The 3-day right to cancel is a federal notice and isn't required in most states.

2. There no harm in skipping this form. It's safe to leave it out of your contracts.

3. If you decide to include the notice in your contract, one copy is enough.

4. The 3-day right to cancel is required only on major home improvement jobs.

5. The 3-day right to cancel is required only if you extend credit to the owner.

First, something that should be obvious: Don't start work, don't deliver materials, don't schedule crews until three business days after the contract is signed. When a contract is cancelled under federal law (12 C.F.R. 226.15), you have to undo the deal at your own expense. Any lien you thought you had is cancelled. You're liable for twice any finance charge up to $1,000 plus costs and attorney fees.

Answer to Question 1 – Not required in most states.

False. The 3-day right to cancel is a federal right. But it's a right granted in all states any time you do work on the principal residence of the owner. Even if your state has its own 3-day right to cancel, you still have to deliver the federal form, filled out with the date of signing, your mailing address and the last day to cancel.

Answer to Question 2 – It's safe to skip this form.

False. It's not safe at all. Omitting the 3-day notice gives the owner three years to cancel (§ 226.15-b).After cancellation, you have the right to take materials back. But you have to make a full refund! Imagine making a full refund on a home improvement job three years after completion. More on that later.

Answer to Question 3 – One copy of the form is enough.

False. 12 CFR 226.15-b requires that each owner receive two copies of the cancellation notice. If two adults are living in a home, it's safe to assume that both are owners. Delivering less than four copies of the 3-day right to cancel is like delivering none at all. See Weeden v. Auto Workers Credit Union, Inc., 1999 U.S. App. LEXIS 5272.

Answer to Question 4 – Required only on major jobs.

False. The federal 3-day notice is required on every job that qualifies as the principal residence of the owner, whether a custom home, home improvement or home repair. There is no threshold dollar amount. Even replacing a water heater gives the owner 3 days to cancel. In a true emergency, the owner can waive the right to cancel with a written statement.

Answer to Question 5 – Required only if you extend credit.

False. The 3-day right to cancel exists on every job that could result in a lien on the owner's property. And that's every job because all states give contractors a construction lien for their work.

Don't let this happen to you.

A few years ago Alma and Robert Johnson needed a little work done on their front porch at 65 Stanford Street, Providence, Rhode Island. Interstate Contractors got the job. They finished the work and got paid -- $12,400. Unfortunately for Interstate, their work was better than their contract. I'll explain.

Two years later, the Johnson's had some financial reverses. Their home fell into foreclosure and the Johnsons filed for bankruptcy. One of their creditors had a smart attorney with the good sense to pull out the contract for that front porch job. Turns out, Interstate's contract wasn't quite right. There wasn't any federal 3-day cancellation notice. That was Interstate's Mistake One. The Johnson's could still cancel the job, two years after completion, and get a full refund under federal law. Great! But it gets better.

Rhode Island gives owners a 3-day right to cancel – but only if the owners don't get the federal right to cancel notice. Well, the Johnsons never got their federal notice. So Rhode Island's law applied. Interstate must have known that. Interstate's contract with the Johnsons included the Rhode Island 3-day cancellation notice. Unfortunately, the Rhode Island notice wasn't quite perfect. It wasn't in 10-point bold type. And one part of one paragraph was missing. Bingo! Interstate's Mistake Two.

So the Johnsons canceled under Rhode Island law. Interstate now had 20 days to refund the full $12,400. Too bad. They didn't make it. And that was Mistake Three. Failure to make a full refund in 20 days made Interstate liable to the Johnson's creditors for double the contract amount -- $24,800. And that was the award of the court. (I'm not making this up. See 239 B.R. 255.)

Like I said, that federal 3-day notice can be full of nasty surprises.

My recommendation: Don't be an Interstate. Use quality contracts that comply with both your state law and federal law. You'll find plenty here.