Your memory is good. As I am sure you recall, Regulation Z grants the right to rescind to any consumer if a security interest is or will be retained or acquired in a consumer’s principal dwelling. The Truth in Lending Act grants the right to rescind to any obligor if the transaction is secured by a dwelling he or she occupies as a principal dwelling.
Under Regulation Z the borrower in your example does not have the right to rescind; he does not have an ownership interest. But, under the TILA the borrower does have the right to rescind; the loan is secured by the dwelling they occupy as a principal dwelling.