What is the Right of Rescission?
Most people will agree that there are times in life when we wished we could go back and undo something that we did. Besides matters of the heart (which are slightly out of our element, sorry!), many folks can relate to this regarding some big decision that affected their financial situation. For example, have you ever purchased something frivolous, and then immediately regretted the decision the moment you walked out of the store?
Sometimes, entering into a loan agreement can have that very same effect. The difference is that home loans are typically exponentially larger investments and can have lasting benefits -- or consequences for a borrower. The sad truth is that once a borrower signs the paperwork at closing, it’s all too easy for them to feel trapped if they suddenly have a change of heart.
The funny thing, though, is that they actually aren’t trapped in some cases. A lot of borrowers don’t realize that’s there is a way to cancel certain types of loans after the paperwork has already been signed. This is all thanks to a particular right granted to borrowers through the Truth in Lending Act (TILA).
What is the Right of Rescission?
For borrowers who have recently closed on a mortgage refinance, home equity loan, or home equity line of credit, there is a way out, as long as you act fast. Thanks to a specific right outlined in the Truth in Lending Act known as the “Right of Rescission”, borrowers are able to cancel a refinance, home equity loan, or HELOC transaction within three days of closing the loan. Through the right of rescission, the transaction is canceled with no questions asked, and the lender must relinquish its claim to the property and refund all fees within 20 days of the right of rescission being enacted.
The right of rescission was meant to only be used for the purposes of canceling certain refinance transactions, home equity loans, or home equity lines of credit. When utilizing the right of rescission for a refinance transaction, the right can only be enacted for transactions in which the borrower is refinancing an existing mortgage with a new lender, and not the current mortgagee. Interestingly, the right of rescission cannot be used to rescind a new mortgage for a home purchase, a refinance using the current lender for the refinanced loan, a mortgage on an investment property or second home, or a mortgage originated through a state agency.
Purpose of the Right of Rescission
In order to fully understand the reason behind granting borrowers such a right as this one, it is important to understand what the Truth in Lending Act is all about. The Truth in Lending Act or TILA was drafted as a way to protect the public against unfair or predatory credit practices and billing. Ultimately, this federal law works to ensure “the informed use of consumer credit” and standardize the way borrowing fees are addressed and calculated.
Among the guidelines for lawful lending practices outlined in the Truth in Lending Act, is a provision requiring lenders to provide borrowers with accurate details pertaining to a loan, as well as the right to cancel loans. As an extension of this provision, the right of rescission was created as a way for borrowers to truly decide whether or not the loan is in their best interests, and, if necessary, escape predatory lending practices. The right of rescission is a grace period in which a borrower is allowed to change their mind, and cancel a loan without any repercussions to their credit file or finances.
How the Right of Rescission Works
When a borrower closes any of the aforementioned loan transactions that are eligible for the right of rescission, they enter the rescission period. The rescission period begins on midnight of the day after the loan documents are signed and lasts for a period of three business days, ending on midnight of the third business day. Saturdays are included in the rescission period, but Sundays and federal holidays are excluded, and will not be counted against the borrower.
Federal Holidays (that will not be counted as part of a borrower’s rescission period) include:
New Year’s Day (January 1st)
Martin Luther King, Jr. Birthday (3rd Monday in January)
Presidents’ Day (Third Monday in February)
Memorial Day (Last Monday in May)
Independence Day (July 4th)
Labor Day (First Monday in September)
Columbus Day (Second Monday in October)
Veterans Day (November 11th)
Thanksgiving (Fourth Thursday in November)
Christmas (December 25th)
So, for an eligible loan that is closed on a Monday, the rescission period would begin at 12:00 am on Tuesday, and end at 12:00 am that Friday when the transaction becomes official, and the loan is funded. The borrower would have all of Tuesday, Wednesday, and Thursday to change their mind and rescind the loan. If the loan closes on a Friday, they would have all of Saturday, Sunday, Monday, and Tuesday to mull over finalizing the loan, since Sunday is not considered a business day, and therefore does not count towards the rescission period.
The Truth in Lending Act does not detail how a borrower is supposed to exercise their right to rescission. It does, however, firmly state that lenders are required, by law, to inform borrowers of their right of rescission. Additionally, lenders are required to detail the procedures borrowers must take to cancel a loan transaction as a part of the right of rescission notification documentation. A lender’s failure notify a borrower of their right of rescission (when applicable) negates the legality of the mortgage contract.
Once exercised, lenders are required to refund all fees back to the borrower including all lender and/or broker fees (for application, processing, etc.), and third-party fees, such as title and appraisal fees, regardless of whether they were paid to the lender or directly to that third party. The only non-refundable fees are any fees paid by the borrower to a third party that takes place separate from the loan transaction, including costs such as building permits. The lender must also renounce their claim to the property, clearing the borrower of any debt obligation. This must all occur within 20 days of the borrower exercising their right of rescission.
How to Exercise the Right of Rescission
The Truth in Lending Act does not clearly detail the process by which a borrower must exercise their right of rescission. Lenders are supposed to outline the procedure for canceling a loan is in their Right of Rescission documentation. In a case where the procedure is not clearly detailed, in order to ensure legitimacy, a borrower must submit to the lender their intention to cancel the loan in writing. The borrower is held responsible for proving that the notice of cancellation was submitted within the allotted period of time in the rescission period. Borrowers should also be able to document when the notice was sent to the lender.