Prepare to Rescind Your Refinance Before You Close
Rescinding a
contractual agreement is unusual. A major purpose of
contracts is to define the rights and obligations of each
party, and if provision is made for a rescission, a penalty
will almost always be imposed on the rescinding party. For
example, when one party to a merger recently decided to
rescind, it had to pay a penalty of $150 million.
The right of
mortgage borrowers to rescind a refinance transaction is
unusual in that the right is not negotiated between the
contracting parties but is imposed by law. Further, the cost
of rescission is borne not by the rescinding party, the
borrower, but by the lender.
Under the
Federal Truth in
Lending Act, borrowers who
refinance a
loan on their primary residence with a lender other than
their current lender can cancel the deal at no cost to
themselves within 3 days of closing. If the borrower
rescinds, the lender has 20 days to return all payments that
the borrower has made, including payments to third parties.
The law does not provide a right of rescission to borrowers
who refinance with their current lender. Congress evidently
believed that borrowers would not be exploited by their
existing lenders, which is far from the truth. In
Refinance
Mortgage With Current Lender ?, I point out that most
borrowers do better refinancing with a new lender than with
their current lender.
Interestingly enough, all the major lenders have elected to
grant the right of rescission to their own customers
voluntarily. I doubt that their rescission offer includes
reimbursement for monies paid by the borrower to third
parties, but I am not sure about that. If I am wrong, I
invite any lender reading this to set me straight.
The purpose of
the law granting a right of rescission was to give borrowers
who had been sweet-talked into a transaction that was not in
their interest an opportunity to back out without it costing
them anything. In principle, it should be a very powerful
weapon against abuse. Borrowers who have had a deal
changed on them from what they understood was promised
earlier, can use the threat of rescission to obtain redress
at the closing table. And if they don’t get it, they can
follow through and rescind.
Yet very few borrowers use it. To those who thought it would
level the playing field, it has been a major disappointment.
The reason is not that borrowers are never given any cause
to regret their actions. I hear from many borrowers who have
come to realize that their refinance was a mistake, but
almost always the letters come in months after the closing.
Borrowers who have taken the time and trouble to go through
the refinance process have an emotional investment in their
decision. They may also be reluctant to confront their loan
officer with bad news. Three days is not nearly long enough
to work through these emotional barriers. Yet extending the
rescission period is not practical because the funds
scheduled to be paid are frozen during the period, which is
a cost to every borrower who doesn’t rescind.
The time for borrowers to start thinking about rescission is
not at closing but immediately after submitting an
application. To put themselves in the proper frame of mind,
they might even compose the letter to say that they are
hereby rescinding their application, address it to the
lender and hold it just in case.
While the application is in process, they should consider
the circumstances that would induce them to send it. When
the loan is closed, borrowers should immediately consider
whether those circumstances have materialized. If they are
not sure and need some help in thinking it through, send me
an email with the words “Rescission Help” in the subject
line.
Do not write me if your rescission is designed to allow you
to profit from a decline in market interest rates that
occurred after you locked the price. The law authorizing
rescission was designed to protect borrowers from being
taken advantage of by unscrupulous lenders. It was not
intended as a tool with which unscrupulous borrowers could
take advantage of lenders.
If the decision is made to rescind, make sure you send the
letter registered mail with return receipt requested.
Otherwise, the lender can claim that the letter was not
received on time.