Jack M. Guttentag The Mortgage Professor

Borrowers who refinance loans on their primary residences with lenders other than their current lender have a "right of rescission." That means they can cancel the deal at no cost to themselves within three days of closing. Following a rescission, the closed loan ceases to exist.

What is the purpose?

The right of rescission is designed to protect borrowers who have been deceptively sweet-talked into a transaction that is not in their financial interest. It gives them an opportunity to think it over, solicit advice from others and back out, while recovering any monies they have paid out.

Why the exclusions?

Probably the reason that investors -- those who rent out their properties -- were not given a right of rescission is that Congress decided they should be able to take care of themselves. Home purchasers are not covered because it is not possible to rescind a mortgage that finances a purchase without rescinding the purchase.

Refinances with the borrower's current lender that are not "cash-out" are not covered because of a naive belief by Congress that lenders would not take advantage of their existing customers. This exclusion gives refinancing borrowers a good reason to shop lenders other than their current lender.

How exactly do I rescind?

You must inform the lender of your rescission in writing, postmarked within three business days of the closing date. The three days begin when all the documents are signed, before any funds are disbursed.  To make sure the lender does not drop your letter in the shredder and deny ever receiving it, send your letter registered mail with return receipt requested.

Is there any way to get more than three days?

Yes, if you were not given all the written disclosures to which you were entitled, you have three years to rescind instead of three days. These required disclosures include most of the items on the Truth in Lending statement, and also include a statement of your right to rescind, which must be signed by all co-borrowers.

Which fees can I recover?

In principle, all of them. Truth in Lending says that "Within 20 calendar days after receipt of a notice of rescission, the creditor shall return any money ... that has been given to anyone in connection with the transaction ... ."  This includes monies paid to third parties, including mortgage brokers and appraisers.

The borrower dealing directly with a lender should look to the lender for reimbursement. The borrower dealing with a broker can also try the lender, who may, however, redirect him to the broker. Lenders will try to force brokers to assume the repayment obligation, but how successful they will be remains to be seen. I have not received any feedback on this from readers. Meanwhile, borrowers should keep in mind that even though they did everything through the broker and might not even have known who the lender was until the closing, it is the lender who is legally obliged to reimburse them.

Are many loans rescinded?

Very few. A loan provider recently told me that of the many hundreds of loans refinanced through his office in recent years, only two were rescinded. In neither of these cases did the borrowers rescind because they had realized they had been hustled into bad deals. In one case, the borrowing couple won a large jackpot in Las Vegas, in the other, the couple decided to get a divorce.

Do some borrowers use the right of rescission to negotiate better terms?

I have heard of a few cases in which borrowers, who have had a deal changed from what they understood was promised earlier, did use the threat of rescission to obtain redress at the closing table. In such cases, the rescission law is being used to good effect, even though the loans involved are not being rescinded. Such cases, however, seem to be few and far between.
 
Why has the right of rescission had so little impact?

Borrowers who have taken the time and trouble to go through the refinance process have an emotional investment in their decision. They want it to be right, and most of them tend to ignore or explain away information that comes their way, suggesting that the decision might have been wrong. Psychologists have coined a term for this widespread phenomenon. They call it "cognitive dissonance."

The reluctance of refinancing borrowers to admit they are wrong is strengthened by a reluctance to confront their loan provider with such a message. The broker or loan officer may be extremely personable (the most effective ones usually are), they have invested a lot of time in the deal, and most borrowers are reluctant to send them off with nothing to show for their efforts.

For most borrowers, three days just isn't long enough for them to work their way past these barriers. I receive very few letters from refinancing borrowers soliciting my help within the three-day period. I receive many letters from borrowers, long after their rescission period ended, asking what recourse they have against the loan provider.

Since it is not possible to extend the rescission period enough to make a difference, a question arises as to whether there is some way to induce borrowers to confront the issue within three days. I'm working on this.