When do borrowers retain the right to change their minds?
How to invoke the right of rescission
- Borrowers have three full days after signing to walk away from many mortgage agreements.
- Lenders must provide borrowers with a Closing Disclosure before completing a loan agreement.
- The right of rescission does not apply when purchasing a new home, vacation home, second home or investment property.
- Earnest money, down payments or fees must be returned within 20 days of receiving a right-of-rescission form.
Have you ever had buyer’s remorse?
Maybe you purchased a new car and found it wasn’t safe enough for your kids. Maybe you went to a new ice cream shop and thought their rocky road wasn’t that good.
In those instances, you may or may not have tried to get your money refunded. It depends a lot on the opportunity cost of returning for a refund, how much time has passed since the purchase and whether the merchant has a refund policy or not.
Truth in Lending
The federal Truth in Lending Act (TILA) helps protect borrowers against cases of buyer’s remorse. Established in 1968, the law protects consumers “against inaccurate and unfair credit billing and credit card practices” and “requires lenders to provide you with loan cost information so that you can comparison shop for certain types of loans.”
The law also contains an important provision called a right of rescission. Essentially, this provision grants consumers a short period of time in which they can get their money back and sustain no penalties. This includes getting refunds on lender-application and processing fees, broker fees and third-party charges such as title recording and appraisal.
When it comes to mortgages, the right of rescission gives borrowers three full days after closing to cancel agreements involving home equity loans and lines of credit through a new lender, as well as refinancing through a new lender.
The right of rescission does not apply, however to borrowers who have purchased a new home, whether as a primary residence, vacation home, second home or investment property. In addition, right of rescission does not apply to refinancing through the same lender that granted the initial mortgage loan or to home equity lines of credit (HELOCs) that are used in their entirety for a new purchase (such as a second mortgage).
Exercising your rights
There are several things borrowers should be aware of when considering their right of rescission. Lenders, by law, must provide borrowers with specific information, including a TILA disclosure (now covered by the Closing Disclosure) and two copies explaining their right to rescind. Lenders also cannot fund the loan until the three-day rescission period ends.
Federal law does not contain a procedural process for rescission, but a lender’s notice about rescission rights typically contains one. Borrowers should be aware of specific procedures before signing their loan documents. Some lenders will have borrowers sign a waiver at closing that nullifies their right to rescind.
If you do choose to invoke your right of rescission, here is what happens next:
- Complete and deliver the lender-provided rescission form. Be sure to retain a copy and make certain that the form is mailed or delivered to the lender prior to midnight on the third business day after closing. Business days include Saturday, but not Sundays or public holidays.
- The lender must process the rescission in an expedient fashion. The law states that lenders have 20 calendar days to return any “money or property given as earnest money, down payment, or otherwise.”
Note that the Consumer Financial Protection Bureau also states that borrowers who did not receive a Truth in Lending disclosure (Closing Disclosure) or the notice of their right to rescind, could be eligible to rescind for up to three years and should consult an attorney in such cases.