"The Ins and Outs of Rescission for Closed End Loans"
Contributed by Blair Rugh, Trinovus
The customer’s right to rescind a mortgage loan is one of the most financially dangerous parts of any of the regulations. With the increase in foreclosures and bankruptcies, understanding rescission has become increasingly critical to ensure an institution’s interests are protected. Generally, a borrower has the right to rescind a loan if the lender is taking a mortgage on the borrower’s principal residence as security for a consumer loan and the purpose of the loan is not to either purchase the residence or to refinance an existing loan secured by the residence without advancing new money, that is the new loan amount does not exceed the amount of the existing loan plus any costs to close the loan. The refinance exception applies only to the lender who made the original loan that is being refinanced. If the refinance is by a lender other than the lender that made the original loan, the refinance is rescindable even if no new money is being advanced. Whenever a lender is making a consumer purpose loan secured by the borrower’s principal residence, the first thing that the lender must do is determine whether or not the loan is rescindable.
If a loan is one where the borrower does have the right to rescind, the lender must deliver to the borrower an accurate disclosure under Regulation Z, and two copies of the notice of right to rescind. If there are multiple borrowers who have the right to rescind a transaction, each borrower must be provided his or her Regulation Z disclosure and two copies of the notice. It is not a requirement of the regulation that the borrower signs a receipt for the notice but it is an industry standard and a good practice to obtain a signed receipt.
A form of the notice is in the Appendix to Regulation Z. As always when a model form is provided, we suggest that it be followed exactly. The borrower has until midnight of the third business day following the day of closing, which is the day that the borrower signed the note and mortgage, to provide the lender notice that the borrower elects to rescind the loan. The borrower must provide the notice to the lender in writing either by telegram, mail “or other means of written communication.” The regulation and the commentary to this part of the regulation were written before the days of the internet and email. I am not aware of any ruling whether a notice of rescission from the borrower by email is effective or not. If I was a borrower and that is the way I provided notice I would sure claim that it was, and if I was a lender and my customers had a method of sending me emails, I would certainly be on the lookout for an email notice of rescission.
If the borrower does not elect to rescind the loan, the lender may fund the loan on the fourth business day after the day of closing. For the purpose of rescission, Saturday is a business day regardless of whether or not you are open substantially for business. Accordingly, if a customer signs the note and mortgage on Thursday, Friday is the first business day after the day of closing; Saturday is the second; and Monday (provided it is not a designated federal holiday) is the third. The lender may fund the loan on Tuesday.
Before funding, the regulation requires that the lender obtain evidence that the borrower did not exercise the right of rescission timely. A lender must be reasonably satisfied that the consumer has not rescinded. The lender may either require the borrower sign a statement prior to the funding (but not prior to the end of the waiting period) that the borrower did not exercise the right to rescind, or the lender can wait a further reasonable time before funding to allow for delivery of a mailed notice that would have been mailed at midnight of the third business day following the closing.
Failure to obtain the evidence that the borrower did not rescind is a violation of the regulation, but it does not affect the rescission. If the borrower did not rescind, the failure to obtain the evidence or otherwise be reasonably satisfied that the borrower did not rescind does not give the borrower any additional rights, nor does it extend the rescission period. On the other hand, if the borrower did mail the notice of right to rescind at midnight on the third business day and on the next day signs a statement to the lender that he or she did not exercise the right to rescind, and based on that the lender funds the loan, the loan was still rescinded. The borrower may have committed fraud and several other things, but the loan was rescinded. Once a loan is rescinded, it is terminated and may not be resuscitated. The borrower cannot change his mind and pick up where he or she left off. If the borrower does change his or her mind, everything has to begin again, starting with the early disclosures.
If an inaccurate disclosure is given, or the two copies of the notice of right to rescind are not provided, the rescission period never begins and the customer has three years from the date of closing to rescind the loan. If a customer does rescind a loan, the lender must return to the customer all costs that the customer paid to obtain the loan and close the loan and all finance charges that the customer has paid. Also, the rescission voids the mortgage, so the lender must provide the borrower a release of the mortgage. Having done that, the lender may attempt to collect the then unsecured loan. In actuality, it is normally not as draconian as that. Courts have held that rescission is an equitable right; therefore, the borrower must do equity, that is return title to the property to the lender simultaneously with the release of the mortgage. If you are ever in a case of rescission after a loan has been funded make sure that you get the attorney for your institution involved immediately.
The disclosure that is provided to the borrower at closing must accurately state what are termed the “material disclosures”. They are the annual percentage rate, the finance charge, the amount financed, the total of payments, and the payment schedule. Additional material disclosures are required if the loan is subject to Section 226.32, which is a high cost (HOEPA) loan, (for example, the “You are not required to complete this loan… statement, the APR, balloon payment, etc.). If the loan is subject to HOEPA and/or subject to Section 226.35 (HPML), it is the omission of certain penalties that are part of the ‘material disclosures’.
In rescission, the tolerance for the finance charge is higher than for restitution. In the normal case, it is 1/2 of 1% of the loan amount. In the case of a refinance by a new creditor without advancing new money, it is 1% of the loan amount. However, in a foreclosure action the tolerance drops to $35. Accordingly, you may have a disclosure that is well within the tolerance under normal circumstances but not within tolerance in a foreclosure. If you have a rescindable loan that becomes delinquent during the first three years after it was made, check the disclosures carefully. In many cases, it is more prudent to attempt to collect the loan without foreclosure until the three year period has run and then file for foreclosure.
Finally, the borrower may waive the right to rescind in a “personal financial emergency.” To do so, the borrower must provide the lender a hand written statement of the personal financial emergency and the waiver request. No pre-typed or other form letter may be used.
A personal financial emergency means first, it is personal; and second, it could not have been foreseen. Examples normally given are that a tornado has taken the roof off of a house, or the furnace has quit working and freezing weather is on the way. The fact that a person has a hot tip on the third horse in the fifth race doesn’t qualify. One ruling that I thought was a little restrictive but demonstrates the limits on the waiver, was a situation of a husband and wife that were purchasing a new home and were using their existing home as well as the new home as collateral for the loan. Because they were using their existing home, the loan was rescindable. The purchase contract was about to expire and if they did not close by the expiration date, they would lose the purchase. The court held that was not a personal financial emergency as the expiration date had been known for some time. To me, that would have been an emergency because if I had allowed that to happen, my wife would kill me.
I hope this description of the right to rescind has been helpful. If you have any questions about rescission that I did not answer please let us know.