As homeowners continue to take advantage of historically low interest rates by refinancing their mortgages, the Supreme Court is preparing to hear a case involving the right to rescind a loan. Buying a new home or refinancing your existing mortgage involves a large amount of paperwork that must be reviewed prior to closing. There are many necessary disclosures and legal documents associated with a mortgage. The Truth in Lending Act was created to give homeowners extra time to review information as well as the opportunity to exercise their right of rescission even after the documents are signed.
What is rescission?
Borrowers are allotted 72 hours after a loan closes to cancel or rescind the loan. If all the required disclosures are not provided, a borrower has up to 3 years to exercise the right of rescission. By this point, payments will have been made on the loan, which increases the complexity of the cancellation process. The dispute in the Supreme Court case involves proper notification of the borrower’s intent to rescind a loan. The question is whether simply a letter will suffice or if a lawsuit must be initiated.
Why borrowers choose to rescind a mortgage loan
Federal regulators want to ensure that borrowers have ample time to read the financial disclosures associated with a loan. Sometimes, after a loan closing, further review of paperwork or payment schedules leads a buyer to conclude that they cannot afford the terms of the mortgage as specified. In this case, the buyers may inform the mortgage company of their intent to rescind the loan.
Rescission vs. renegotiation
Before exercising their right of rescission, buyers should understand that a mortgage rescission is a final decision and not the beginning point for renegotiation. If borrowers are unhappy with the terms listed in the mortgage documents, they must consider the ramifications of rescission. The loan will be immediately canceled, and borrowers will be forced to restart the application process from scratch.
How the Supreme Court case may affect future rescission
If the Supreme Court decides that a written letter is a sufficient means of informing a bank of a borrower’s intent to rescind a loan, the ruling will simplify the process for those wishing to exercise this right. However, this simplification could make lenders perceive home equity loans as riskier and result in a more stringent internal compliance or approval processes. On the flip side, if the Supreme Court decides a lawsuit must be filed to rescind a loan after the initial three-day period, consumers will be forced to incur higher expenses to rescind a loan if the lender does not provide the required disclosures. To avoid this issue, borrowers should take the time to review all loan documents prior to closing and ask any questions before moving forward and completing the transaction.
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