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The Mortgage Professor: Before Closing a Refinance, Be Ready to Rescind

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By Jack Guttentag

(MCT)—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 three 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 a recent article, I pointed 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.

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