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The purpose of the law granting a right of rescission was to give borrowers who had been sweet-talked into a transaction that was not in their interest an opportunity to back out at no cost. In principle, it should be a very powerful weapon against abuse. Borrowers who find a deal has changed from what they understood was promised can use the threat of rescission to obtain redress at the closing table. And if they don’t get it, they can follow through and rescind.

Yet very few borrowers use it. To those who thought it would level the playing field, it has been a major disappointment. The reason is not that borrowers are never given any cause to regret their actions. I hear from many borrowers who have come to realize that their refinance was a mistake, but almost always the letters come in months after the closing.

Borrowers who have taken the time and trouble to go through the refinance process have an emotional investment in their decision. They may also be reluctant to confront their loan officer with bad news. Three days is not nearly long enough to work through these emotional barriers. Yet extending the rescission period is not practical because the funds scheduled to be paid are frozen during the period, which is a cost to every borrower who doesn’t rescind.

The time for borrowers to start thinking about rescission is not at closing but immediately after submitting an application. To put themselves in the proper frame of mind, they might even compose the letter to say that they are hereby rescinding their application, address it to the lender and hold it just in case.

While the application is in process, they should consider the circumstances that would induce them to send it. When the loan is closed, borrowers should immediately consider whether those circumstances have materialized. If they are not sure and need some help in thinking it through, send me an email with the words “Rescission Help” in the subject line.

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