Law Gives 3 Days to Cancel Refi or HELOC

By Features Bankrate.com

The law gives you the right to cancel a mortgage refinance or home equity loan. But only if you act quickly, and follow the rules to the letter.

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A little-known power called the "right of rescission" gives borrowers the ability, in certain circumstances, to cancel their loan deals within three days, no questions asked, and walk away. "Right of rescission" is another way of saying "right to rescind" a contract.

"It's designed to ensure that the lenders provided accurate disclosures" and that consumers didn't sign up for loans that were "different than what was described to them," says Margot Saunders, counsel for the National Consumer Law Center.

The right of rescission is intended to protect the consumer from putting the family home at risk by using it (or the equity) to secure a loan. It doesn't apply in cases where the mortgage is made to buy the house itself.

"It isn't to protect the (home) purchaser, it's to protect the person who has equity in their home," says Nessa Feddis, vice president and senior counsel to the American Bankers Association.

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Some of the categories where the right of rescission applies include the following:

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  • Home equity loan (often called a second mortgage).
  • Home equity line of credit.
  • Mortgage refinance (provided that the new loan doesn't come from the same lender that financed the original home-purchase loan).
  • Cash-out refinance (regardless of whether the new loan comes through the same lender that made the original home-purchase loan -- but only the new money is covered by the right of rescission).

It doesn't matter what type of lender you borrowed the money from. The right of rescission covers loans from banks, mortgage companies and any other lenders, Saunders says.

You don't have to give a reason for canceling the transaction within a three-day period, says Carole Reynolds, senior attorney with the Federal Trade Commission. "The fact that you don't want to proceed is enough," she says.

You don't need the lender's permission or authorization to cancel the deal, Reynolds says.

What it Doesn't Cover

Some borrowers and prospective borrowers are under the impression that there is a right of rescission with all mortgages. Not so. While state and local statutes vary, the federal right of rescission is specific, as described in the Truth in Lending Act.

"There is no right of rescission for purchase-money mortgages," Saunders says. Some of the categories where the right of rescission does not apply include the following:

  • Loans made to purchase a house.
  • Any loans (first or second mortgages, refinancing mortgages, etc.) involving properties that aren't the primary residence.
  • Business loans.

How to Rescind a Deal

This is one instance when the devil -- or the path out of an unwanted contract -- is in the details.  

If you've recently refinanced your mortgage or taken out a second mortgage or home equity line of credit, you probably remember getting a single sheet spelling out your right of rescission.

That paper should tell you who you have to contact if you want to rescind your loan, along with any information you should include and where your rescission notice should be sent, says Justin Anderson, staff attorney with the National Credit Union Administration.

If you want to rescind the transaction, you have to do it in writing, by either mail or fax. Your letter doesn't have to be received or postmarked within the three-day window. It simply must be mailed within that period, Anderson says. "You have to state that you are rescinding the transaction for whatever property it is," he says.

Though not required, it's a good idea to send your rescission letter or notice in a way that proves when it was sent and that it was received, Reynolds says.

The Right of Rescission Clock

The right of rescission gives you three days to back out of a deal. And the clock starts either when you close on the loan or when you get your loan disclosure documents -- whichever comes later. But, as with many things legal, those three days aren't simply 72 hours.

First of all, the regulation specifies three business days. And it includes Saturday as a business day, even if the lender is closed.

What it doesn't count as a business day: Sunday and any legal holidays.

That clock starts ticking at midnight after you signed the loan, and proceeds until midnight three days later (excluding any Sundays or pesky holidays).

For example: If you signed your loan on 2 p.m. Thursday, your right of rescission would expire at midnight Tuesday (or to put it another way, Monday when the clock passes 11:59 p.m.).

But, in at least one instance, the rescission clock could run much longer than three days.

If you didn't receive the proper disclosures at closing, then the clock never started in the first place, Saunders says. In that case, you have three years from the date of closing to rescind your loan.

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