This article examines a homeowner’s right to rescind their mortgage transaction following closing under two possible scenarios.
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Right of rescission after closing
Rescission by a homeowner of a borrower mortgage origination terminates their already closed borrower mortgage transaction and restores the lender and homeowner to their original positions as though they had never originated the mortgage, rights given to homeowners under the Truth-in-Lending Act (TILA). [12 Code of Federal Regulations §1026.23(a)(1)]
The homeowner as borrower of consumer-purpose funds has two rescission scenarios. The initial right to rescind is exercisable before midnight of the third business day following the last of the following to occur:
- funding and recording of mortgage documents — settlement;
- delivery of the 3-day right of rescission notice; or
- delivery of all material disclosures. [12 CFR §1026.23(a)(3)]
Further, when the 3-day right of rescission notice or material financial disclosures are not yet delivered, the right to rescind expires after any of the following occurs:
- three years after the funding and recording of mortgage documents — settlement;
- upon transfer of all of the borrower’s interest in the property (such when the property is gifted — not when a transfer of partial interest occurs); or
- upon sale of the property (including a foreclosure sale or carryback sale). [12 CFR §1026.23(a)(3)]
To rescind the mortgage, the borrower may use any written statement that is signed and dated by the borrower and states their intention to cancel, or they may use a rescission notice provided by the lender. [See RPI Form 222]
Material disclosures required by MLO or lender
Before the three-day rescission period begins to run, the lender must complete delivery of all material disclosures they are required to hand to the borrower. The disclosures are financial — about the debt incurred — and include disclosures of the:
- annual percentage rate;
- finance charges;
- amount financed;
- total of payments; and
- payment schedule. [12 CFR §1026.23(a)(3)]
The following statement of obligations to perform is written into the disclosures on a separate piece of paper or page as a stand-alone statement:
“You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.” [12 CFR §1026.23(c))]
Further, when the transaction is a high-cost mortgage, subject to Section 32 regulations (generally a second trust deed loan) the additional material disclosures required for Section 32 mortgages are also to be delivered to the borrower. [See Module 1 Unit 2 of this course]
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The lender’s receipt of a mailed notice of rescission
Consider a borrower mortgage transaction — a loan funding a consumer use purpose and secured by the homeowner’s principal residence. The mortgage closes on Friday, March 1. The lender provides the borrower with the Notice of the Right to Rescind and all material disclosures on the same day as closing (not three business days before, which is better risk management practice).
The homeowner experiences a personal financial emergency on Tuesday, March 5 and decides to rescind the now closed mortgage transaction. The homeowner places the rescission notice in the mail that same day and the lender receives the notice on Thursday, March 7.
Is the originated mortgage rescindable within this timeframe?
Yes! The homeowner has until midnight on the third business day following the day the lender delivers the right-to-rescind notice to mail or physically deliver the notice to rescind to the lender. Since Tuesday, March 5 is the day of the mailing, the rescission falls within the three-business day period following funding and closing of the mortgage. The mortgage is rescindable even though the lender receives the notice after the three-day period has run.
To allow for this possible delay in actual receipt before funding and closing the mortgage transaction, the lender must wait until it is reasonably satisfied that the borrower has not canceled their mortgage application within the rescission period. The lender may:
- wait a reasonable time after expiration of the rescission period to allow for late receipt of a notice timely delivered by mailing; or
- obtain a written statement from the borrower that the right has not been exercised. [12 CFR §1026.23(c)(4)(i)]
The lender may disburse loan proceeds during the delay period before receipt of the notice to rescind. But the lender may not appoint the borrower as “trustee” or “escrow agent” and then distribute funds to the borrower during the delay period for receipt. [12 CFR §1026.23(c)(2)]
Further, when more than one borrower has the right to rescind, the lender cannot reasonably rely on the assurance of only one borrower that they have not rescinded, since the other borrower may exercise their right. [12 CFR §1026.23(c)(4)(ii)]
