The Three Day Right of Rescission

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One reason to check your referral logs every day: Sometimes you can find great material for an article. I got one about the three day right of rescission.

This is a feature (or bug, depending upon your situation) with every refinance on a home that is a primary residence. The reason it exists is that loan documentation is massive, and confusing to the non-professional, sometimes intentionally so on the part of the lender. Some will throw massive documents at you so fast at closing that you never do figure out what's really important, delaying those documents until you show signs of just wanting to get it over with. Furthermore, until you see the final documents at signing, there is literally no way to prove that what your prospective loan provider quoted you on the Mortgage Loan Disclosure Statement (California) or Good Faith Estimate (the other 49 states) is actually what they intend to deliver. There's a lot of paperwork that can be put under your nose to make it look like that's what I intend to deliver, but until you have the final loan documents sitting in front of you, none of it means anything. Just because they give you those wonderful forms like a MLDS or GFE or TILA or anything else does not mean that is what they intend to deliver. The only document that is required to be an accurate accounting of the loan and all the money that goes into and comes out is the HUD-1, and that comes at the end of the process, and you get it at the same time as you sign the note.

I have said it before, but there are three documents you need to concentrate on at loan closing. Everything else is in support of those. They are the Trust Deed or Mortgage, the Note, and the aforementioned HUD-1. An unscrupulous lender certainly can slip stuff past you on other forms, but most won't bother. These three forms will tell you about 99.9 percent of the shady dealings. Some lenders and brokers will actually train their loan officers in how to distract you from the numbers on these three documents.

Once you have signed all of the requisite paperwork to finalize your loan (the stuff you sign in front of a notary at the theoretical end of the process), there is potentially a waiting period that begins. Purchases have no federal right of rescission, nor do refinances of rental or investment property, but if it's your primary residence and you are refinancing, you have three business days to call it off. Note that some states may broaden the right of rescission, and some may even lengthen it, but they can't lessen what the federal government requires.

As an aside, just because you have signed "final" documents does not necessarily mean your loan will fund. There are both "prior to docs" conditions as well as "prior to funding" conditions. The former means they must be satisfied before your final loan documents are generated, the latter means they must be satisfied as a condition of funding the loan. I want to emphasize that there will always be "prior to funding" conditions, but they should be routine things that make sense to do at that time, in that they cannot realistically be done any sooner. Many lenders, however, are moving "prior to docs" conditions to "prior to funding." This has always been prevalent for so-called "hard money" loans, but recently sub-prime lenders in particular have been emulating their example. The reasoning for doing this is simple. Once you've signed documents, you are bound to them unless you exercise right of rescission. Once right of rescission expires, you are bound to them period, until they either fund the loan or give up on the possibility of funding it. I strongly advise you to ask for a copy of outstanding conditions on your loan commitment before you sign.

Assuming that there is a right of rescission applicable, once you have signed final documents, the clock starts ticking. The day you sign documents doesn't count. Sundays and Holidays don't count. It is possible that Saturdays don't count, depending upon the law in your state. Here in California, Saturdays count unless they are holidays. It is three business days. So let's say that you sign final documents with a notary on a Monday of a normal five day week. Tuesday, Wednesday, the Thursday all go by while you have still got your right of rescission. Thursday midnight the right of rescission expires, and the loan can fund on Friday. Note that no lender can or will fund a loan during your right of rescission period, and every so often an otherwise excellent loan officer will have you sign loan documents before some other conditions are finished so that the right of rescission will expire in timely fashion to fund your loan before your rate lock expires. Remember that if the rate is not locked, the rate is not real, but all locks have expirations.

Applicable rights of rescission cannot be waived, cannot be shortened, and cannot be circumvented. Ever. There literally is no provision to do so in the law. This is both intentional and, in my opinion, correct. Kind of defeats the purpose of having it, which is to give you a couple days to consult with third party professionals before it's final, if it can be waived, because you can bet millions to milliamps that the sharks you are trying to protect folks from would have the folks sign such a document if it existed.

Now, just because the right of rescission has expired and the loan can be funded does not mean that it will be funded, much less on that day. For starters, good escrow officers will not request funding upon a Friday because the client will end up paying interest on both loans over the weekend for no good purpose. Once they request funding, the lender has up to two business days to provide it, and then the escrow officer has two business days to get everybody their money.

Also, remember those "prior to funding" conditions I spoke about a couple of paragraphs ago? If there's something substantive, it usually should have been taken care of prior to signing docs, leaving procedural stuff for prior to funding. But sometimes it can be in your interest to move them, if it means your loan is more likely to fund within the lock period, so you don't have to pay for lock extensions. On the other hand, there has been a movement towards making as many conditions prior to funding as possible, simply because once you have signed final documents you are more tightly bound to that lender.

In summary, if a right of rescission is applicable, start counting with the next business day after you sign final loan documents. After three business days, the right of rescission has expired and the loan can fund. Assuming a normal five day week, and that Saturday counts, as it does in every state I've worked in:



If you sign:
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Sunday
Rescission expires:
Thursday midnight
Friday midnight
Saturday midnight
Monday midnight
Tuesday midnight
Wednesday midnight
Wednesday midnight

Caveat Emptor

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That question brought someone to the site. The answer is "Yes, they can". As a matter of fact, just because they have you sign those documents does not in any way obligate that lender to actually fund your loan. There... Read More

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I read with great interest you article on the internet about pre-payment penalties. I find my self in a situation involving a pre-payment penalty and would appreciate your advice on this. I currently have a loan in which the... Read More

8 Comments

lisa lucas said:

what if you were not given the right of rescission, not even told it existed? Is it something everybody is just suppose to know?

Dan Melson Author Profile Page said:

In California, it's a required notification that you have three business days to rescind a primary residence refinance.

Plus, escrow has to sit on the signed documents for three business days.

If lenders fund the loan and you later rescind (within the three days), they have to return your situation to what it was prior. Therefore, they won't fund until rescission is passed.

But once it has passed, it's gone for good.

Dave said:

What if I did a refinance and was not given my appropriate right to rescind. Do I have any recourse against my lender. I have had my loan in place for 2 1/2 years and am just curious if I have any action I can take against my lender for not having me sign a 3 day right of rescision.

Dan Melson Author Profile Page said:

You need to talk to a lawyer in your state. I think statute of limitations is three years, but I could be wrong. I'm pretty certain you're going to have to file a suit to get anything, but if that's worthwhile to you, talk to a lawyer.

Kimberly Slone Author Profile Page said:

My former boyfriend, an attorney, who was living with me for free in exchange for paying a 43,000 condo assessment had me sign documents that I have since found out gave him the right to foreclose on my property. There is no note and after signing the documents I was given a check which I deposited into my account immediately to pay the assessment. I thought we were going to get married. The agreement was suppose to be that he would live there for free. The relationship ended and he married someone 13 years younger and is now trying to foreclose on my condo. He claims I owe interest and keeps increasing the amount of the loan telling me if I don't sign, he'll foreclose. I tried to fight this but two attorneys told me they would need a $50,000 retainer and that I should get a loan and pay him. I tried. It seems it is impossible to get a loan for a condo. And it doesn't help that I had to move to an island in Alaska that recieved more rain than anywhere else in the US to secure full time employment as an RN. Now, the local banks consider my condo investment property! Besides working at KGH, I also work for a nonprofit and recieve a free room in exchange for helping the independent seniors. Hardly a house, or even an apartment! I told the local banks I am only here to get RN experience and plan to move home as soon as I can secure full time employment. No luck. Please advice. Everything I have is invested in that condo. Thank you for your time.

Dan Melson Author Profile Page said:

Things like this are enough to make me hate attorneys and our current legal system.

I'd like to help, but I am not an attorney. If attorneys are telling you to pay him the money, I haven't got anything.

Unfortunately, you are in an investment property situation because you're not currently living there. The standard terms are: occupy it within 30 days, and live there at least twelve continuous months. You cannot meet this.

Davie Truong said:

Hi There,

If I have NOT signed the FINAL Document on the Refinance Loan w/ a Notery,I know I can cancel the loan, but am I obligate to pay any fees such as administration and loan preparation???

Thanks

Davie

Dan Melson Author Profile Page said:

Only if you have a loan contract that obligates you to pay them. Also, if they have some of your money in the form of a deposit, it's unlikely to be cost effective to get it back (e.g. spend $10k in lawyer's fees to maybe recover $2k).

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About this Entry

This page contains a single entry by Dan Melson published on June 19, 2013 7:00 AM.

Questions You Should Ask Prospective Loan Providers was the previous entry in this blog.

What Are Recurring and Nonrecurring Closing Costs? is the next entry in this blog.

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