The Three Day Right of Rescission

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.

The three day right of rescission 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 Mortgage Loan Disclosure Statement or Good Faith Estimate or Truth-In-Lending Advisory 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:

Caveat Emptor

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