If you’ve ever signed for a mortgage, or any other loan for that matter, you may be familiar with the 3-Day Right of Rescission. It’s a right granted to all borrowers to change their minds after the loan papers have been signed. There are limits of course, but the goal is to give the borrower just a bit of time after the papers have been signed to change his or her mind. It’s an added measure of protection and, as a current or future borrower, it’s your responsibility to understand how the law protects you.
How the 3 Day Right of Rescission Works
The law gives a borrower 3 full business days to rescind, or change his mind, after signing the loan documents. That means you can sign your loan docs on Monday, and if you go home and notice there’s a mistake on the loan documents and the interest rate is significantly higher than expected, you have 3 full days to fax in your notice of rescission to the lender and you won’t lose anything because of it.
The 3 full days begin the day after you sign your loan documents and do not include Sundays and federal holidays (list of U.S. federal holidays), but do include every other day, including Saturday. For example, if you sign your loan documents on a Thursday, the 3 days doesn’t begin until Friday. The first day is Friday, the second day is Saturday, you skip Sunday, and the third day is Monday (assuming Monday’s not a Federal holiday). In this example, you would have until Monday at midnight to send in a written notice of rescission to your lender.
The rescission notice can be anything typed or hand-written by you notifying your lender that you would like to rescind. Be sure to include your name, loan number, your lender’s name, and the current date and time on your notice. You can also find sample notices by searching Google for “Rescission notice.” The notice can be faxed or mailed to your lender.
If you mail the notice, the 3-day rule says it only has to be dropped into the mailbox by the rescission deadline. So, in the above example – your rescission period ends on Monday at midnight – you could drop the letter in the mailbox at 11:59 pm on Monday and you would have just made the deadline. Obviously they have no way of knowing whether you dropped it in the box at 11:59 pm on Monday or if you were a bit late and dropped it in at 12:01 am on Tuesday, but that’s the rule.
Now let’s say you sign your loan documents on Friday, but the following Monday is a federal holiday. Your rescission period begins the day after signing, which would be Saturday in this case. We skip Sunday, but we also skip Monday since it’s a federal holiday. So day 2 would be Tuesday, and day 3 would be Wednesday. You would have until Wednesday at midnight to rescind in this example.
Calculate Your Funding Date Based on the Rescission Period
If you’re wondering when your loan will fund, it’s simple to calculate, it’s just the day after your rescission period expires. So, in the previous example, where Monday was a holiday and the rescission period expired on Wednesday at midnight, your loan would fund sometime on Thursday. The exact time really depends on a number of factors, but I’ve found it’s usually before noon.
When Your Right to Rescind Does Not Apply
It’s important to note that the 3-day right of rescission does not apply to all types of mortgages. Here are some examples of when the 3-day right of rescission does not apply:
- Does not apply to purchase mortgages, only to refinances
- Does not apply to refinances if you refinance with the same lender
- However, if you refinance with the same lender and take cash out, it does apply to the cash out portion of the loan
- Only applies to refinancing of your primary residence (doesn’t matter what type of home – i.e. manufactured, mobile, etc)
- Does not apply when you borrow money for your business
- Does not apply when you borrow from a state agency
It Gets a Bit More Complicated Now
Those are the basics of the law, however, there are some interesting quirks that you may never have to deal with, but we’ll share them anyway just in case . The 3-day clock doesn’t actually start ticking until 3 conditions have been met, however, in the vast majority of cases, all 3 of these things will happen on the signing day. Nonetheless, the conditions are:
- Borrower must sign the loan papers
- Borrower must receive a copy of all loan disclosures
- Borrower must receive a copy of the Notice of Right to Rescind
In the rare case that your lender does not supply these on the day of your signing, the rescission period can run up to 3 years after your signing date. In such a case, should you decide to rescind, say, a year later, your lender’s security interest in the property becomes void and they must reimburse you for all finance charges collected over the life of the loan.
Additionally, the right to rescind applies to anyone with an ownership interest in the property. For example, if your husband is on Title, but will not be signing for the loan, he still has the right to rescind because the Title grants him ownership interest in the property.
Now, if you’ve really been paying attention up to this point – and bravo for you if you have – you may be wondering why the rule only requires that you drop your rescission notice in the mailbox by the deadline and not that the lender receives your notice by the deadline. Because your loan funds the day after your 3-days expire, and if you drop your rescission notice in the mailbox at 11:59 pm on the 3rd day, your loan will undoubtedly fund before the lender receives your notice.
Well, you’re right about this…in such a case you’d end up having to pay the lender right back. The law only requires that the lender be reasonably satisfied that the owners have not rescinded before releasing the funds from escrow. It ends up being a hassle for you and, especially, for your lender. That’s why it’s always a good idea to give your lender a call before the deadline if you plan to rescind. That way you can avoid the hassle of having to pay back the full amount of the loan. Incidentally, the potential for something like this to occur is just the reason your loan officer/broker may call you on the last day of your rescission period just to check that you haven’t decided to rescind or, in some cases, your lender may request written confirmation that you or anyone else with ownership interest in the property has not decided to rescind.
Waiving the Right of Rescission
While the 3-day right of rescission is designed to protect borrowers, it can also be a burden. The lender will not release funds from escrow until the day after the rescission period expires, but what if you need those funds immediately? What if your house was hit by a tornado and you need the funds to make repairs or you’ll have nowhere to live? In such a case, and only if you have a “bona fide personal financial emergency,” you can opt to waive your right of rescission and have your loan fund 3 days sooner.
If you’re interested in more information, you can check out the FDIC’s page on the topic of rescission at http://www.fdic.gov/regulations/laws/rules/6500-200.html#6500105