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How to back out of a refinance

A recent Supreme Court ruling clarified the process borrowers must follow to back out of a refinance. Ruling on what’s known as “mortgage rescission,” the court said a simple letter from the borrower to the lender would suffice to cancel a loan – no need to file a lawsuit. Let us explain. 

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TILA

Back in 1969, Congress passed the Truth in Lending Act (TILA). Among its other provisions, the Act allowed borrowers to back out of a refinance or home equity loan at any time before the third business day after closing. In other words, borrowers had three days to back out of a refinance no questions asked, as long as they notified the lender in accordance with “regulations.” The rules on notification were pretty vague.

The three-day freebie that allows borrowers to back out of a home loan is only available for refinance or home equity loans, not a home purchase loan. It’s designed to protect the equity that a homeowner has built up by allowing borrowers to back out of a refinance or home equity loan they regret signing.

Once the three days pass, borrowers have up to three years to rescind a mortgage if their lender doesn’t provide required disclosures. The three-year rule gives lenders an incentive to comply with disclosure requirements, and homeowners a bit of time to get wise to any lender abuse. As with the three-day rule, the law required that borrowers notify lenders in the appropriate fashion. But what exactly is the appropriate fashion?

SCOTUS

This question became the subject of a lawsuit that eventually made its way to the Supreme Court. The question at stake was this: When borrowers want to notify lenders of a mortgage rescission, does the Truth in Lending Act require homeowners to file a lawsuit within the three-year grace period, or does a simple letter suffice?

As of this year’s ruling, a letter is all it takes. The Supreme Court ruled that borrowers can write to their creditors and state their intent to rescind a loan within the three years. They don’t have to initiate a lawsuit within the three-year time frame. It’s a ruling that makes mortgage rescission a little easier for homeowners.

It’s nice to know that the right of rescission is out there if you need it, and that the Supreme Court has borrowers’ backs on this one.

Photo credit: flickr

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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