Foreclosure prevention: rescission

Among all the tools one should consider when facing foreclosure is the right of rescission. Rescission is the right to cancel the contract and unwind everything back to start. While a homeowner may have the right to rescind for a variety of reasons, I want to focus on one, the right of rescission under the Truth In Lending Act (TILA). Every one who borrows money should be familiar with TILA. It is the law that require that prior to borrowing money, you be told the APR, the Finance Charege, the Amount Financed, the Total of Payments, the monthly payment amount, etc. It should show up as a box of information on the loan or in the case of a mortgage as a separate sheet. TILA requires that these disclosures be accurate within a certain tolerance, which if you are facing foreclosure is $35.

The right of rescission under TILA is a special tool that only applies under certain circumstances, so that it is often over looked. Rescission generally only applies to a loan which takes a security interest in the home of the borrower and was not used to purchase the home. For most this means a refinance or a home equity loan. You also have to be within 3 years of closing and still own the property.

Thus if you refi’d your home, which you still own, less than 3 years ago, and are now facing foreclosure read on:

***WHAT FOLLOWS IS A SIMPLIFIED DESCRIPTION OF THE ANALYSIS FOR POSSIBLE TILA RESCISSION FOR IMPROPER DISCLOSURE. IT IS INTENDED ONLY A QUICK GUIDE. IF YOU ARE FACING FORECLOSURE YOU SHOULD IMMEDIATELY SEEK HELP FROM A LEGITIMATE FORECLOSURE PREVENTION COUNSELOR (NOT SOMEONE WHO SENDS YOU A FLYER IN THE MAIL SAYING THEY CAN HELP YOU SAVE YOUR HOME OR CONTACT AN ATTORNEY WHO REGULARLY HANDLES FORECLOSURE CASES OR TILA CASES.***

What you need to do is determine if your disclosures were accurate. If they are off by more than $35 you likely have the right to rescind.

Heres how to check. Get out your Truth In Lending Disclosure Statement and your Settlement Statement (also called a HUD-1).

On page 1 of the HUD-1 will be the amount of the new loan. For example purposes let’s say the loan was $215,000.

Now look at the “Amount Financed” on the Truth In Lending Disclosure. in this example let’s say the amount financed was $208,500. Why is the amount financed less than the amount of the loan? Because the “Amount Financed” is the amount of money that you actually got to use for refinancing. The $6,500 difference between the amount of the loan and the “Amount Financed” was actually prepaid finance charges.

Now heres where the work starts. Pull out page 2 of the HUD-1. Its the page with all the settlement charges, like brokers fees, taxes, closing costs, etc. Take a sheet of paper and make 3 columns. “Finance Charge”, “Amount Financed” and “Questionable”

In the “Finance Charge” column place all the charges that are payable as a part of getting the loan. Think: “Would I have had to pay this charge if I had bought this house with cash?” If the answer is “NO” than it is likely a finance charge. Anything that is listed as being paid to the lender or a mortgage broker should be in this column along with any prepaid interest. An exception to this is the Appraisal Fee, which is an “Amount Financed” so long as it is bona fide and reasonable.

Add this column up and it should equal the prepaid finance charges. The $6,500 in the example. If it is over by more than $35 dollars you may have the right to rescind. If its under recheck, you likely missed something. But that’s not the end of things, you also need to look at the other charges.

All those other charges that you would normally have to pay if you were buying with cash, like closing fees, title search, title insurance, recording fees etc. are properly part of the amount financed as long as they are “bona fide and reasonable.” This means the amounts actually were paid to whoever and the amount was reasonable. For example if you where charge $1500 for title insurance on a $215,000 refinance when the market rate was $450 for such insurance, the extra $950 wasn’t bona fide or reasonable. Or being charged a recording fee of $250 when actually only $50 was paid to the recorders office.

Sleuthing out whether these charges are bona fide and reasonable may take a bit of work, but one thing that can help is to go to the internet and look for “closing costs calculators YOUR STATE” or “closing fees calculators YOUR STATE” A lot of closing companies as part of their marketing have these calculators on their websites. Get 3-4 such estimates and average them if your charges aren’t similar, there is a good chance your charges weren’t bona fide or reasonable.

So after you have gone through this exercise and found that you paid more in finance charges than was disclosed, Lets say the example person actually paid $6536 in finance charges not $6500 as disclosed, what happens next. Well if you still own the home and it has only been less than 3 years since the closing you send a notice of rescission. Upon receipt of the notice the lender has to immediately cancel any security interest they have in the property. (This stops the foreclosure dead). Then within 20 days they must return all money or property given as earnest money, downpayment or otherwise. Once this is done you have to give the lender the amount you actually got the benefit, which is likely a lot less than you think.

This mean the lender has to give you back all the money above the amount you actually got to use out of the loan. (This is the amount used to pay off your old loan, any credit cards paid off, and any cash you got at closing) Back to the example of the $215,000 refinance: Let say they paid off a $190,000 loan, $5,000 in old credit cards and got $5,000 in cash at closing. They got the benefit of $200,000. The remaining $15,000 now has to be returned, and all the principal and interest payments made on the loan. Let’s say the monthly principal and interest payments are $1000/month and were paid for 24 months. The lender has to give back $39,000, then the Examples would have to give it $200,000. But the Examples have $39,000 in cash so they actually only need $161,000. So now the Examples have a house worth say $230,000 and only need to get a loan for $161,000. If the examples are in bankruptcy, the effect of rescission is even greater because the loan from the bank may be considered unsecured.

Remember this is a very simplified explanation, so see an attorney!