What Rescinding Your Mortgage Means Under the Truth in Lending Act
The Truth in Lending Act generally requires businesses making loans to provide disclosures about the true cost of the credit they are extending, such as the payment schedule, interest rate, and total of the payments that will be made over the life of the loan.
If all these disclosures are made, a consumer can rescind her loan within three days. But if the disclosures are not made, the consumer has an extended period to rescind. Under the federal Truth in Lending Act this period is three years. But under Massachusetts law, the rescission period is even longer, four years. This is because Massachusetts has its own version of the Truth in Lending Act called the Consumer Credit Cost Disclosure Act.
How does rescission work? First, the consumer must send a written notice of her intent to rescind the loan. The creditor must then do two things: (1) release any liens, such as mortgages, and (2) pay back any interest and fees that the consumer paid. Then, the consumer has to pay back the principal amount that she borrowed (this is technically called “tender”). This last part is often forgotten by consumers. Also, rescission only applies to refinances, not purchase-money loans.
Example TILA Rescission
For example, say a consumer refinances her mortgage for $100,000. She pays $5,000 in closing costs. She has a mortgage payment of $500 per month. At the closing, however, she does not realize that she did not receive a disclosure of the total amount financed.
The final day of the fourth year she realizes this, and she mails a letter to the bank rescinding the loan. The bank must file a discharge in the registry of deeds and pay her back the $5,000 in closing costs plus any interest she has paid over the past four years (approximately $18,000 for a $100,000 loan at 4% for 30 years). Once she receives this $22,000, she has to pay back the balance of the $100,000 loan, minus any payments she already made of principal. In this case, it will probably be around $88,000.
As you can see the rescission process under the Truth in Lending Act is complex. It usually does not result in a free house. Most of the time, however, banks refuse to rescind, which can cause damages. Damages may offset the principal amount that has to be paid.
If you believe you may have claims under the Truth in Lending Act or Massachusetts Consumer Credit Cost Disclosure Act related to a mortgage or other consumer transaction, our office may be able to provide you with a no-cost consultation.
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Culik Law is a Massachusetts Law Firm. The posts on Culik Law’s blog are not intended as legal advice. If you have questions about your particular situation, CONTACT CULIK LAW for a Free Consultation.