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Mortgage borrowers retain their right to void the deal


WASHINGTON -- Home mortgage borrowers just dodged the legislative equivalent of a cruise missile on Capitol Hill. They almost lost one of their fundamental consumer rights as loan applicants: The option to cancel the deal under certain circumstances if they don't like the final terms or they feel they're getting ripped off.

More importantly, they retained their legal right to unravel a mortgage transaction as much as three years after closing if the lender violated federal truth-in-lending rules.

When President Clinton recently signed into law the Truth-in-Lending Act Amendments of 1995, the final legislation preserved this key right -- known as "rescission" -- despite a determined assault by banking and mortgage industry interests. The specific issue involved cancellation of home refinancings when the borrower is changing lenders but taking out no additional money. This was a common situation during the "refi" boom of 1993, when homeowners sought to lower their rates -- but not increase their outstanding debt -- and shopped the market vigorously.

Under the Truth-in-Lending Act, such borrowers have had a three-business-day cooling-off period to change their minds.

You'd no longer have that right, though, if a banking industry regulatory-relief bill had sailed through the House and Senate unchallenged. It would have eliminated the cooling-off period for refinancings in which a homeowner changes lenders but takes out no additional debt.

Kathleen Keest, a truth-in-lending specialist at the National Consumer Law Center in Boston, said the legal significance of rescission extends far beyond the three-day cooling-off period. Its three-year reach when lenders improperly disclose terms to applicants "has been very important as a defense tool" for lower-income borrowers who sign up for high-fee, abusive loans, according to Keest.

The mortgage industry, for its part, thinks rescission rights for many refinancings are completely unnecessary. Sharon Canavan, counsel for the Mortgage Bankers Association of America, argued that for the "relative handful" of loan applicants who actually suffer from truth-in-lending abuses every year, vast numbers of applicants are forced to wait an extra three business days before they receive their refi money. That's because lenders don't physically deliver the loan proceeds until the cooling-off period is over.

That delay, in turn, prevents homeowners from cutting their mortgage expense immediately -- costing the average borrower an extra $30, according to estimates by the mortgage bankers association.

So be aware that you still have the right to a three-day cooling-off period on all refinancings with a new lender, plus all home equity lines of credit and second mortgages.

And count your consumer rights blessings. With Congress hellbent to get rid of federal regulations, remember that you don't have to score on Capitol Hill to win in this ballgame. A zero-zero tie may be all you need.

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