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From where a $150 refund should come


Dear Mr. Azrael:

During the spring, I was sent information about refinancing [a second mortgage].

[The mortgage company] told me they received a list of requirements from [my first mortgage holder].

The requirement that I had to fulfill was to send in a check for $150. They needed to receive the money before the subordination agreement would be prepared. I did as instructed.

In September, I received the settlement package in the mail. I noticed that lender services was charging an additional $100 for the work performed by [my first mortgage holder]. I signed the right to cancel and returned the entire package back to the title company.

The right to cancel states: "You have a legal right under federal law to cancel this transaction without cost. If you cancel the transaction, the mortgage, lien or security interest is also canceled. Within 20 calendar days we must return to you any money or property you have given to us or to anyone else in connection with this loan." That was signed Sept. 29.

I have contacted both [mortgage companies] about returning my $150. They have both refused verbally.

Mr. Azrael, when the right to cancel was signed, I would expect that the subordination agreement became void. If federal law states I am entitled to a full refund, who is responsible for returning my $150.

David W. Russell


Dear Mr. Russell:

The Federal Truth-In-Lending Act (TILA) allows consumers to cancel certain loan transactions secured by real property used as a principal dwelling.

The borrower has a right to cancel the credit transaction, without cost, within three business days from whichever of the following events occur last:

* The date of the transaction.

* The date the borrowers received the disclosures required by TILA.

* The date the borrowers received a written notice explaining their right to cancel.

If the borrowers properly exercise their right to cancel, the lender must return any money the borrowers have given to the lender or anyone else in connection with the loan transaction.

The right to cancel under TILA does not apply to all residential loan transactions.

For example, TILA does not cover loans made to purchase real property or to loans made for business purposes, even if secured by the borrower's principal residence.

A borrower has no right to cancel a refinancing loan by the same lender, which merely reduces the interest rate and changes the corresponding payment schedule in keeping with the reduced interest rate, without advancing any new money other than to cover refinancing costs.

Since your loan was refinanced with the same lender, I will assume TILA applied because you either received a new advance or changed the repayment term of your loan. An official comment to TILA makes clear that the ultimate purpose of the borrower's rescission right is "to place the consumer in the same position as he or she was on prior to entering into the new credit transaction."

Any amount paid to the lender or to a third party as part of the credit transaction must be refunded by the lender who made the loan. "Any amount" includes charges, such as broker's fees, application and commitment fees or fees for a title search or appraisal, whether paid to the lender or paid directly to the third party. It is ir- relevant that these amounts may not represent profit to the lender.

A lender need not return any money given by the consumer to a third party outside the credit transaction, such as costs for a building permit or a zoning variance.

In your case, you paid a third party $150 for its services in providing a subordination agreement. This agreement assured the new lender that its security interest would be superior (in a first position) to the security of the Secondary Bank.

Since your obtaining the subordination agreement was a requirement of the new loan transaction, I believe the new lender is required to refund the $150 fee. The new lender may claim that the $150 was paid outside the credit transaction rather than "in connection with the credit transaction."

I could find no case or regulation that expressly requires a subordination fee to be refunded when a consumer exercises a right to cancel under TILA.

What is certain is that the bank which charged the $150 fee is not required to refund it. The responsibility for repayment must fall only on the bank which extended the new credit.

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