What is the right of withdrawal?
The right of termination is a legal protection under the Loan Truth Act (TILA) that allows you to cancel certain mortgage contracts within three days without any financial penalty. The right to terminate only applies to mortgage refinances, home equity loans and home equity lines of credit (HELOC), not purchase loans. In addition, you cannot exercise this right in the following situations:
- If you are refinancing or consolidating a mortgage with the same lender, although protection applies if the new amount financed is greater than the outstanding balance
- If the contract states that a state agency is the lender
- If you renew optional insurance premiums
You don’t have to give a reason to exercise your right to cancel a qualifying mortgage contract – let’s say you want to shop around a bit more, especially if you’ve found a better deal or think you’ve made a mistake. Another valid reason, according to Shashank Shekhar, CEO of Arcus Lending in San Jose, Calif., Is if you notice any fine print that you weren’t aware of at the time of closing or that has been changed without your knowledge. .
When does the right of withdrawal start?
The clock starts on your right of cancellation as soon as the following three events occur:
- You sign the mortgage contract (the “promissory note”)
- You receive the TILA disclosure or closing information document
- You receive two copies of a notice of your right to withdraw from the contract
Once this happens, you will have until midnight on the third business day after the transaction to cancel your agreement. Working days include Saturdays, but not Sundays or statutory holidays. So, for example, if you completed the close on the Friday before Memorial Day weekend, you would have until midnight the following Wednesday to exercise your right of withdrawal.
If you never received the TILA disclosure or the right to terminate the agreement, or if they were inaccurate, you may have up to three years to exercise that right.
How to exercise the right of withdrawal
The easiest way to cancel your mortgage contract is to use the notice you received from your lender about your right to cancel.
“Any security holder can sign it and send it to either their lender or the closing agent to reverse the loan closing,” Shekhar says.
Alternatively, you can write a letter. In both cases, it must be delivered or mailed before midnight on the third business day after the transaction.
Once received, the lender must comply with a full refund within 20 days of the date of termination.
Keep in mind that once you terminate the loan agreement, you won’t be able to go back.
“If borrowers are unsure about something, they should first seek clarification from their lender,” Shekhar says. “It would be a shame to completely cancel a transaction for the confusion which could have been easily clarified.”
Right of withdrawal and TILA
The Truth in Lending Act (TILA) was first enacted in 1968 to protect borrowers from abusive lending practices, and includes the three-day right of termination. The Real Estate Settlement Procedures Act (RESPA) of 1974 also protects borrowers by requiring lenders to provide disclosures about a mortgage, among other provisions, within a certain time frame. Under the TILA-RESPA (TRID) Integrated Disclosure Rule (also known as “Know Before You Owe”), all mortgage lenders are required to provide a loan estimate and closing disclosure to borrowers.