Three Day Right to Cancel on Refinance: Good or Bad?

As anyone in the mortgage industry knows, a consumer has a three day right to cancel a mortgage loan that is secured by the owner’s principal residence under Federal Law. This would be a re-finance of a first mortgage or taking out a second mortgage. I am surely in the real estate industry being a real estate attorney in South Carolina, especially since I represent many banks and credit union in doing their second mortgages. See my last column about attorneys being required to do South Carolina real estate transactions.  The three day requirement is mandatory except for a bond fide financial emergency. Examples of this would be your house got flooded out or your house was about to be sold at a foreclosure sale. I was trained about the right to cancel seven years ago by my first boss. I know how to calculate the days (day of closing does not count, Sundays and Federal Holidays do not count) and the date the loan disburses. I did not even think about it even when I re-financed my house; I knew I was going to wait the three days. However, I think it is time to give this law a look and discuss whether it is a good idea.

A borrower exercising his or her right to cancel has been very rare in the closings I have done. I give you one example where borrowers did exercise their right to cancel where the federal right to cancel law because of the South Carolina Predatory Lending Act of 2003. The South Carolina law requires a “net tangible benefit” to the borrowers for doing the “re-fi.” The borrowers were changing an ARM (variable rate) to a fixed rate mortgage. The predatory lending act prohibited them from going from one variable rate to another, even if the new variable rate was lower and the original interest rate would stay for a longer time. The mortgage broker could only get them a fixed rate that was higher then their current variable rate, even though the low variable rate was going to expire soon. The borrowers could not afford their higher payment and canceled the loan two days later. I assisted them with filling out the paperwork. I referred them to our credit union client and they assisted the borrowers get the money they needed with a second mortgage. As usual, the good intentions of laws mess things up. In this case, the right to cancel was a good thing. The borrowers had three days to think about it and exercised their judgment.