Your Mortgage : Consumer Truth-in-Lending Protection at Risk

Millions of homeowners could lose one of their key consumer protections--the truth-in-lending right to rescind or cancel a mortgage refinancing--if legislative efforts now under way on Capitol Hill succeed.

A bill endorsed by most of the Republican leadership of the House Banking Committee--and pushed vigorously by mortgage lending industry lobbyists--would amend the Truth-in-Lending Act to strip away the longstanding right of borrowers to cancel most refinancing transactions within three business days after closing. Companion legislation is slated for introduction in the Senate in the near future.

Under current law, a homeowner refinancing into a larger loan, or refinancing with a new lender, has a federally mandated three-day “cooling off” period to cancel the deal. The lender must provide written notification of this right, typically accompanied by other truth-in-lending disclosures about the mortgage’s annual percentage rate (APR), payment schedule, total payments, finance charge and the amount financed.

Although the three-day right is exercised in only a small fraction of home refinancings, it carries a far greater protection than many consumers are aware of:

You can get out of a refinancing for up to three years if your lender either incorrectly disclosed any of the required truth-in-lending information, or failed to provide you with notice of your rights. Any bill that terminates the three-day right would also terminate the three-year protection.

The three-year risk motivates most lenders to take pains to make their disclosures correctly in the first place. The last thing they want to do is to refund thousands of dollars of fees, interest and closing costs to you two or three years down the road. Though most truth-in-lending abuses have involved mortgage companies who gouge elderly, lower-income and minority borrowers, the fact remains: The rescission hammer is available to any home refinancer, at any income level, who gets ripped off by a mortgage lender.

The exceptions to this rule are very narrow. There is no statutory right to rescind when you refinance with your current lender and don’t increase the amount of your debt. You are allowed to waive your rescission rights in a refinancing when you are experiencing a personal finance emergency and need the refi money immediately--for example, a pending foreclosure against your home or similar disaster.

In a March 23 report to Congress, the Federal Reserve Board recommended one additional exception be made to truth-in-lending rescissions. The Fed said that a waiver of the right to rescind should be permitted when a borrower refinances with a new lender, but doesn’t take out any additional debt--i.e., gets no “new money” from the transaction. Since most refinancers take out at least a little “new money,” this wouldn’t hurt large numbers of homeowners. It would, in fact, help consumers who currently have to wait an extra three business days before they can begin reaping the benefits--usually a lower interest rate--of their refinancing.

Contrast this limited change with legislation sponsored by Rep. Bill McCollum, R-Fla., and co-sponsored by 16 other House banking committee members, including the influential chairman, Rep. Jim Leach, R-Iowa. Known as the Truth-in-Lending Act Amendments of 1995 (HR 1184), the bill would virtually eliminate rescission rights on all first lien refinancings--whether involving new money or not. The main exceptions would be for so-called “high cost mortgage” loans that involve rates in the high teens or lender fees in excess of 8 points. (Each point equals 1% of the mortgage amount.)

An aide to McCollum, Tom Rosenkoetter, said the refinancing section of the bill is designed to “help the consumer by removing some of the inconsistencies” in current truth-in-lending rules. For example, he said, since consumers using “purchase money mortgages” receive no rights to rescind their loans, neither should refinancers. Purchase money mortgages are those you use to buy a principal residence.

Rosenkoetter conceded that abolition of the three-day period would also eliminate refinancers’ current rights to demand rescission when they discover two or three years down the road that they were misled or cheated by their lender.

Other segments of McCollum’s bill would allow lenders new tolerance for error in estimating truth-in-lending finance charges. Some consumer group attorneys estimate that this loosening of accuracy standards would permit unscrupulous lenders to avoid upfront disclosure of thousands of dollars that borrowers would have to pay at closing.

Where’s this legislation headed? Both supporters and critics agree it’s on Capitol Hill’s fast track, and could zip through the House later this spring. Prospects in the Republican-controlled Senate are also considered strong. That could leave the final fate of truth-in-lending protections for refinancers in the hands of Bill Clinton.

Distributed by the Washington Post Writers Group.