Home mortgage borrowers just dodged the legislative equivalent of a cruise missile on Capitol Hill. They almost lost--but ultimately shielded--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 if they think they're getting ripped off.
More important, they retained their legal right to unravel a mortgage transaction as long as three years after closing if the lender violated federal truth-in-lending rules.
When President Clinton signed the Truth-in-Lending Act Amendments of 1995 into law recently, the final legislation preserved this key right--known as rescission--despite an assault by banking and mortgage industry interests.
The specific issue involved cancellation of home refinancing when the borrower is changing lenders but taking out no additional money. This was a common situation during the refinance 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 after becoming obligated to the debt. Many of them may not have had the slightest idea that they enjoyed this right, but that's a separate story.
Say you're a homeowner with a $175,000 loan at 9%. The market drops to 7 1/2% and you want to lower your monthly payments. You check with your current lender and contact several others. The lowest refinance rate quote you get is from a small mortgage company that underbids everybody else by one quarter of a percentage point. So you sign up.
But at closing you get a rude shock. The settlement sheet contains fees that were either not mentioned or were much lower in the "good faith estimate" disclosures you received after application. You're being asked to cough up another $850 to settle the mortgage.
What to do? Under current law, you can use your three-day right to bail out of the deal, no questions asked. Indeed, you can bail out solely because you found a cheaper loan package at the last minute somewhere else.
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.
"We can't afford to lose any ground whatsoever" when it comes to protecting borrowers' rights vis-a-vis lenders, said Consumers Union legislative counsel Michelle Meier, who joined with legal services lawyers to fight the change.
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 abusive high-fee loans, according to Keest.
The mortgage industry, for its part, thinks rescission rights for many refinancings are unnecessary. Sharon Canavan, counsel for the Mortgage Bankers Assn. 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 refinance money. That's because lenders don't 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.
The upshot of the new legislation for you? First, be aware that you still have the right to a three-day cooling-off period on all refinancings with a new lender and on all home equity lines of credit and second mortgages.
And count your consumer rights blessings. With Congress hellbent to get rid of federal regulations--some of which protect you, your home and your financial existence--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.
Distributed by the Washington Post Writers Group.