Customer fees for rescinded loan

Question: We closed a refinanced home loan several days ago and the customer just called to rescind the loan. I understand that we have to refund the loan fees and cancel the loan. However, we have some disagreement about whether we need to refund fees for services such as the appraisal or credit report. These services were actually performed. Isn't it appropriate to require the customer to pay for them?

Answer: No. Even though you or a third party performed the service, you cannot require a rescinding customer to pay for the service. The idea behind rescission is that the customer should be in the position they were in before applying for the loan. That means they must be returned to that position before paying even an application fee. The fact that the service is performed is irrelevant.

If this rule seems unduly harsh, it may be helpful to consider how it came into being. The rescission rule is the Congressional response to a series of practices that were nothing short of predatory. We sometimes refer to rescission as the "aluminum siding salesmen rule" because of the practice of selling aluminum siding (or storm windows or similar home improvements) door to door. The home improvement sales practice was to go from door to door, use pressure sales tactics to "persuade" homeowners to purchase the product or service, and have homeowners sign on the dotted line right then and there. What homeowners didn't realize was that they were signing documents that gave a security interest in their home. When the service or product was unsatisfactory or never provided, the homeowners discovered that their note had been sold to a holder in due course and the homeowner faced the choice of paying for something they didn't get or losing their home.

The rescission rule is the result of Congress's indignant response to this admittedly sleazy practice. We have to live with the consequences.

Copyright © 2002 Compliance Action. Originally appeared in Compliance Action, Vol. 7, No. 13, 11/02