What is rescission?

A rescission often starts with a notice of cancellation. It requires that all parties be brought back to the position they were in before entering into the contract. This means any benefit received as part of the contract, such as money, must be returned within a set period of time. A good example of this is a real property refinance. Once the documents are signed, there’s a recession period of 3 days in which the borrower can change their mind. When this happens, escrow and the lender are required to return all money and make it as if it never happened financially speaking. 

Rescission can occur as a result of innocent or fraudulent representation, mutual mistake, lack of legal capacity, an impossibility to perform a contract not contemplated by the parties, or duress and undue influence. For example, assume you agreed to sell and the buyer agreed to buy two acres of land that you thought you owned. You signed a purchase agreement and laid out agreed upon terms. Later, it turns out that you did not have title to the property. Rescission would be the proper remedy.

Many people encounter rescissions when dealing with insurance companies, as insurers have the right to rescind customers’ insurance policies in certain circumstances. Typically, real property insurers issue a binder or EOI (evidence of insurance) that is only finalized later on. 

Whiled the binder is active, an insurance company can cancel your policy if it discovers that you intentionally listed false information on your application for insurance.

Can an Equity Loan Fall Be Subject to Rescission?

You may have come across rescissions if you have ever applied for a Home Equity Line of Credit (HELOC). Like they would in a standard refinance, banks are required by law under the Truth in Lending Act to provide customers applying for a HELOC with a new lender a three day “cooling-off” period after the loan is signed. This allows customers to read over the loan documents and change their minds.

Customers can rescind the contract no questions asked during these three days, and the lender must give up any claim it has to their property and return all fees paid within a 20-day period of the rescission. However, not all mortgage related loans have the right of rescission.

For instance, there is no rescission period for a purchase mortgage loan. Likewise, it doesn’t apply if the property is a second home or investment property.

There are several other situations in which a contract can be rescinded. You can rescind a contract by agreement. If all parties to a contract agree to cancel it, they can do so. You can also rescind a contract because of a breach by another party, but the breach must be so substantial that it defeats the purpose of the contract.

What Happens When There’s Material Misrepresentation in a Loan?

Many mortgage loans and insurance plans go through third party brokers in the United States. Brokers and lenders are required to follow certain laws, typically under RESPA and TILA. This includes material disclosures designed to educate borrowers on the terms of their potential mortgage before they sign anything. There is a mutual agreement to do business and play different roles in the loan process.

In most cases, loans are either accepted or rejected. Those accepted are soled to FNMA or FHLMC, more commonly referred to as Fannie Mae and Freddie Mac if they fit within certain parameters. Occasionally, lenders will offer “non-QM” loans that they keep in-house. Rates are typically higher, and they can set stricter underwriting guidelines.

With any insurance policy, insurers can cancel policies with enough notice and if certain rules are followed. This is virtually guaranteed in cases of material misrepresentation (misrepresenting material facts that would change the underwriter’s decision). In mortgage loans, it can go both ways. A borrower can rescind the original contract if there are material misrepresentations from the lender. If the loan cannot be sold or otherwise runs into issues due to material misrepresentation from the borrower or broker, the lender can ask the broker to buy back the loan after the fact. If the broker refuses, they can go to court.

Do You Have a Rescinded Contract?

A rescinded contract of any kind can be a headache. It’s rarely as simple as it may sound. In fact, court cases are often a part of the deal. A simple notice of rescission is just one step. Even in the best cases, there’s a significant financial loss on one side or the other. 

Whatever your circumstance, you have certain rescission rights. Even if your mortgage lender is rescinding your mortgage loan, you have the right to a certain number of calendar days in most cases to respond. More importantly, you can always seek out legal advice. 

Even if you’re the one requesting contract rescission, contacting an attorney to review the process with you can keep you on the straight and narrow. This is even more true if you think of it as a mutual rescission. At the very least, an attorney can help you make sure you meet your contractual obligations as well.

Case Studies: Rescission in Contract Law

Case Study 1: Unforeseen Title Discrepancy in a Property Transaction

John, a homeowner, decided to sell his two-acre property to Mary. Both parties signed a purchase agreement, and Mary made a substantial down payment. However, during the title search process, it was discovered that there was a title discrepancy, and John did not have legal ownership of the property as he had thought.

Since the contract was based on the mistaken belief that John owned the property, the agreement was subject to rescission. The situation called for the contract to be voided, and all parties were to be restored to their original positions. John returned Mary’s down payment, and the contract was terminated without any financial penalties.

Case Study 2: Rescission of an Invalid Insurance Policy

Samantha applied for a homeowners’ insurance policy with an insurance company. After submitting the application, she received a binder, indicating temporary insurance coverage until the policy was finalized. However, during the underwriting process, the insurance company discovered that Samantha had provided false information on her application, misrepresenting certain material facts about her property.

As a result, the insurance company exercised its right to rescind the policy. According to the terms and conditions of the binder, they canceled the insurance coverage and refunded Samantha’s premium payment. The rescission was lawful, as it was based on the material misrepresentation made by Samantha during the application process.

Case Study 3: Home Equity Line of Credit (HELOC) Rescission

David applied for a Home Equity Line of Credit (HELOC) with a bank to access the equity in his home. After signing the loan documents, he received a three-day “cooling-off” period, during which he could reconsider the loan.

During this time, David carefully reviewed the loan terms and realized that the interest rate was much higher than he had anticipated. Feeling uneasy about the financial burden, he decided to rescind the HELOC within the three-day period. As a result, the bank canceled the loan, and David was no longer bound by the contract. The bank returned any fees David had paid, and he was not obligated to proceed with the loan.