Is there any harm (violation) for a rescission period that is longer than three business days?

Are you really extending the recission, ie, giving them more time to rescind, or are you just dispursing later than the day after the three days expires? You can do the latter without penalty but I can't think of a good reason why you would want to do so.

The loan officers are actually extending the rescission period to four days, disclosing a four-day rescission period on the notice, and disbursing on the fifth day.

Reg Z Section 226.15(3) specifically states three days.
Your LOs are making the borrowers wait longer for their money thereby making them pay more interest on the loan they're paying off. I'm betting the examiners are not going to like that.

Interest does not begin to accrue until disbursement.
But I think you're right. The reg says to give a three day rescission period. To make the borrower wait for longer is not permitted. If the extra day caused some sort of a hardship or fee, they could sue us for making them wait an extra day.

Actually, unless your state prohibits it...you can collect interest or accrue interest on either or both loans while in recission...my problem with the above practice is that it is holding up funds...and depending on the circumstances could be in or not in the borrower's favor, so why risk it?

It's a questionable business practice, but there's no violation of Reg. Z and it's not likely there's a state law that prohibits the practice, either.

The argument that the practice is abusive is a very long stretch--for each 1% the IR might be reduced per $100,000 refinanced, the borrower's interest differential is only $2.74. On the other hand, I don't have to make the case that a cooling-off period is a good thing--because Congress did that when enacting TILA. Who's to say that 3 days is better than 4? In 1968, Congress thought 3 was sufficient, but maybe my customers are a bit slower than average.

If you could know the origin of your 4 day rescission policy, it's probably a kneejerk reaction to ancient violations involving shorter periods. Whoever was in charge at the time declared - "that'll never happen again if we go to 4 days." After a few years, the practice rose to the unquestionable status of "we've always done it that way."

It might very well be that the bank is doing this to make sure that the borrower did not rescind before the new loan is funded. Some banks call the borrower and ask if they are ready to fund, some just assume everything is okay and fund (and sometimes it is not okay), this bank might wait an extra day. Similar to Richard's example, it could be a reaction to a prior situation.