I have a loan in which the borrower refinanced an existing mortgage loan with us. The loan amount increased by $5000. Of that $5000 the borrower will be put the extra funds he would have taken as cash back on the principal to pay it down, so the customer is not getting any money. Would this require ROR?

Why does he want cash back to pay against the loan you are making him? That doesn't make any sense to me....nor should it to him.

But regardless....the $5000 is cash out, regardless of what he's going to do with it....it's an additional encumbrance on his primary residence, and yes, if he goes forward with this idea that it is somehow beneficial to him to borrow money just to immediately pay the principal down....yes it would need rescission. Assuming that is that this is the borrower's primary residence, which i assumed, but isn't actually stated in your post.

Yes it was his primary residence, thank you for your help!

So why does he want a (i'm throwing out theoretical numbers) $40,000 loan where $35,000 will pay off the existing loan and $5000 he will use to pay DOWN this new loan to an amount of.......$35,000. What's the point of that?

^^^yes, inquiring minds want to know.

My only guess on this weird situation is the loan was close to maturity, and the due-date would be bumped out

I get refinancing it (maybe for a better rate, or because near maturity)...i just don't understand getting "new money" for the purpose of immediately giving it back to the bank. That part makes no sense. It sounds like the bank should explain to the borrower that borrowing extra money to "pay down" the loan amount isn't a thing...

Yes - very strange and I probably would not do it. Now if you cut a check to the customer and the customer subsequently decided to pay down the loan that would be up to them. Maybe they received the money as cash back and its purpose went away. But if you are just doing an automatic principal reduction and not handing them the cash back in a form of a check - you need to think about that very hard. What is the actual loam amount for disclosure purposes if you are doing this. Sounds like the borrower is playing some sort of game and you need to know what it is to make sure it does not involve legal counsel and some new way to sue a bank.

this. we've seen where someone refinances and takes out money and then either doesn't need or needs less than thought, so they just pay back

Well....since the OP was asking about whether the loan would require ROR, i would have to assume all of this is happening pre-loan closing. So...if they find out pre-closing that their need went away....why not just amend their requested loan amount? But only the OP knows for sure.