Consumer groups: Fed proposal would 'eviscerate' powerful remedy to stop foreclosures
The Federal Reserve Board is proposing changes to Truth in Lending mortgage regulations that consumer groups say would hurt homeowners facing wrongful foreclosure.
The controversy revolves around a clause that gives consumers the right to unwind an illegal loan through "rescission" for up to three years after the loan was signed.
A proposed change in the regulations by the Fed that was released last summer would require homeowners to pay the entire amount demanded by the creditor before the creditor is required to cancel the security interest in the home -- basically making the rescission rule useless.
"Instead of informing consumers about the terms of their loans as Congress intended, these proposals would allow broad misstatements of loan terms through new tolerances that are without statutory authority," the Consumers Union, National Consumer Law Center, the Center for Responsible Lending and a dozen other advocacy groups wrote in a letter to the Fed.
The letter pointed out that "the great majority of cases" brought to stop a foreclosure include rescission claims.
A New York Times editorial published Sunday said that requiring a borrower to pay off the remaining principal before the lender gives up its security interest "would be clearly impossible for troubled borrowers." "So," the paper reasoned, "the Fed's proposal would benefit the creditor who violated the law rather than the borrower, paving the way for foreclosures that otherwise could be avoided."
The modification to the rescission clause is part of a broader proposal by the Federal Reserve released on Aug. 16 that was supposed to enhance consumer protections in the act. The 90-day public comment period for the proposal ends on Dec. 23.
A Federal Reserve spokeswoman declined to comment on the proposal Tuesday, but in a written explanation the Fed said that the new regulations would "reduce uncertainty and litigation costs" for creditors.
Ariana Eunjung Cha
| November 30, 2010; 2:00 PM ET
Categories: Federal Reserve, Housing
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