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Fed Wants to Strip a Key Protection for Homeowners

Tony Pugh

The Fed's proposal to amend a 42-year-old provision of the federal Truth in Lending Act has angered labor, civil rights and consumer advocacy groups along with a slew of foreclosure defense attorneys.

— As Americans continue to lose their homes in record numbers, the
Federal Reserve is considering making it much harder for homeowners to
stop foreclosures and escape predatory home loans with onerous terms.

The Fed's proposal to amend a 42-year-old
provision of the federal Truth in Lending Act has angered labor, civil
rights and consumer advocacy groups along with a slew of foreclosure
defense attorneys.

They're not only asking the Fed to withdraw the
proposal, they also want any future changes to the law to be handled by
the new Consumer Financial Protection Bureau, which begins its work
next year.

In a letter to the Fed's Board of Governors, dozens of groups that
oppose the measure, including the National Consumer Law Center, the
NAACP and the Service Employees International Union, say the proposal is
bad medicine at the wrong time.

"At the depths of the worst
foreclosure crisis since the Great Depression, we are surprised that the
Fed has proposed rules that would eviscerate the primary protection
homeowners currently have to escape abusive loans and avoid foreclosure:
the extended right of rescission."

Because the public comment period on the Fed's proposal is still open until Dec. 23, a spokesman declined comment on the matter.

in a September passage in the Federal Register, the Fed said the
proposal was designed to "ensure a clearer and more equitable process
for resolving rescission claims raised in court proceedings" and
reflects what most courts already require.

Since 1968, the Truth
in Lending Act has given homeowners the right to cancel, or rescind
illegal loans for up to three years after the transaction was completed
if the buyer wasn't provided with proper disclosures at the time of

Attorneys at AARP have used the rescission clause for
decades to protect older homeowners stuck in predatory loans with costly
terms. The provision is also helping struggling homeowners to fight a
wave of foreclosure cases in which faulty and sometimes-fraudulent
disclosures were used.

The violations must be of a material nature
to invalidate a loan under the extended-rescission clause. To do so,
homeowners — usually those facing financial problems or foreclosure —
hire an attorney to scour their mortgage documents for possible
violations regarding the actual cost of the loan or payment terms.

problems are found, a notice of rescission is sent to the creditor,
which can either admit to the alleged violation or contest it in court.

Creditors that end up rescinding a loan are then required to cancel their "security interest," or lien, on the property.

that occurs, the homeowner must then pay the outstanding loan balance
back to the lender — minus the finance charges, fees and payments
already made.

Dropping the lien provides homeowners with a defense
against foreclosure and allows them to refinance to pay the outstanding
loan amount.


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Critics say the proposed change by the Fed would
render the rescission clause useless. The Fed proposal would require
homeowners who seek a loan rescission through the courts, to pay off the
entire loan balance before the lender cancels the lien.

"This, of
course, would be almost impossible for most consumers to do because
they can't come up with the money until they get out of the loan. And
they can't get out of the loan until the lien is released," said Barry
Zigas, director of housing and credit policy at the Consumer Federation
of America. "None of us are quite sure what purpose is being served by
this proposal or what prompted it."

The Fed's proposal is part of
an ongoing effort begun in 2005 to review and update rules and
guidelines for disclosure in the rescission process, said Kathleen
Keest, the senior policy counsel for the Center for Responsible Lending.
That effort, which includes a review and update of the forms used for
rescission, pre-dates the housing-market meltdown and the recession, she

The Fed "believes this adjustment would facilitate
compliance with the Truth in Lending Act," adding that the "majority of
courts that have considered this issue" condition the release of a lien
on a homeowner's ability to repay the balance.

The Mortgage
Bankers Association, the main trade group for the real estate finance
industry, hasn't taken a position on the issue or submitted public
comment to the Fed. But "we are inclined to support the direction the
Fed is headed," said John Mechem, the MBA's vice president for public

Requiring homeowners to pay what remains of the original
loan before a rescission can proceed is tantamount to a "verdict first,
trial later" philosophy, Keest said.

"It basically puts the cart
before the horse," she said, adding that securing the "right to rescind
determines how much you have to (pay)."

David Certner, the
legislative policy director at AARP, which also has criticized the
proposal, said rescission is an effective tool to make sure creditors
follow the rules and are transparent about the true cost of loans.

can help put off a foreclosure and give one the leverage in negotiating
some other type of appropriate payment or settlement. It's a very
powerful tool to help people stay in their homes," Certner said. He
called the proposal "egregious."


Letter to Federal Reserve opposing the rescission proposal

Federal Register notice explaining its proposed changes on rescission (begins on pg. 58541)

To submit a comment to the Federal Reserve

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