December 6 2010 (Shirley Allen)
The Federal Reserve is considering changing policy that will make it much harder for homeowners to stop foreclosures and escape predatory home loans. The Fed’s proposal to amend a 42-year-old provision of the federal Truth in Lending Act would put an end to a homeowners 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 closing.
The proposal has not only angered labor, civil rights and consumer advocacy groups along with a slew of foreclosure defense attorneys, but they’re also asking the Fed to withdraw the proposal because they 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 stated, “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.”
The way the law is now, if problems are found with a homeowner’s loan, 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. Once 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.
Critics say the proposed change by the Fed would render the rescission clause useless. The Fed’s 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.
Barry Zigas, director of housing and credit policy at the Consumer Federation of America argues, “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.”
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.
Critics of the new proposal claim rescission is an effective tool to make sure creditors follow the rules and are transparent about the true cost of loans.
Tags: federal reserve, rescission clause, foreclosure, predatory loans, truth in lending act, homeowners right to cancel, lien, loan rescission