Consumer groups and top members of the Senate Banking Committee are pressing the Federal Reserve Board to withdraw a plan they claim would eliminate a critical tool for homeowners to get out of risky mortgages.
The central bank issued a proposal in September to amend the Truth in Lending Act that would, among many other things, revise the so-called right of rescission, which allows borrowers to rescind a loan within three years that fails to comply with disclosure requirements. Under the plan, a borrower would have to repay the entire mortgage in full before a loan is rescinded.
The Center for Responsible Lending, National Consumer Law Center and other groups said such a requirement effectively stops most borrowers from using the right of rescission.
"We feel that this proposal almost completely guts the right to rescission, which is the main tool that consumers have to defend against foreclosures where loans were not properly originated," said Nina Simon, director of litigation for the Center for Responsible Lending. "Over the years I've practiced defending homeowners and have probably used that right almost every time. All of the cases we have worked on have had very abusive terms and often violated state law. But the remedy that stops the foreclosure cold in its tracks is the rescission claim, and that's been undermined by many courts, but never by the Fed before."
The consumer groups are backed by six lawmakers on the Senate Banking Committee, including Sen. Tim Johnson, who is expected to chair the panel this year. In a Jan. 3 letter the lawmakers agreed the proposal could do substantial harm.
"The extended right of rescission has been an important home-saving legal tool protecting borrowers against predatory loans," wrote the lawmakers, who also included Sens. Jack Reed and Sherrod Brown.
"The Board's proposed rule would reverse the traditional understanding of TILA's rights of rescission by requiring a homeowner to pay off the entire mortgage amount before a creditor is required to cancel its security interest in the home. Requiring a borrower to repay the entire mortgage would render this important borrower right inaccessible to all but the wealthiest homeowners."
Consumer groups have a host of other objections to the plan, but worry chiefly about the right-to-rescission revision.
"TILA has been the principal tool used by victims of irresponsible or predatory lending to stop foreclosure and it was really a critical stop gap measure to ensure that lenders would underwrite appropriately," said David Berenbaum, chief program officer of the National Community Reinvestment Coalition.
"So, we were taken quite by surprise [when] it was suggested a regulatory change to remove or eviscerate that primary protection."
Although a Fed spokeswoman declined to comment for this article, the central bank argued in its proposal that the changes to the right to rescission would help compliance with the Truth in Lending Act. The central bank said the objective was to update and clarify the rules for home-secured credit and reduce undue compliance burden and litigation risk for creditors.
