Fed Pressured to Preserve Homeowners’ Rights

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Consumer advocates are up in arms over the Federal Reserve’s proposal to eliminate a homeowner’s right to contest an illegal home loan, as defined by the Truth In Lending Act. The elimination of that right, more formally known as “rescission,” could mean big fees and penalties, and even more foreclosures.

Rescission is a borrower’s right to contest a loan for up to three years from the date of origination. It gives homeowners some legal leverage to “undo” a home mortgage refinancing, or a home equity loan within three years if the bank or mortgage lender failed to make the proper disclosures. That “failure to disclose” usually involves the interest rate and the loan’s repayment terms.

In a Nov. 16 letter from a group of attorneys, consumer advocates, and civil rights groups, critics of the proposal asked the Federal Reserve Board of Governors to “withdraw the proposed Truth in Lending mortgage regulations” that the Federal Reserve has been pushing.

“In the face of an unparalleled foreclosure crisis, now is the time to reinforce the fundamental importance of TILA rescission,” the letter states. “Instead, the Board’s proposal would eviscerate the single most effective tool that homeowners have to stop foreclosures and avoid predatory loans: the extended right of rescission.”

While the Truth in Lending Act does allow mortgage lenders to make certain mistakes, the rules on loan terms and interest rate disclosures are rigidly enforced through TILA. According to the letter, if the Federal Reserve gets its way then it puts homeowners at a further disadvantage. That could mean more loan delinquencies and more foreclosures.

“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 letter states.

With the avalanche of foreclosures in the past few years – there were 332,172 foreclosures in October alone – banks are looking for any edge they can get to force homeowners out of their homes.

Rescission is one of the key tools lawyers use on behalf of homeowners to keep their houses. By merely invoking rescission, homeowners force banks and lenders to make a stronger case for foreclosure in front of judges who are less amenable to the lender’s cause, given the documentation screw-ups by bank foreclosure analysts.

What the Federal Reserve will do with the proposal is up in the air. Consumer advocates maintain there is only one decision for the Fed to make – to abandon the proposal to do away with rescission and come out on the side of homeowners.

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