Is the Federal Reserve Leaving Homeowners out in the Cold?

Consumer groups worry that a new proposal will make homeowners more vulnerable to foreclosures

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The Federal Reserve, sensing it hasn't whipped up enough controversy recently with its decision to purchase $600 billion in government bonds or its release of documents detailing the emergency loans it made during the financial crisis, has stirred the pot once again. This time it wants to amend part of the Truth in Lending Act that gives homeowners the right to cancel, or rescind, a loan up to three years after the transaction if the lender illegally withheld information about a mortgage from the homeowner--a frequent occurrence during the recent housing bubble.

The modification floated by the Fed--part of a broader proposal intended to advance consumer protections--would insist that homeowners pursuing a rescission in court pay the entire amount demanded by a lender before interests and fees on the loan are canceled, and the lender gives up the right to foreclose. McClatchy reports that the Fed's proposal is part of a campaign launched in 2005, pre-mortgage meltdown, to reform the rescission process, while the New York Times notes that the Fed is justifying the proposal based on concern about banks' compliance costs. Whatever the rationale, the plan has invited all manner of backlash from consumer groups and commentators:
  • This Will Rob Homeowners of an Essential Protection, warn hundreds of groups, including the NAACP and the Service Employees International Union, in a letter to the Fed's Board of Governors: "At the depths of the worst foreclosure crisis since the Great Depression, we are surprised that the Federal Reserve Board has proposed rules that would eviscerate the primary protection homeowners currently have to escape abusive loans and avoid foreclosure." The letter notes that the majority of cases to halt foreclosures involve rescission claims and calls for the Fed to leave any future changes to the law to the newly minted Consumer Financial Protection Bureau.
  • Troubled Borrowers Won't Be Able to Pay the Loans as Required, maintains a New York Times editorial. Under current law, when an illegal loan is rescinded, the lender gives up its security interest in the home and therefore cannot foreclose on the homeowner, though the lender will get the money back. "In practice," these lenders, in the face of rescission, often modify loans instead. This won't occur if the Fed proposal takes effect. The Fed will demand the full loan be repaid before interest and foreclosure rights are canceled, which some homeowners can't afford to do. As the editorial argues, "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."

  • Whose Side Is the Fed On? wonders AlterNet's Zach Carter: "If borrowers cannot obtain relief through rescission, then they have little reason to press claims about fraud in other parts of the mortgage process. This is an enormous gift to the nation's four largest banks, with major public policy implications that go beyond the very critical problem of rampant, illegal foreclosures."
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