The Federal Reserve may drop its controversial effort to gut a rule that protects homeowners from fraudulent bank practices. After widespread complaints from consumer advocates that its changes to the rescission rule would actually kill the rule entirely, the Fed has quietly announced that it will duck the issue altogether.
Rescission is used by homeowners facing foreclosure who can prove that their lender either lied or failed to disclose important details about the loan. It “is one of the key defenses people have against foreclosure,” says Kathleen Day, spokeswoman for the Center for Responsible Lending.
If they can prove the bank failed to tell them about hidden fees or other costs buried in the loan, homeowners can win a judge’s approval of a rescission, which forces the bank to pay them all the costs and fees associated with the loan. The homeowner gets a new loan from a different bank, which pays off the remainder of the first loan and allows the original lender to keep all the interest that’s already been paid.
The Fed’s proposal would have switched the order and forced homeowners to pay off the loan first, before obtaining a rescission. Since most people don’t have enough money to pay off their entire mortgage in one big payment, the change would have made it impossible for the vast majority of homeowners to get a rescission.
“Unless you’re a millionaire, people are in no condition to pay off their mortgage immediately,” Day says.
The Fed made its announcement quietly. Leonard Chanin, a Fed spokesman, said at an American Bar Association conference in Florida that the Fed will probably abandon its rescission rule change, passing the issue off to the new Consumer Financial Protection Bureau, according to a Jan. 14 story in the Wall Street Journal.
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