The Federal Reserve is pushing a new mortgage regulation that would effectively eliminate the most powerful federal remedy for predatory lending.
The regulation would severely limit a practice called "rescission," used to strike down demonstrably-illegal or fraudulent loan contracts and void a bank's ill-gotten gains from such predatory lending practices. When a mortgage borrower wins a rescission case in court, the bank loses the right to foreclose, and has to give up all profits from interest and fees on the loan. The borrower still has to repay the principal -- the original amount of money extended by the bank -- but can't be kicked out of the house.
Under the Fed's new proposal, however, borrowers would be required to pay off the balance of the loan before the bank loses its right to foreclose -- that means borrowers could still lose their homes, even in cases where banks have broken the law.
Unsurprisingly, banks support the move, but consumer advocates say this would essentially make rescission worthless to borrowers.
"The ... proposal would eviscerate the single most effective tool that homeowners have to stop foreclosures and avoid predatory loans," reads a letter penned by Margot Saunders of the National Consumer Law Center and signed by 16 national public interest groups, along with 33 state housing and legal aid groups and 144 individual attorneys. "Passage of the proposed rule will considerably exacerbate foreclosure statistics in this nation."
Six Democratic senators, led by Sherrod Brown of Ohio, also urged the Fed to reconsider its rule in a Monday letter. "In this time of record foreclosures and reports of systemic problems with the operations of the largest mortgage servicers, the proposed revisions are unfortunate and unnecessary," the letter reads. "The mortgage market needs greater oversight and accountability to restore borrower confidence lost in the mortgage crisis. The proposed rules would undermine this goal." The signatories included outgoing Senate Banking Chairman Chris Dodd (Conn.), incoming Chairman Tim Johnson (S.D.), and Sens. Jack Reed (R.I.), Daniel Akaka (Hawaii) and Jeff Merkley (Ore.).
The controversy comes as the U.S. mortgage market enters one of the bleakest years in its history. Foreclosures continue at a record pace, slowed only briefly by recent concerns that borrowers were being improperly evicted due to bank errors. At the end of September, nearly 1 million homes were in foreclosure, according to data collected by the foreclosure analyst RealtyTrac. According to the Center for Responsible Lending, 2.5 million homes were lost to foreclosure between January 2007 and the end of 2009, and another 5.7 million stand in "imminent" danger of foreclosure today.
"There are thousands of rescission cases in hundreds of courtrooms all across the country," Center for Responsible Lending spokeswoman Kathleen Day said. "Rescission is a main tool for fighting foreclosures."
The proposed change is part of a larger package of rules the Fed hopes to adopt, several of which appear designed to protect the public from shady financial hucksters. But while consumer groups are enthusiastic about some of the possible new regulations, they are so worried by the rescission changes that they are asking the Fed to withdraw the whole package. If winning a predatory lending case still means losing their home and owing hundreds of thousands of dollars to the bank that ruined them, they say, many consumers would prefer not to fight.
Dozens of other consumer advocacy organizations and concerned citizens have also sent the Fed comments on new rules. Many of the comments from individuals were more colorful than the letter penned by Saunders. All Fed regulations are open to public comment from anyone, but it is unusual to see a high volume of individuals weigh in on a technical consumer protection rule.
"I view this as nothing less than a criminal ploy to shove hard working Americans out of their homes and onto the streets," wrote Ann Capotosto in an undated comment letter. "It is immoral and must be stopped."
"Think of mankind for once, please," requested Larissa Cavanaugh in a Dec. 4 letter.
"Have you lost your minds?" inquired Beth Findsen in another letter from Dec. 4. "In the depths of an unprecedented catastrophe for the middle class, related to the predatory loans and their rapacious securitization by the financial industry, resulting in millions of middle class Americans losing all of their wealth and their homes, you want to loosen TILA? Are you tone deaf? Have you lost your humanity entirely?"
A Fed representative did not immediately respond to a request for comment.