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Fed Officially Abandons Plan To Gut Predatory Lending Rule

First Posted: 02/01/11 05:49 PM ET Updated: 05/25/11 07:30 PM ET

Fed Rescission

WASHINGTON -- The Federal Reserve Board of Governors confirmed Tuesday that it will not proceed with plans to gut a principal federal remedy for predatory lending.

As HuffPost reported last week, the central bank had already quietly made that clear to legal experts and fair-lending advocates, who had opposed the rule change. Principal regulatory authority on the issue will now shift to the new Consumer Financial Protection Bureau, which is not expected to revive the earlier Fed proposal.

"The Board has determined that proceeding with the 2009 and 2010 proposals would not be in the public interest," the Fed said in a press release. "Accordingly, the Board does not expect to finalize the August 2009 and September 2010 proposals prior to the July 2011 date for transfer of rulemaking authority to the CFPB."

The Fed is officially backing down from its proposal to eliminate rescission, a critical component of consumer-protection law that strips banks of the right to make money on illegal loans. Under current law, if a borrower wins a rescission case in court, the bank loses the right to foreclose on the home and forfeits all income from the loan's fees and interest. Borrowers are still required to repay the original amount the bank extended to them under the loan, but since banks cannot foreclose on the property, that amount can be repaid over time without the borrower facing pressure from a bank that sold them a predatory loan.

Under the controversial Fed proposal, however, the borrower would have been required to pay off the full principal balance before the bank lost its right to foreclose. Since most victims of predatory lending do not have hundreds of thousands of dollars lying around to hand over to a bank at a moment's notice, the new rule would have severely limited the protections offered by rescission. Even if a judge found a bank guilty of predatory lending, the bank would still be able to foreclose on the wronged borrower.

Consumer advocates met with Fed staffers three times before the release of last year's proposal, urging the central bank not to pursue the plan. Once the prospective rule was announced, several concerned citizens posted colorful, critical comments on the Fed's website.

The CFPB had been the arbiter of choice for consumer advocates, given that the new bureau is not expected to alter the existing rescission framework.

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