Fed Trying to Make It Harder for Homeowners to Fight Mortgage Fraud by Gutting Truth In Lending Laws

As reported by the Washington Post, the Fed turned a blind eye for years and allowed massive fraud in the mortgage market.

After Alan Greenspan changed his mind and admitted that financial players commit fraud unless laws are enforced (see this and this), many hoped that the Fed would start cracking down on fraud a little bit.

Unfortunately, the Bernanke Fed is continuing to try to sweep fraud under the rug. As just one example, the Fed has been consistently trying to downplay the significance of mortgage fraud, claiming it's not widespread and that nothing much really has to be done about it.

Now, the Fed is proposing a change to the Truth in Lending laws which would make it harder for homeowners to fight mortgage fraud. The Fed's proposal can be read here, starting on page 58541.

As McClatchy noted yesterday:

The Federal Reserve is considering making it much harder for homeowners to stop foreclosures and escape predatory home loans with onerous terms.

The Fed's proposal to amend a 42-year-old provision of the federal Truth in Lending Act has angered labor, civil rights and consumer advocacy groups along with a slew of foreclosure defense attorneys, [who point out that] any future changes to the law [should not be proposed by the Fed, but should instead] be handled by the new Consumer Financial Protection Bureau, which begins its work next year.

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"At the depths of the worst foreclosure crisis since the Great Depression, we are surprised that the Fed has proposed rules that would eviscerate the primary protection homeowners currently have to escape abusive loans and avoid foreclosure: the extended right of rescission."

[T]he public comment period on the Fed's proposal is still open until Dec. 23 ....

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Since 1968, the Truth in Lending Act has given homeowners the right to cancel, or rescind illegal loans for up to three years after the transaction was completed if the buyer wasn't provided with proper disclosures at the time of closing.

Attorneys at AARP have used the rescission clause for decades to protect older homeowners stuck in predatory loans with costly terms. The provision is also helping struggling homeowners to fight a wave of foreclosure cases in which faulty and sometimes-fraudulent disclosures were used.

The violations must be of a material nature to invalidate a loan under the extended-rescission clause. To do so, homeowners — usually those facing financial problems or foreclosure — hire an attorney to scour their mortgage documents for possible violations regarding the actual cost of the loan or payment terms.

If problems are found, a notice of rescission is sent to the creditor, which can either admit to the alleged violation or contest it in court.

Creditors that end up rescinding a loan are then required to cancel their "security interest," or lien, on the property.

Once that occurs, the homeowner must then pay the outstanding loan balance back to the lender — minus the finance charges, fees and payments already made.

Dropping the lien provides homeowners with a defense against foreclosure and allows them to refinance to pay the outstanding loan amount.

Critics say the proposed change by the Fed would render the rescission clause useless. The Fed proposal would require homeowners who seek a loan rescission through the courts, to pay off the entire loan balance before the lender cancels the lien.

"This, of course, would be almost impossible for most consumers to do because they can't come up with the money until they get out of the loan. And they can't get out of the loan until the lien is released," said Barry Zigas, director of housing and credit policy at the Consumer Federation of America. "None of us are quite sure what purpose is being served by this proposal or what prompted it."

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Requiring homeowners to pay what remains of the original loan before a rescission can proceed is tantamount to a "verdict first, trial later" philosophy, Keest said.