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Consumer Groups Protest Federal Reserve Proposal to Change Truth in Lending Act

December 6, 2010

As Fontana predatory lending lawyers, we were disturbed to read about a proposal that would destroy an important provision of the federal Truth in Lending Act. According to the Political Economy blog at the Washington Post, the Federal Reserve Board is considering a change to the part of TILA that essentially allows loans to be canceled when they were made illegally, without the proper disclosure of the loan's terms. The proposed rule would keep that right, but require borrowers to repay the full amount of the loan before the loan is canceled. This would be impossible for most mortgage borrowers, making the right of rescission useless. Because this right of rescission is frequently used in foreclosure cases, a group of foreclosure attorneys and consumer protection groups have written to the Fed (PDF) to protest the proposal.

When lenders make a mortgage loan on a primary home, they are required under TILA to disclose things like the payment schedule, APR, finance charges and other basic loan terms. Failure to disclose all of this gives the borrower a right to rescind the transaction for up to three years after closing. The rescission cancels the lender's legal claim on the physical property, and requires the lender to return any finance charges it has already collected. The borrower will still be required to pay off the loan, but he or she will not be required to pay any finance charges in the future. In essence, rescission takes the profit out of the loan. This gives the lender an incentive to make the legally required disclosures. In recent years, rescission has also been used as a tool to defend against foreclosures among people whose loans were illegal to start with, who can then refinance.

Under the new proposed rules by the Fed, the right of rescission would still be in place -- but the consumer would be required to pay the entire loan back before the lender canceled its interest in the property. As the consumer groups' letter says, this rule would make the right of rescission useless. There would be no incentive to make the disclosures, because the lender would retain its ownership right in the property despite having broken the law. This would also take away borrowers' ability to use rescission as a defense against foreclosure, and their ability to refinance the loan with another, more ethical lender after rescission. As the New York Times observed recently, this rule change would benefit and incentivize law-breaking.

Our West Covina predatory lending attorneys strongly agree with the Times and the letter-writers. The Truth in Lending Act tries to even the playing field between mortgage lenders and borrowers. Without full disclosure of the terms of the loan, borrowers have no hope of understanding what they are signing unless they happen to be real estate attorneys. (Even with disclosure, that's questionable.) This opens the door for lenders to commit outright fraud with impunity, because they would know that even if they were caught and the loan was rescinded, they would still be able to foreclose. The Federal Reserve said it proposed the rule to "reduce uncertainty and litigation costs" to lenders, and indeed, the rule would do that. But this is a case where uncertainty and litigation costs are an entirely appropriate reward for breaking the law.

If you believe you were lied to or misled when you were taking out your mortgage, don't hesitate to call Howard Law PC to discuss a predatory lending claim. The right of rescission is a powerful tool for homeowners dealing with loans made under questionable circumstances, but it only lasts three years. Many other consumer protection laws also have time limits, including laws against racial bias in lending, presenting a contract in a different language from the one used to negotiate, and more. All of that is illegal behavior by lenders that our Lake Forest predatory lending attorneys can use to get the loan modified or canceled. In many cases of predatory lending, our goal is to stop a foreclosure that is happening under unfair circumstances and replace the unfair loan with a loan whose terms our clients understand. We want to leave our clients with loan payments they can realistically make and freely agreed to, without deceit or fraud.

Howard Law offers free, confidential case evaluations, so you risk nothing by speaking to us about your rights and your case. To set one up, contact us through the Internet or call 1-800-872-5925 toll-free.