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You are here News Economy Federal Reserve works to strip a key mortgage protection for homeowners - Rescission

Federal Reserve works to strip a key mortgage protection for homeowners - Rescission

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As Americans continue to lose their homes in record numbers, 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.  They're not only asking the Fed to withdraw the proposal, they also want any future changes to the law to be handled by the new Consumer Financial Protection Bureau, which begins its work next year.

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.

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