FED SEEKS CHANGE IN RESCISSION RULE

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

The Truth in Lending Act from 1968 gives borrowers the “right of rescission,” the ability to undo a home refinancing or home equity loan within three years of the closing if the lender did not make proper disclosures — generally of the loan amount, interest rate and repayment terms. The law makes allowances for mere mistakes by the lender, but otherwise requires strict compliance, as well it should: disclosure is the main — often the only — consumer protection in the mortgage market.

the Fed’s proposal would benefit the creditor who violated the law rather than the borrower, paving the way for foreclosures that otherwise could be avoided.”

Following a decision by a district court Judge in Minnesota (see Decision on Rescission) the megabanks have stepped up their pressure to politicize the Federal Reserve. The FED is now thinking of changing the rescission rule. The rule gives consumers the only protection available in the event a genuine dispute over a mortgage loan. By invoking the right of rescission within the time limits stated in the statute, the rule currently states that the “lender” has two choices: (1) file a declaratory action within 20 days or (2) lose the security of the mortgage which allows foreclosure for non-payment.

The Minnesota decision went further, following the statute and the current rule, stating that the borrower must tender the money, not the house, and that the tender of the money is AFTER deductions for set-offs and counterclaims. Further, the decision allows the homeowner to tender a reasonable payment period in which monthly payments would be made.

By operation of law, the mortgage is removed from the property under the current statute and the Federal Reserve Reg Z unless the “lender” brings a judicial action for declaratory relief. The “note” is deemed satisfied and the “lender” is required to send back the original note and execute a satisfaction of mortgage, although the mortgage is deemed extinguished by operation of law anyway.

The use of rescission provisions in the Truth in Lending Act (TILA) had fallen out of favor simply because Judges refused to apply them. That trend was suddenly reversed when one District Judge simply stated the obvious. The statute is clear on its face and so is the Rule.

This has led many homeowners and their attorneys to revisit rescission as a substantive remedy — and as a procedural remedy. By merely invoking the right to rescind, which the courts have already interpreted as any clear statement in any form that the homeowner wishes to rescind the loan, the statute does the rest of the work for them. A pretender lender seeking non-judicial foreclosure would be forced into a judicial forum where it would not only have to prove standing, but the right to foreclose.

The current status is that tens of thousands of homeowners have claimed rescission only to be told by their lawyers or the courts that it will have no effect. Judges were refusing to apply the law because of their conviction that the loan was legally created and that the securitization of the loan had no effect on the obligation, note or mortgage.

Now in the last few months, it has become evident that the pretender lenders were using forgeries, fabrications and outright perjury in court to sustain their right to lift stay in bankruptcy proceedings, and proceed with sale in non judicial and judicial foreclosures. This in turn has led to questions as to why that would be necessary if the original mortgages were valid. Lawyers are arguing that if the pretender lenders were admitting the fatally defective nature of the original loans by resorting to illegal means to enforce the “mortgages” and the “notes” and the “obligations.”

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November 28, 2010, NY Times

The Fed and Foreclosures

There are two sides to every delinquent loan — a lender who made a bad lending decision and a borrower who cannot repay. Yet, banks have never acted as if they bear responsibility for the mortgage mess.

They have pursued foreclosures in violation of borrowers’ rights to due process, as revealed by the recent robo-signing scandal. And, despite having been bailed out for their mistakes, they have pursued their self-interest, not the public interest, when it comes to modifying bad loans. They have resisted reducing principal balances for troubled borrowers, for instance, because that could force them to take losses they would rather delay.

Now, despite mounting evidence of borrower mistreatment, the Federal Reserve has proposed a rule that would disable the most effective legal tool that borrowers have to fight foreclosures.

First, some background: The Truth in Lending Act from 1968 gives borrowers the “right of rescission,” the ability to undo a home refinancing or home equity loan within three years of the closing if the lender did not make proper disclosures — generally of the loan amount, interest rate and repayment terms. The law makes allowances for mere mistakes by the lender, but otherwise requires strict compliance, as well it should: disclosure is the main — often the only — consumer protection in the mortgage market.

It will come as no surprise that disclosure violations are not uncommon in the loans of the bubble years, so rescissions have become a valuable defense against foreclosure. That’s because when a loan is rescinded, the lender must give up its security interest in the home — and without a security interest, the lender cannot foreclose. The borrower must still repay the loan principal, minus payments already made. Essentially, a lender that has not complied with required disclosures can get its money back, but not interest and other fees.

In practice, one of the ways that rescissions have worked is that lenders faced with rescission have instead modified the loans, by reducing principal and setting new repayment terms.

The Fed proposal would change all that. Citing concern over banks’ compliance costs, it would require a borrower to pay off the remaining principal before the lender gives up its security interest. That would be clearly impossible for troubled borrowers. So the Fed’s proposal would benefit the creditor who violated the law rather than the borrower, paving the way for foreclosures that otherwise could be avoided.

The Fed failed to protect consumers before the financial crisis, and is failing again. Hundreds of consumer and civil rights organizations, state and local legal aid programs, and homeowners’ lawyers have signed a letter asking that the proposal be withdrawn. The Fed should comply.


9 Responses

  1. Is it true that you can do a rescission after the statute of limitations if you are in foreclosure? I read that somewhere but not sure if it was regarding a particular state or everywhere or misinformation.

  2. “In short, what this means is that if the bank violated black-letter law in making a loan to you the change would require you to pay off the entire principal before you could assert your rights and remedies.

    This is like requiring someone who was robbed to somehow come up with the money to repay the owner of the property that was stolen before the robber can be held to account for his criminal act.

    Yeah.

    No wonder The Fed doesn’t want this one out in the public eye.

    Sorry BerScrewTheCommonMan – now there’s 300,000+ people who know about it.

    Spread the word.”

    http://market-ticker.org/akcs-www?post=173557

  3. I must say this is a deperately bold move even for the fed (strange thing is before all this, I sent a message directly to the fed demanding that they enact a reg requiring the courts to honor valid rescissions, but got the opposite).
    The fed knows that this reg is in direct contravention with the clearly unambiguous language of the enacted statute, extends far beyond the feds delegated authority to enact regs that “ensure creditor compliance” with rescission and let us not forget the conflict of interest position they are in considering their recent involvement in the lawsuit (or threatened) against B of A attempting to force buybacks.

    When looking to identify the strategic moves, intent and positions of your enemies you’ve got to keep an eye on the bigger picture.

  4. I sent a letter of rescission to my pretender/lender but received nothing back. I sent it last year. I have no idea what they thought of it or what they did with it. At this time, I don’t know whether it would have any effect or not. I have since sued them, so I do not know what effect that rescission has now. I can say this: the foregoing letter of rescission has some very good paragraphs (causes of action) that could be added to a Complaint or Motion to Dismiss. http://www.challengingforeclosure.com Sirak@challengingforeclosure.com

  5. Why is there a ‘rule’? Law should be law, not a rule.

  6. Recission…In our situation BOA the stated lender forecloses on primary mortgage. Then 2nd lein holder US Bank motions to redeem at end of redemption period.
    US Bank rejects short sale offer during remption period (because it would not close prior to redemption).
    US Bank sells house 4 months later for 50K less than our offer while we were in remption trying to sell.
    I think US Bank paid BOA so they could get the fed money. We estimate US Bank made $$$$ in this scam.
    We found an attorney that filed fraud complaint on BOA for robo signers within the 1 year statute for fraud.

  7. we are going to have to apply pressure on this end. either by calling congress, the fed and the white house.

    wr have demonstrated we can move in unison.

    we also must remember, that because we just had turkey last week, that our adversaries are not moving to steal our wealth and our homes.

  8. The Fed should allow for a three year “Right to Rescission” on Purchase Money loans instead of one year.

  9. Even as useless as recission is it presented a theoretical brake on predatory lending practices, so if they cut back on this remedy, does that leave any defense to predatory lending?

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