Consumer Law

Right of Rescission may be Rescinded by the Federal Reserve

By Sam Glover

Rescission is the right to undo a fraudulent loan—usually a mortgage. The bank gives back the interest and fees, the borrower pays back what remains of the original amount of the loan—and keeps the house—and everybody pretends the loan never happened. Bringing a claim of rescission also terminates a bank’s right to foreclose.

Rescission is a powerful tool in the fight against fraud, and a powerful incentive for banks to avoid it.

But the Federal Reserve wants to reverse the order of rescission, so that banks could continue to foreclosure—even if they committed fraud and violated the law—until the borrower pays back the loan. This would have the obvious result of increasing the flood of foreclosures, mostly with fraudulent mortgages.

Banks don’t like rescission for obvious reasons: they don’t want to give up the interest and fees, and they want to be able to foreclose the home for some extra cash. The Federal Reserve appears to be listening to the banks, as usual, and the Consumer Financial Protection Bureau is still too new and nebulous to weigh in. The best we’ve got is a letter from a group of Senators, which accurately observes:

In this time of record foreclosures and reports of systemic problems with the operations of the largest mortgage servicers, the proposed revisions are unfortunate and unnecessary. . . . The mortgage market needs greater oversight and accountability to restore borrower confidence lost in the mortgage crisis. The proposed rules would undermine this goal.

Or, as another commenter on the proposed rules asked the Fed, “Have you lost your minds?”

(Thanks, Felix Salmon!)

(photo: http://www.flickr.com/photos/santiagogprg/5023648200/)

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Full post as published by Caveat Emptor on January 07, 2011 (boomark / email).