Rescission Under Fire by the Fed

by: Karl Denninger

Fraud, you know, is a business practice. And protecting fraud is the primary function of The Fed, as we learn from a Bloomberg article today:

Consumer groups and industry lawyers say a rule under consideration by the central bank would make it harder for borrowers to exercise their right of rescission, which forces a lender to relinquish a lien on a mortgaged property. They said the number of rescissions has grown in recent years as a result of the foreclosure crisis and allegations that mortgage documents were fabricated or processed improperly.

Ken Markison, regulatory counsel at the Mortgage Bankers Association, said the change would save lenders money. Greater clarity will help avoid unnecessary litigation and reduce costs, Markison said.

Note the spin: "Save money" and "Reduce costs."

Nowhere is the point made that the reason these "costs" show up is that the lender screwed the borrower in the first instance.

Rescission is a powerful tool to address fraudulent lending practices; it gives the borrower the right (granted by the Truth In Lending Act [TILA] of 1968) to shove a bad loan back on the lender. That is, a loan that was made where there was material misstatement or fraud to the borrower can have its security interest voided and all interest and costs removed. The borrower then can refinance with a legitimate lender who is willing to sell them legitimate money under legitimate terms, and pay off the now-unsecured debt.

The key to this is the lien release. Without it the refinance can't happen, as there's no collateral available to pledge for the honestly-refinanced loan.

What The Fed proposes to do is to force the principal repayment to happen before the lien is released. This effectively destroys the remedy, since without the ability to pledge the collateral for the new loan, it will be impossible to obtain the new loan.

Citing TILA and RESPA (Real Estate Settlement Procedures Act) violations is one of the most potent tools available when a consumer has been legitimately screwed. The risk of having the loan's security interest voided, and then paid at principal value only, is a tremendously powerful tool to force lenders who have screwed a borrower to come to the table with a realistic and reasonable modification that cures the original breach of good faith.

As has been the practice over the last 20 years, the Fed's position on this makes clear exactly who the Fed represents -- and who it doesn't. It also makes a mockery of the claim that the Fed "protects consumers" and "polices lenders"; if it had, there would have been no housing bubble and the predatory lending practices that were rampant during the 2000s would have led to enforcement actions and criminal referrals.

Now that the bad debts are floating to the surface and stinking up the joint, the Fed proposes to remove one of the tools available to those who got screwed in finding justice ... in the name of "lower costs" for lenders (read: Yet another attempt to keep illicitly-gained money.)

Where's Congress on this issue?

In bed with the banksters.