This is why we need Elizabeth Warren:
There is only one serious federal remedy for predatory lending, and the Fed is now knowingly trying to gut that remedy in order to help banks avoid losses from their own fraud.
This is from Zach Carter's article over at Alternet.
The federal remedy he is talking about is a rule called "the extended right of rescission," and it is the most potent protection that homeowners have against predatory lending.
It works like this:
If a bank failed to make key consumer protection disclosures about a mortgage, the borrower can demand that all of the interest and closing costs on the loan be refunded. Equally important, the bank must also stop all foreclosure proceedings and give up its right to foreclose. Once the bank gives up its right to foreclose, the full amount of the mortgage, minus interest and closing costs, becomes due. This isn’t a free lunch for the borrower, especially when the value of her home has declined dramatically, but it’s better than nothing, and it does impose real costs on banks.
For this process to function at all, it is absolutely critical that the bank be barred from foreclosing before the borrower has to pay off the remainder of the loan.
Let's make sure we understand this: Once the homeowner can prove that the bank failed to make disclosures required under the Truth-in-Lending-Act, the homeowner has the right to demand that all of the interest and closing costs be refunded, and the bank loses the right to foreclose, temporarily. Once the bank refunds the wrongfully acquired interest and closing costs, the principal balance of the loan becomes due, in its' entirety, immediately. If the homeowner is unable to refinance or otherwise pay off the principal balance of the loan, the bank can then proceed to foreclose.
The teeth in this regulation is in the order in which the events happen. The bank must first refund the wrongfully acquired interest and closing costs, which potentially gives the homeowner enough cash to refinance the principal, and keep their home, and the bank must give them the opportunity to do so.
The new regulation requires that the homeowner must pay the fraudulent loan off, in full, before the foreclosure can be stopped.
Let me say that again. The entire fraudulent loan, including interest, late fees, and whatever other costs or fees the bank claims are owed, must be paid off, in full, by the already cash-strapped homeowner before the foreclosure can be stopped. How many people in foreclosure do you think are going to be able to do that? Not very fucking many, right?
But wait, it gets better! Assume for the moment that, after your house has been foreclosed and sold, it is finally determined that the bank did not have the right to foreclose on your home, and refunds you your money; do you still get your home back? Not without financing litigation, against a subsequent purchaser for value, who may well not have had notice. Think the courts are getting jammed with fraudulent foreclosure cases now, just wait . . . of course, that's a dispute between the two homeowners, to quiet title -- the bank doesn't have to participate in that litigation, or pay for it.
So, why is the Fed doing this? Because the whole system is now based on fraud, and only the continuation of fraud can keep the system from crashing.
The Fed knows full well that it’s gutting the law here. The Board of Governors and their staff have met with key consumer lawyers no less than three times about this exact rule proposal, and the Fed is going ahead with it anyway.
Here’s what’s really going on. The largest banks don’t have enough capital to weather a bad housing market. And any process that sheds light on the documentation procedures at mortgage servicers will expose the big banks to investor lawsuits. But investors can’t sue without those documents. Rescission judgments create a paper trail for illegal loans. In addition to creating immediate losses for banks, rescission documents that banks sold illegal loans, giving investors who bought mortgage-backed securities ammunition for well-founded lawsuits. Those lawsuits, in turn, could sink some of the biggest names on Wall Street, something the Fed has been trying to prevent at all costs since 2008.
All those "toxic assets" didn't just disappear. They are still on the books, often at 100% value, even though they are worthless. Carter uses 2nd mortgages to make the case in point: with collapse of the housing market, many of the 2nd or even 3rd mortgages, lines of credit, etc., that the banks were so eager to hand out, are completely valueless, but are still being carried on the books at full value. If the banks are forced to write those loans off, it will bankrupt them. It's that simple. And that's not counting the potential investor lawsuits. That's how deeply embedded the fraud is, and why it has to be covered up at any cost. The banks have written checks they can't cash, and if they are forced to pay, the system will collapse, just the same as it would have two years ago. EVerything that has been done since has been to delay the day of reckoning, and continue the fraud for as long as possible.
This simple rule could well be the straw that breaks the camel's back. Gut it, and the system can keep the fraud going for a little longer, and leave the taxpayers with that much more of the bill when collapse comes. How effective is this rule? It's been the primary weapon in homeowner's arsenal since the Truth-in-Lending-Act was passed in 1968.
I will leave you with a quote from a letter from Americans for Financial Reform, sent to the Fed's Board of Governor's two days ago:
This order of obligations is the essence of the protection provided by TILA’s extended right of rescission. The cancelling of the security interest
means that the homeowner has a defense to a foreclosure. It also means that the homeowner has the means to obtain refinancing so as to be able to tender the amount due. The extended right of rescission does not mean that the homeowner does not have to repay the loan. While the amount due is reduced by the finance charges, fees and amounts the homeowner has already paid, the balance is still due the creditor.
Despite the clear order of these events set out in the Act passed by Congress, the Board’s proposed regulations would make the extended right of rescission useless by requiring that the homeowner must pay the entire amount demanded by the creditor before the creditor is required to cancel the security interest in the home. This proposed changed order will undermine the primary purpose and power of TILA’s extended right of rescission – the mandatory cancellation of the security interest by the creditor upon receipt of the homeowner’s notice. It is the order of events which has meant that the extended right of rescission under TILA has been the primary home-saving legal tool against predatory loans and foreclosures for the past forty-two years. This proposal would make it completely useless to all but the wealthiest homeowners.
Calling Keith, Rachel, Ed: somebody, raise a ruckus about this, willya? And we'll see whether the administration and/or the lame ducks will actually do anything about this.
Update No. 1: Not that it is likely to do any good, but, here's a link to the Fed's comment board regarding the proposed rule, R-1390.
Fed's electronic comment form.
And this is a link to
the Federal Register, where you can review the entire proposed rule (warning, it's long and technical).
You can submit a formal comment to the Federal Register until December 23, 2010, using this form on the Federal Register's website.
Update 2: Looks like this has scrolled off, haven't had any new comments in a while, so, thanks to those who stopped by.