Most people involved in the lending process understand that in certain instances a consumer has a 3-day right of rescission under Regulation Z. However, in certain cases, this rescission period can be far, far longer if something has gone wrong in the lending process. By far longer, I mean years and years later and usually only after the consumer has been sued for not paying on the mortgage. Much of this law over the years has come from courts seeking to allow borrowers to get out from under a loan for a variety of reasons.
It comes as a pleasant surprise then that in the face of the avalanche of pro-consumer legislation recently that the Federal Reserve Board apparently has proposed to require homeowners who are looking to rescind beyond that 3-day period to pay the entire principal balance on the loan first. I say apparently because this goes back to an August press release that is only garnering attention from pro-consumer groups now. It seems to have flown under the radar for a few months, but the comment period expires on December 23, so there is still plenty of time to express one’s thoughts on the issue.
The froth of anger from some of these articles is rather intense. The proposal would change something that acts as a lien stripping provision to something that is a true rescission. Pay us and we’ll release our lien. The lender still takes a hit on fees and interest but retains its status as a secured lender until it gets paid (which is particularly important in the bankruptcy context or when the consumer is otherwise uncollectible). Given the incredible pro-consumer turn that regulations have taken recently, it just seems surprising that this would hit a consumer activist hot button because this proposal is very limited in scope and only affects a comparatively small number of consumers. The reality is that rescission was never intended to give borrowers a windfall. If a lender gets its principal balance back as opposed to losing the entire distribution of the loan proceeds to an insolvent or bankrupt consumer, that is clearly more just than the contrary. If a consumer has actually been wronged, Regulation Z provides a plethora of other remedies to address the entire spectrum of lender misdeeds.