The Fed Protecting Bank Fraud, Nth Edition
A November 28, 2010 NYT editorial laid bare a scheme by the Fed to protect banks from the consequences of widespread deceptive and fraudulent behavior. The Truth in Lending Act (TILA) of 1968 granted to borrowers the right of rescission for three years in home equity (HELOC) and mortgage loans if the bank failed to provide "material disclosures". What this means is that in these loans a person's house is used as collateral for the loan. This is the bank's security interest. But if the bank should lie, as has been commonly seen, about the interest rate for the loan or charge hidden or bogus fees, it loses through rescission its security interest. The homeowner is still on the hook for the principal, but the bank through its misdeeds has lost the right to foreclose. The practical effect of this arrangement is to force the bank to refinance the HELOC or mortgage on better terms to the homeowner, either by reducing the rate or principal, or both.
Enter the Fed which is run both by and for the banks. As announced on August 16, 2010 and published in the Federal Register on September 24, 2010, it offered the proposed rule change to TILA (buried deep in a much longer document) which covers for the banks' pervasive bad, and usually fraudulent, practices, indeed exacts no penalty for them by eliminating rescission and doing away with any incentive for refinancing.
Rescission process in a court proceeding. The Board proposes to use its adjustment authority to ensure a clearer and more equitable process for resolving rescission claims raised in court proceedings. The sequence of rescission procedures set forth in TILA and the current regulation would seem to require the creditor to release its security interest whether or not the consumer can tender the loan balance. The Board does not believe that Congress intended for the creditor to lose its status as a secured creditor if the consumer does not return the loan balance. Therefore, the proposal provides that when the parties are in a court proceeding, the creditor is not required to release its security interest until the consumer tenders the principal balance less interest and fees, and any damages and costs, as determined by the [[Page 58548]]court. The Board believes this adjustment would facilitate compliance with TILA.
Of course, this in no way complies with TILA as the weasel wording " would seem to require the creditor to release its security interest" clearly shows. TILA requires the release. The Fed simply inserts an ambiguity where there is none in order to reverse the black-letter of the law. This rule change not only validates but incentivizes fraudulent conduct by the banks. Perhaps the people at the Fed should revisit the title of the bill. It is the Truth in Lending Act, not the No Truth in Lending Act.
(This will be item 211 of my Obama scandals list)