New lending rules would weaken consumer protections against predatory lending by allowing creditors to avoid penalties for misstating the real costs of mortgages, a leading consumer advocacy group contends.

The National Consumer Law Center (NCLC) says that new regulations proposed by the Federal Reserve would harm consumers by weakening their right to back out of a mortgage where the lender misrepresented the terms. The Center was also critical of proposed changes to regulations affecting reverse mortgages, particularly ones that would loosen restrictions on cross-selling secondary products to seniors obtaining such loans.

The proposed regulations are part of an extensive series of changes the Federal Reserve Board has proposed for implementing the Truth in Lending Act (TILA), which is the major law protecting consumers in matters of borrowing money, including mortgages, auto loans and credit cards, among others financial transactions.

Right of recission weakened

The NCLC's primary objection to the new regulations involves changes to consumer's right of rescission, the right to back out of a loan when the terms were not accurately described. Presently, borrowers may back out of a mortgage loan for any reason up to three days after closing, and up to three years later if it is determined the lender misrepresented the costs or other terms.

The Fed's proposed rule changes would eliminate the right of extended revision (beyond three days) if the creditor overstated costs or understated them by a minor amount not likely to have influenced the borrower's decision to obtain the loan.

The NCLC argues that introducing wiggle room into the rules for stating the terms and costs of a mortgage means creditors will be able to escape penalties for misstating the costs of a loan and will have less incentive to provide accurate information. It argues that the impact would be to effectively render the right of extended revision useless.

In an extended critique of proposed TILA regulation changes submitted to the Fed, the Center says that while many of the proposed changes have merit and would enhance consumer protections, the changes to the right of rescission is a fatal flaw and calls for the whole package to be withdrawn.

Weaker protections on reverse mortgages

The Center was also critical of proposed changes to reverse mortgage regulations included in the same package of regulations, in particular a proposed "safe harbor" for cross-selling products to seniors taking out a home equity conversion mortgage (HECM), as reverse mortgages are officially known.

Presently, lenders who make reverse mortgages to seniors are prohibited from selling them annuities, insurance or other financial products as part of the package, due to concerns that seniors may be pressured to buy such products in order to obtain a reverse mortgage. The proposed rule would allow lenders to begin marketing such products to borrowers after a 10-day window after the loan is closed, which the NCLC contends is not adequate to protect consumers.

The Center also objected to proposed changes that would allow reverse mortgages to be structured as recourse loans, meaning the lender would be entitled to more than just the value of the property securing the loan in repayment. It also criticized language that would allow lenders to disclose terms to only one spouse in a couple where both had an ownership interest in the property.

The objections were registered by the NCLC as part of the public comment period on the proposed rules promulgated by the Federal Reserve.

Published on December 29, 2010