Inquirer Editorial: Fed's idea favors banks

The Federal Reserve should withdraw a proposal to weaken one of the few tools available to homeowners to stop foreclosures or get relief from predatory loans.

Since 1968, the Truth in Lending Act has given homeowners the right to cancel illegal loans if the lender didn't disclose all the terms. The law protects home buyers up to three years after the transaction.

But the Fed wants to water down the law to the point where it's useless for most homeowners. Consumer groups, the AARP, organized labor, and others rightly oppose the central bank's proposal.

About 2.5 million homes have been repossessed since 2005, and more than six million others are in the foreclosure pipeline. With so many banks found abusing the foreclosure process, this is no time to take away a legal weapon on the side of homeowners.

The Truth in Lending Act says homeowners can get out of a mortgage if the bank's documents contain errors regarding the total cost or payment terms. If the lender agrees that a violation occurred, it will cancel the lien.

The homeowner then must pay the loan balance to the creditor, minus finance charges, fees, and payments already made. The procedure is common when homeowners can't afford payments.

But the Fed wants a homeowner seeking to rescind a loan to repay the full amount before the lien is canceled. The central bank says this change would "ensure a clearer and more equitable process" for resolving foreclosures.

Most homeowners, however, can't borrow the money to pay off the balance until the creditor releases the lien on a property.

AARP lobbyist David Certner noted that the Truth in Lending Act "has been instrumental to saving the homes of thousands of homeowners who were victimized by a series of predatory mortgages." He said terminiating this right would put the onus on the borrower to pay off a loan before the bank takes any action.

The foreclosure crisis hasn't hit Philadelphia quite as hard as other areas. In October, one out of every 389 homes nationwide received a foreclosure notice. In Philadelphia, the foreclosure notice rate was one in 438 homes.

One reason for the lower rate in the city could be the Common Pleas Court's mortgage foreclosure diversion program, which forces mortgage companies to negotiate with borrowers. The program started in 2008 has served as a model for other cities.

But the examples of homeowners holding the short straw legally are plentiful. The state Supreme Court's disciplinary board is investigating Philadelphia law firm Goldbeck, McCafferty and McKeever for allegedly acting as a foreclosure mill, with workers who would forge the names of attorneys on documents.

Around the nation, more tales are emerging of homeowners falling victim to false foreclosures in cases where they never missed payments. Homeowners have had to hire attorneys to fight wrongful foreclosures resulting from bank errors. It's an environment in which homeowners need more legal protections, not fewer.