Perhaps a Sign of Things to Come

A Federal Reserve staffer suggested this week that the Fed will defer a key consumer decision to the newly-created Consumer Financial Protection Bureau (CFPB). That decision concerns homeowners’ rights of rescission. The rescission right gives a homeowner a certain period of time (in some cases up to three years) to challenge a mortgage on the grounds of misrepresentation or inadequate disclosure and requires the mortgagor to release its lien on the subject property. As you might guess, the rescission remedy has been invoked extensively in the recent economic downturn.

The mortgage industry has been encouraging the Federal Reserve to address the rescission issue with a sense of urgency, perhaps fearing what might happen to the rule after July 21, 2011—the date that authority on such issues is transferred to the CFPB. The Federal Reserve looked poised to make a move, having proposed a rule in September 2010 that would significantly restrict the circumstances under which a homeowner could seek to rescind a mortgage. The comment period for the proposed rule closed on December 23rd, and, despite opposition by consumer groups, many thought the Federal Reserve would continue to pursue the proposal. 

A decision by the Federal Reserve to defer this particular issue to the CFPB would be consistent with the CFPB’s objective to consolidate the oversight and implementation of consumer protection regulations in a single agency. It may not, however, produce a result consistent with the intent of the Federal Reserve’s proposed rule and the desires of many in the mortgage industry. One of the CFPB’s charges is to oversee the mortgage and credit card industries, including the language and substance of consumer disclosures. Given the CFPB’s preemption provisions (which favor enforcing state consumer protection laws), the CFPB’s proposed partnership with state attorneys general and the robo-signing and related concerns swirling around the mortgage industry, I doubt that weakening consumers’ rescission rights is high on the priority list.

I look forward to seeing how this and other pressing consumer issues play out, particularly after July 21st. The CFPB is starting to take shape (see here and here), and it appears that it will hit the ground running. (For interesting Q&A with Elizabeth Warren on the CFPB, see here and here.) In any event, the agency certainly has its work cut out for it.

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2 Responses

  1. Ken Rhodes says:

    Michelle — I am puzzled (a little) by this game of “hot potato” regarding Reg Z. I guess my confusion originates with the opening text of the regulation:

    Subpart A—General

    § 226.1 Authority, purpose, coverage, organization, enforcement and liability.

    (a) Authority. This regulation, known as Regulation Z, is issued by the Board of Governors of the Federal Reserve System to implement the federal Truth in Lending Act, which is contained in title I of the Consumer Credit Protection Act, as amended (15 U.S.C. 1601 et seq.).
    The paragraph titled “Authority” does not explicitly state the authority, but merely implies that it passed to the Fed from the legislation. If, in fact, that authority was assigned by the legislation, then does the Fed have it in their purview to delegate it to another agency?

    OTOH, it seems to me that your third paragraph emphasizes the intent of Congress, which is to consolidate consumer protections under the CFPB. If that seems in conflict with the desires of many in the mortgage industry, well — tough luck, Sparky. Shoulda done your homework better.

  2. Michelle Harner says:

    Ken: Thanks so much for the comment. I think the intent and directive to consolidate consumer oversight in a single agency stems from the Dodd-Frank Act itself, which the regulation does not reference (other than in a footnote). It is a curious game indeed, particularly since the Federal Reserve knows that the transition is on the horizon. I have attached another great overview of Dodd-Frank’s provisions concerning the CFPB below. Best regards, Michelle.