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Cutting back protection for borrowers debated


Washington -- Congressional debate over banking legislation is focusing fresh attention on one of the most potent -- but little-understood -- federal consumer protections for home mortgage borrowers.

The protection is the "R" word: The right of rescission or complete cancellation of a home loan financing. To lenders it is the functional equivalent of a nuclear meltdown on a loan transaction. To some borrowers it can be a lifesaver -- preventing TTC the foreclosure sale of a home at the eleventh hour.

In both the House and Senate, efforts are under way to limit the right of rescission for certain mortgage financings as part of comprehensive banking deregulation legislation.

Passage of a bill in some form is considered a good bet this fall. What might that mean to you as a consumer? More to the point, do you know your current, federal rescission rights as a home mortgage borrower? Since the odds are strong that you don't, here's a quick overview.

Under the Truth in Lending Act, you may have the right to rescind a mortgage during a three-business-day cooling-off period after becoming obligated on the debt. And under some circumstances, your effective right to get out of the deal may even extend up to three years, if your lender didn't provide accurate disclosures of your finance charge, annual percentage rate (APR) or other key items.

The idea here is straightforward: When you're putting up your home as the collateral for a loan -- and you stand to lose the home if you fall behind on monthly payments -- then you ought to have a few days to think about the terms of the deal and whether they make sense for you.

But not all home mortgage transactions come with the right of rescission. For example, when you borrow money to purchase a new home, you have no such right. Nor do you when you refinance your mortgage with your current lender for the same principal amount -- i.e., you refinance solely to lower your interest rate and take out no "new" cash in the process.

You do have federal rescission rights when you apply for or obtain:

* Any refinancing of your existing mortgage debt by a new lender, whether you're increasing the size of the loan or not;

* Any home equity line of credit, no matter how large or small; and

* Any home improvement loan secured by a lien on your home, or other second mortgage.

Besides the obvious value to a consumer of having a brief cooling-off period for such a large financial matter as a home mortgage, there's another important role rescission plays. It is used nationwide to stop foreclosures against homeowners -- often the elderly and other vulnerable borrowers -- who sign up for loans they can't afford.

A Boston-based attorney at the National Consumer Law Center, Kathleen Keest, cites what she calls the "prototypical" use of the right of rescission:

Say a widow falls $10,000 behind on payments on her mortgage because of unexpected medical bills. Loan brokers or finance companies who specialize in pre-foreclosure refinancings contact her and offer to pay off her old debt and place a new loan for the same amount on her house.

Inexperienced with financial paperwork, the woman signs up for a mortgage with a rate and fees far higher than prevailing market levels. The monthly payments on the new loan are beyond the woman's capacity to pay, and she's heading for foreclosure again within a few months.

Using the three-year reach of the right of rescission, lawyers currently can stop the foreclosure dead in its tracks.

They may sue the loan brokers, recover all the money expended by the woman -- and cancel the abusive refinancing altogether -- if the lender failed to meet truth-in-lending disclosure rules.

By contrast, under pending legislation being pushed by banking and other groups on Capitol Hill, the woman's loan would not qualify for rescission at all. That's because any first-lien refinancing for the same principal amount as the original loan -- but with a new lender-- would be exempted from federal rescission rights.

Banking lobbyists defend the proposed change, arguing that when no new debt is incurred, consumers need no cooling-off period, even if there's a change in lender. But Keest and other consumer advocates disagree passionately.

"Foreclosure is a disaster for any homeowner," says Keest, "but especially the elderly or unsophisticated.

"Taking away the primary legal tool that's been able to save them from foreclosure when they've been abused is terrible public policy."

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N. W., Washington, D.C. 20071.

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