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From: Jay L. Hack
Sent: Wednesday, February 11, 2004 4:09 PM
To: regs.comments@federalreserve.gov; Comments;
regs.comments@occ.treas.gov; regs.comments@ots.treas.gov
Subject: EGRPRA
Ladies and Gentlemen:
I am an attorney who has been working with financial
institutions to assist in compliance with federal
consumer lending regulations for more than 25 years.
Although I believe that many of the regulations covered
by the request for comment impose undue burdens and have
little social utility, I have chosen to limit my comment
to only one provision of one regulation in order to
highlight what I believe to be an unbalanced assessment
of the benefits provided by a regulation versus the
burdens imposed by that regulation. The regulation on
which I will comment is Section 226.23(c) of Federal
Reserve Regulation Z, the requirement that lenders
withhold performance until the rescission period has
expired and the lender is reasonably confident that the
borrower has not rescinded.
Many people, including senior regulators with whom I
have spoken, are under the mistaken impression that
withholding disbursement of funds is required under the
Consumer Credit Protection Act. That is simply not the
case. Title 15 Section 1635 of the United States Code
includes no such requirement. Instead, the requirement
is imposed in Regulation Z, and I urge the Federal
Reserve to delete the requirement. Deletion is clearly
justified as a matter of social utility. How many
millions - yes millions - of borrowers have been
inconvenienced by waiting three extra days to obtain the
fruits of their mortgage refinance? How much effort has
been spent by bankers, attorneys, title insurance
companies and closing agents to "consummate" a
transaction and then pick the transaction up four
business days later just to disburse funds? How much
wasted effort has been put into re-verifying the status
of title at the end of the rescission period? How much
extra money have borrowers been charged for such
re-verification? How many dollars of extra interest have
borrowers had to pay simply because they could not pay
off a high rate loan with a lower rate refinancing until
the rescission period expired? How many acres of forests
have been destroyed printing forms of "acknowledgement
of expiration of right to cancel" which are then faxed
or delivered to the lender so that the lender is
"reasonably satisfied" that the borrower has not
cancelled? We could have all paid Mrs. Rodash's medical
bills a thousand times over for the wasted money and
effort that has gone into compliance with the delayed
performance provision.
And what is the benefit of delayed performance? The
cancellation of the security interest in the borrower's
residence in the event of rescission is not "protected"
if performance is delayed any more than if performance
is immediate. The lender can cancel the mortgage or deed
of trust after recording it, and the statute explains
how. In fact, a careful reading of Section 1635 makes it
appear that Congress contemplated performance prior to
the expiration of the three day period. OTHERWISE, why
would they have expended so much effort explaining how
to unwind performance through a return by the borrower
of property received? The only performance that I can
see which is difficult to unwind is the payoff of a
prior lien with the proceeds of a new loan, because tere
is a third party involved. The prior creditor takes the
position that he or she does not have to participate in
the unwinding. So instead of delaying performance for
four business days for millions of transactions which
are not rescinded, protect the isolated rescission by
adopting a regulation requiring everyone receiving the
proceeds of a covered loan to refund those proceeds if
there is a rescission. And provide that the new lender
subrogates to the former creditor's claim if the
borrower rescinds until the former creditor disgorges
the amount received. Then also adopt a rule against bad
faith rescissions undertaken in order to cause a prior
lender to delay a foreclosure sale or other remedy
scheduled to occur between consummation and rescission.
Maybe additional protection is needed in the case of the
home improvement company that throws a little tar on the
driveway and takes back a mortgage, because it is
difficult for the borrower to give the tar back. But not
in the case of a loan transaction in which the lender's
perfrmance is the disbursement of money.
If you look at litigation under 226.23 and Section
1635, you find that it is extremely rare that there is a
bona fide rescission during the three day period. The
primary use of rescission is in "convenient" late claims
of rescission asserted to defend against collection
action when the lender makes an error in disclosure. In
those cases, withholding performance is irrelevant,
because the lender has released funds and the borrower
claims that a late rescission is valid. Let's recognize
the true facts and stop imposing a burden on millions of
refinances for an illusory benefit to the one consumer
who legitimately rescinds.
Jay Hack
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