WASHINGTON - Bankers say they will benefit greatly if Congress passes legislation limiting the right of borrowers to back out of a mortgage after the loan is closed.
But opponents say the measure would be a devastating blow to consumer protection.
Under the Truth-in-Lending Act, borrowers who offer their homes as collateral have the right in some cases to rescind the loan - up to three days after the deal is closed.
This "right of rescission" currently applies primarily to refinancings in which new money is advanced. Exempt from the three-day "cooling off" period are loans taken out for the original purchase of a house and refinancings with the original lender in which no additional money is financed.
An exception is the class of "high-cost" mortgages, which are covered regardless of the purpose of the loan.
The regulatory relief bill pending in the House would scale back the right of rescission so it also would not apply to refinancing with new lenders. However, if new money is advanced, the right of rescission would exist. In addition, first-lien mortgages could no longer be considered high cost and thus automatically subject to the rule.
Home equity loans, the area that probably bothers bankers the most, would still be covered. However, the Federal Reserve could issue rules permitting consumers to waive that right. (See story below.)
The legislation may never find its way to the President's desk. It has become the subject of partisan feuding between Republicans and Democrats in the House, in large part because of changes it would make in the Community Reinvestment Act.
More important, it has become a battleground on which the banking and insurance industries are fighting over new powers.
The truth-in-lending provision has gone almost unnoticed in the feuding - even though it is of considerable importance to bankers and consumer activists.
For their part, bankers say the rescission period adds to their disclosure burdens while providing protection that consumers don't necessarily want.
"The industry welcomes any restriction into the right of rescission," said Robert A. Cook, a Baltimore attorney who serves on the Federal Reserve's Consumer Advisory Council.
Michael W. Licamele 3d, president at Unquoa Mortgage Services in Fairfield, Conn., says he'd prefer to completely do away with the right of rescission.
"From our experience ... the rescission period has provided little or no benefit to customers," he wrote in a comment letter to the Fed.
Confusion and misleading information aren't the primary reasons borrowers back out of loans, he wrote. Instead, they rescind mortgages because of their own mistakes or because they found a better deal elsewhere, he added.
Mr. Licamele claims other customers actually complain about the three- day delay. He said banks should instead give borrowers one day to mull over loan documents before the actual closing.
"The rescission period is ... a needless regulatory burden to consumers and lenders," Mr. Licamele wrote.
Not so, says Kathleen Keest of the National Consumer Law Center in Boston. A minor three-day inconvenience is needed to protect people who may be making hasty decisions about complicated transactions, she said.
"Part of the problem this country has is that we don't think enough about what we do," she said. "Americans are impatient, but I don't know that that's particularly a good ground for public policy."
Richard L. Mount, president of the Independent Bankers Association of America, says borrowers have plenty of time to consider their options before a mortgage loan closes.
"There are almost always more than three days between the application and closing," he wrote in a letter to the Fed's Consumer Advisory Council. "The only effect the three-day right of rescission has on a consumer who is refinancing is to force the consumer to pay the higher interest rate on the loan being refinanced for three more days."
One of the most controversial of the proposed changes is to give high- cost status only to subordinate-lien mortgage loans. About half of the current high-cost market would no longer be considered high cost, said Mr. Cook.
Consumer advocates are obviously upset by the proposal. But some banking representatives also are wary.
Mr. Cook said people with more money on the line "probably deserve greater protection ... though I'm sure the entire banking industry doesn't agree with me on that."
Margot Saunders, with the National Law Center in Washington, said the new definition of high-cost mortgage loans will not survive the legislative process. If the bill makes it out of the House, the Senate will surely remove that provision, Ms. Saunders predicted.
Even so, to Ms. Saunders the regulatory relief bill leaves much to be desired.
"I think the bill stinks," she said. "There's nothing in this bill that's good for consumers."
Mr. Gardner is an intern with the Institute on Political Journalism, a program of the Fund for American Studies.