The Federal Reserve said it will no longer push ahead on a controversial proposal that would impact home foreclosures. Instead, the central bank will leave the decision to the new Consumer Financial Protection Bureau, which debuts in July and will oversee the truth-in-lending law.

The Fed had proposed a rule that would make a key timing change of when a borrower can cancel a mortgage that violates disclosure requirements under the truth-in-lending law. Currently, borrowers have up to three years to take a lender to court to cancel a loan--known as “rescission.” Borrowers must then show that required disclosures about the loans terms were not made. If the loan is canceled, borrowers must pay off the principal but can deduct from the loan’s total amount what would have been paid in interest and other fees.

Consumer advocates have argued that the Fed’s proposed rule would require borrowers to pay off the loan before it is canceled, and home owners then would lose leverage to renegotiate loans with banks.

The Fed has said the rule change is needed to add clarity to a confusing system.

Source: “Fed Leaves Truth-in-Lending Rule to Consumer Agency,” Reuters News (Feb. 1, 2011)