The Federal Reserve Board, under pressure from consumer groups, yesterday reinstated a policy of forcing creditors to notify consumers of their right to get out of certain types of loans, the so-called cooling-off period.
The cooling-off period is the time in which a consumer can think over the credit arrangement and possibly cancel it.
Last year the board amended a regulation granting an exception to the cooling off notification requirement in cases in which consumers pledged their homes as security in open-ended credit arrangements.
That amendment stated that a creditor who is not the same person as the seller of goods purchased on credit, doesn't have to notify the purchaser of his right to cancel at each separate advance.
Notice of the right to cancel an open-ended credit transaction secured by a home mortgage must be given only when the credit plan is increased, whenever terms of the account are changed, whenever a security interest in a home is added to an existing credit plan and once annually, the board said in its amendment.
However, after the amendment was adopted the Consumers Union challenged the action in court and several other consumer groups protested the board's decision. Last February the board held hearings in which it received about 160 comments on the amendment.
In reversing itself yesterday "the board took into consideration the concern expressed by some members of the Congress and the Board's Consumer Advisory Council, consumer representatives, and federal, state and local government agencies that consumers might be led unawares into more debt than they could afford and might be led unawares into more debt than they could afford and might as a result lost their homes -- a consequence that the right of recission is intended to help prevent," it said in a statement.
"The board also considered three other factors: the potentially unfair competitive advantage that the amendment gives to nonseller creditors' the fact that few creditors are offering plans pursuant to the amendment, and the fact that creditors can feasibly offer lines of credit secured by a customer's residence even if each use of the line is subject to the right of recission," the board said.