Instead, the Fed will allow its proposals to languish, allowing the CFPB to step in once it is created. That bureau, being crafted by Harvard law Professor Elizabeth Warren, is shaping up to be a strong advocate for consumer interests.

Democrats had criticized the Fed’s proposal as making it too difficult for non-wealthy homeowners to escape loans that do not meet the standards laid out in the Truth in Lending Act. Under the Fed’s proposal, a borrower would have to repay the entire mortgage before a creditor must cancel the security interest in the home.

Sen. Sherrod Brown (D-Ohio), who signed on to a Jan. 3 letter alongside six Senate Democrats criticizing the Fed’s proposals, praised the decision to halt the rules.

“Today’s announcement is a victory for America’s homeowners rather than the Wall Street mortgage servicers who have preyed on borrowers during this time of record foreclosures,” said Sen. Sherrod Brown (D-Ohio). “We need greater oversight and accountability in the mortgage market, not less. We need to focus on restoring borrower confidence lost during the mortgage crisis, preserving home values, and protecting county and city budgets that are already stretched too thin.”

Rep. Maxine Waters (D-Calif.) also applauded the move.

“I applaud Chairman Bernanke for withdrawing these proposals, and I look forward to working with him, our other regulators and the new Consumer Financial Protection Bureau, to ensure that financial products are sold in a manner that encourages transparency, honesty and open competition,” she said.

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