Banking regulators on Friday completed guidelines that call on lenders to strictly evaluate borrowers' ability to repay home loans.
The guidance issued by the Federal Reserve and the other four federal agencies that regulate banks, thrifts and credit unions, comes in response to an increasingly troubled housing market. Home prices have been falling and mortgage defaults have been rising, especially among so-called subprime mortgages given to buyers with shaky credit.
The standards, which are voluntary and only apply to federally regulated lenders, calls for verification of borrowers' incomes in most cases. Consumers should have clear disclosures of their mortgage terms and should have at least 60 days to refinance a loan that is about to jump up to a higher rate without penalty.
In a prepared statement, Federal Reserve Governor Randall S. Kroszner said "it's only good business sense for the lenders and it is the right thing to do for the borrowers' sake."
Lawmakers, some of whom accuse the Fed of being lax in its oversight of the mortgage market for many years, have been urging the central bank to strengthen the guidelines. While the guidelines would not affect state-regulated mortgage companies, many state banking regulators are expected to follow suit.
In addition to the Fed, the agencies issuing guidance are the Federal Deposit Insurance Corp., the National Credit Union Administration, and the Treasury Department's Office of the Comptroller of the Currency and Office of Thrift Supervision.