The Federal Reserve endorsed new rules Tuesday that would give people taking out home mortgages new protections against shady lending practices.
The proposed rules, approved in a 5-0 vote by the board, are geared to providing safeguards to the riskiest "subprime" borrowers, already painfully stung by the housing and credit debacles. The proposal is expected to apply to new loans made by all types of lenders, including banks and brokers. The plan could be finalized next year.
The Fed, which has regulatory powers over the nation's banking system, is proposing:
Restricting lenders from penalizing certain subprime borrowers--those with tarnished credit or low incomes _ who pay off their loans early. The restriction would apply to loans that meet certain conditions, including that the penalty expire at least 60 days before any possible payment increase.
- Forcing lenders to make sure that subprime borrowers set aside money to pay for taxes and insurance.
- Barring lenders from making loans when they don't have proof, or verification, of a borrower's income.
- Prohibiting lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.
"Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and indeed, the economy as a whole," said Fed Chairman Ben Bernanke in prepared remarks. "They have no place in our mortgage system," he added.
Other Rules Considered
Fed policymakers also are considering requiring financial disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees--except for a fee to obtain a credit report--until after the consumer receives the disclosures.
The Fed also will consider prohibiting certain types of misleading or deceptive advertising for certain loans; It also would require that all applicable rates or payments be disclosed in ads with equal prominence as advertised introductory, or "teaser" rates.
In addition, the Fed is expected to propose barring lenders from paying mortgage brokers a fee that exceeds the amount the would-be borrower had agreed to in advance that the broker would receive.
And, the Fed would ban certain practices, such as failing to credit a mortgage payment to a borrower's account when the company servicing the mortgage receives it. The Fed also would prohibit a broker or other company from coercing or encouraging an appraiser to misrepresent the value of a home.
Before taking effect, the rules must be voted again following a period of public comment and possible revisions.
Record Home Foreclosures
The Fed's response has taken on heightened importance given the meltdown in the housing and credit markets that has led to record numbers of home foreclosures. The crisis has raised the odds that the economy might fall into a recession, roiled Wall Street and given Democrats and Republicans much fodder to blame each other.
The plan, if ultimately adopted, offers Bernanke, who took over the helm in February 2006, an important opportunity to put his imprint on the Fed's regulatory powers. Some critics have complained that Bernanke's predecessor--Alan Greenspan, who ran the Fed for 18 1/2 years-- failed to act as a forceful regulator especially during the 2001-2005 housing boom, where easy credit spurred lots of subprime home loans and many exotic types of mortgages.
When the housing market went bust, the carnage was the worst in subprime loans.
Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association from July through September, a record 4.72 percent entered the foreclosure process during those months. At the same time, a record 18.81 percent of the subprime adjustable-rate loans were past due.
When home values weakened, borrowers were left with loans balances that eclipsed the value of their homes. They also were clobbered when their loans reset with much higher interest rates.