The Federal Reserve may update its new, tighter mortgage rules by adjusting the types of loans they cover and further studying mortgage broker compensation, Fed Governor Randall Kroszner said on Thursday.
Kroszner, in remarks prepared for delivery to the Minority Depository Institutions conference in Chicago, said the Fed could adjust the index it uses to determine the loans included in the rules, which now cover nearly all of the subprime market and a "substantial fraction" of near-prime "Alt-A" loans.
"Finalizing our HOEPA rules does not represent the end of our efforts to improve transparency and consumer protections in mortgage lending," Kroszner said in remarks released in Washington. "We will continue to work diligently to determine how best to address the issue of yield spread premiums."
The Fed's rules were tightened under a 14-year-old authority granted by Congress under the Home Ownership and Equity Protection Act.
Yield-spread premiums are essentially commissions that mortgage brokers can earn if they increase a borrower's interest rate, and the biggest premiums are typically coupled with loans containing prepayment penalties.
In the aftermath of the U.S. subprime mortgage crisis that erupted a year ago, brokers were often blamed for steering unsuspecting borrowers with spotty credit histories into unaffordable loans when they could have qualified for less expensive terms, to earn higher commissions from lenders.
The Fed on Monday finalized new rules aimed at stamping out abusive practices in mortgage lending that many believe contributed to the U.S. housing collapse.
These include banning prepayment penalties for many adjustable rate subprime loans and requiring lenders to verify that borrowers can repay the loan from assets and income other than the home's value.
But Kroszner said the Fed dropped a proposed requirement that borrowers and mortgage brokers sign an agreement spelling out the broker's compensation.
The Fed withdrew the proposed rule because testing found such an agreement would not better inform consumers. Many still believed brokers were obligated to find them the lowest interest rate and best terms available, which was not true.
"Our consumer testing led us to the conclusion that our approach was not serving its intent -- that is, to better inform consumers," Kroszner said. "We are continuing to try to find an approach that would be effective, but we did not want to hold up all the other consumer protections while we worked on it," he said.
Kroszner's text did not address the Fed's outlook for the broader economy or Fed monetary policy.