MercoPress. South Atlantic News Agency

Federal Reserve tough new rules for mortgage lenders

The US Federal Reserve approved Tuesday measures to give mortgage holders far more protection to prevent the current housing crisis from worsening further. Tough new regulations will ensure lenders take into account a borrower's ability to repay a loan and would not penalize those making early repayments.

The measures geared to put an end to practices that have led to record foreclosures are the Fed's biggest regulatory initiative since Chairman Ben S. Bernanke took office in February 2006. They were voted unanimously by Board members in a hearing to make lenders responsible for determining whether borrowers can afford their mortgages even after low starter rates expire. "Mortgage-market discipline has in some cases broken down and the incentives to follow prudent lending procedures have, at times, eroded'' Bernanke said at the meeting. The proposed new rules "were carefully crafted" to deter "improper lending" without "unduly restricting mortgage credit availability", he said. Bernanke is aiming to preserve the Fed's consumer- protection role after opposition Democratic lawmakers blamed it for lax oversight and introduced legislation to set rules for mortgage lenders. The proposals received mixed responses from legislators, consumer advocates and finance-industry officials. "This proposal is deeply disappointing" Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said in a statement. "It raises serious questions as to whether the Federal Reserve is the appropriate institution to house consumer protection functions. This is a clear signal that legislation is necessary". Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, commended the Fed and said markets are served "when reasonable rules" are in place. Finance-industry officials have warned that a crackdown on the subprime mortgage market would curtail lending in the midst of the housing recession. The package covers all high-cost mortgages, which are defined as loans with rates at least 3 percentage points above a comparable Treasury security for first mortgages and 5 percentage points for second loans, or home-equity loans. The proposed rules are now submitted for additional public comment before policy makers finalize them and put them into effect. Fed Governor Randall Kroszner, the Fed board's chief liaison with the banking industry, said "we will continue to work as expeditiously as possible to implement these consumer protections''. The Fed governors voted in favor of tightening restrictions on so-called pre-payment penalties, requiring the escrow of taxes and insurance and banning loans made without verification of income or assets. "We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated" Bernanke said. "Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and, indeed, the economy as a whole".