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Fed Targets Shady Home Loans

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By JEANNINE AVERSA, The Associated Press

Published: December 19, 2007

WASHINGTON - The Federal Reserve moved Tuesday to protect homebuyers from dubious lending practices, its most sweeping response to a mortgage meltdown that has forced record numbers of people from their homes.

The Fed has been under attack for not doing more to stem the crisis as hundreds of thousands of people lost the roof over their heads. The situation raised the odds the country will fall into recession, unhinged Wall Street, racked up multibillion-dollar losses for financial companies and resulted in political finger-pointing over who was to blame.

The proposed rules, endorsed by the Federal Reserve Board in a 5-0 vote, would crack down on a range of shady lending practices that has burned many of the nation's riskiest "subprime" borrowers, the people with spotty credit or low incomes, who have been hardest hit by the housing and credit debacles. The rules also would curtail misleading ads for many types of mortgages and bolster financial disclosures to borrowers.

"Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and indeed, the economy as a whole. They have no place in our mortgage system," Fed Chairman Ben Bernanke said. "We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated."

If ultimately adopted, the plan would apply to new loans made by thousands of lenders of all types, including banks and brokers. It would not cover loans already made.

The proposal would:

•Restrict lenders from penalizing risky borrowers who pay loans off early.

•Require lenders to make sure these borrowers set aside money to pay for taxes and insurance.

•Bar lenders from making loans without proof of a borrower's income.

•Prohibit 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.

The plan disappointed both supporters and opponents of tougher home-lending regulations.

Mortgage lenders worried that the Fed plan was too tough and could crimp customers' choices. "We worry that some of the product restrictions could make it harder for bankers to tailor products for their customers and communities and result in some creditworthy customers not being able to obtain a loan," said Edward Yingling, president of the American Bankers Association.

Consumer groups and Democrats in Congress complained that the proposal doesn't provide sufficiently strong safeguards for borrowers.

For both risky and not-so-risky borrowers, the Fed also proposed:

•Prohibiting certain types of misleading or deceptive advertising for home mortgages. For instance, it would bar using the term "fixed" to describe a rate that is not truly fixed over the life of the entire loan. It also would require that all applicable rates or payments be disclosed in ads with equal prominence as advertised introductory "teaser" rates.

•Require lenders to provide financial disclosures to borrowers early enough for them to use while mortgage shopping. Lenders could not charge fees, except to obtain a credit report, until after the consumer receives the disclosures.

Also, the Fed proposed barring lenders from paying mortgage brokers a fee exceeding the amount the would-be borrower agreed to in advance that the broker would receive.

The Fed also proposed banning certain practices, such as failing to credit a mortgage payment to a borrower's account when the company servicing the mortgage receives it. And it would prohibit a broker or other company from coercing or encouraging an appraiser to misrepresent the value of a home.

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