Fed Takes Aim at Deceptive Home Lending Practices


Richard Moore

Whatta laugh! The Fed takes aim at the very practices it actively promoted. A 
very revealing microcosm of how our whole system works.


Original source URL:

Fed Takes Aim at Deceptive Home Lending Practices
By David Cho
Washington Post Staff Writer
Wednesday, December 19, 2007; A01

The Federal Reserve proposed new regulations yesterday to clean up a broad array
of deceptive mortgage lending practices, a move that represents the central 
bank's most significant response to the nation's housing tumult.

The proposed rules signify a shift by the Fed toward an active regulatory role 
over the mortgage business and would affect a wide range of borrowers, lenders, 
banks and brokers. Home buyers would have to provide proof of income to ensure 
that they are not taking on more debt than they can handle. Mortgage ads could 
not promote only low "teaser" rates. Victims of predatory lending would be 
empowered to sue their mortgage providers.

The Fed can unilaterally impose the rules on mortgage lenders based on its 
authority to police lending practices, but the central bank has been wary of 
using this power. Lawmakers have criticized the Fed for not acting sooner.

Chairman Ben S. Bernanke said it took time to write regulations that are 
balanced. They "were carefully crafted with an eye toward deterring improper 
lending and advertising practices without unduly restricting mortgage credit 
availability," he said.

Consumer advocates credited the Fed for its effort to protect ordinary 
homeowners but said the rules would not go far enough. The Fed is not seeking to
ban several practices that were widely used to coax unsuspecting borrowers into 
high-interest loans, the advocates said.

Congressional Democrats were more vociferous, accusing the Fed of putting the 
interests of the banking system before those of homeowners. They noted that the 
central bank is seeking to curb -- but not eliminate -- the compensation that 
mortgage brokers receive from lenders for selling high-interest loans to 
borrowers. And it seeks to restrict -- rather than ban -- the use of prepayment 
penalties, which discourage holders of subprime adjustable-rate mortgages from 
refinancing their loans before the rates jump. Congress wants to outlaw these 
practices altogether.

Sen. Charles E. Schumer (D-N.Y.) said the Fed's move will force Congress to pass
far more stringent measures. Christopher J. Dodd (D-Conn.), chairman of the 
Senate Banking Committee, called the rules "a significant step backwards" 
because they advocate weaker lending standards than what the Fed proposed in a 
guidance paper a few months ago.

Added Barney Frank (D-Mass.), chairman of the House Financial Services 
Committee: "We now have confirmation of two facts we have known for some time: 
One, the Federal Reserve System is not a strong advocate for consumers, and two,
there is no Santa Claus. People who are surprised by the one are presumably 
surprised by the other."

The debate over how the Fed should tackle the mortgage mess is intensifying as 
the crisis continues to roil Wall Street and threatens to bring down the 
economy. The number of people who are losing their homes or have failed to make 
their monthly payments has reached record levels. Fresh data released yesterday 
showed that the construction of single-family homes slid to its lowest level in 
more than 16 years as demand for new houses wilts.

The Fed's role is seen as vital because it can act quickly and because its 
rules, which could be finalized after a 90-day public comment period, would 
apply to all lenders. Legislation by Congress would trump the Fed's authority 
but may take more time to enact. While a measure on mortgage reform has passed 
the House, a Senate bill is likely not to get a full-chamber vote until next 
year. The versions also have to be reconciled.

Consumer advocates said they will continue to push for stricter legislation on 
Capitol Hill. Jim Carr, chief operating officer of National Community 
Reinvestment Coalition, said the Fed was overly concerned about how the rules 
would affect mortgage lenders.

"I don't think the mortgage lending industry is going to fold up and close shop 
if you purge practices that have been proven year after year to be predatory to 
unsophisticated consumers," Carr said.

Michael Calhoun, president of the Center for Responsible Lending, said the Fed 
should have taken a page from Congress and banned lenders from giving loans to 
home buyers who cannot afford to pay after their adjustable rates increase. 
Instead, it merely proposed prohibiting them from "engaging in a pattern or 
practice" of selling such mortgages -- language Calhoun said is too vague and 
"riddled with loopholes."

Industry associations expressed more support for the Fed's effort.

"It sets some tough standards, but it appears to take a reasonable and balanced 
approach that we hope will be workable," said Steve O'Connor, senior vice 
president of government affairs for the Mortgage Bankers Association.

Fed officials added that they are gaining a better understanding of the 
underlying causes of the mortgage mess.

Although a lot of attention was cast on the Bush administration's plan to offer 
a five-year rate freeze to some holders of subprime adjustable-rate mortgages, 
Fed researchers found that many homeowners are defaulting not because the rates 
on their mortgages are increasing but because they did not realize their 
payments would be so high when the cost of home insurance and property taxes is 
tacked on to the monthly cost. Many home buyers, especially the poor and 
immigrants, were confused by the massive stack of documents they had to sign at 

As a result, Fed officials crafted rules that would require lenders to establish
an escrow account for insurance and taxes for holders of subprime loans and to 
provide better and clearer documentation on what home buyers would pay on a 
monthly basis.

Fed officials also noted that mortgage default rates were highest for homeowners
who had provided little or no documentation. Under the new rules, borrowers 
would have to provide independent proof of their income, though some flexibility
is given to the self-employed.

These regulations seek to "strive to protect borrowers from practices that are 
unfair or deceptive," said Randall S. Kroszner, a Fed governor who oversaw the 
drafting of the proposed rules. He added that the agency wanted "to do so 
without unintentionally causing responsible lending to shrink or unduly limiting
consumer choice."

On Capitol Hill, the House yesterday voted to prevent forgiven mortgage debt 
from being taxed as income. The Senate has already passed the bill, which can 
spare homeowners from taxes as high as 35 percent on canceled mortgage debt. 
White House press secretary Dana Perino told Bloomberg News that President Bush 
would sign it.

© 2007 The Washington Post Company

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