Once again, 'free market' abuses trigger more government regulation:
U.S. Fed proposes rules to protect would-be homeowners
By Edmund L. Andrews and David Stout
Published: December 18, 2007
WASHINGTON: The Federal Reserve moved Tuesday to impose tough new restrictions meant to curb unfair and deceptive home-lending practices and prevent a recurrence of the meltdown in subprime mortgages this year.
By a 5-to-0 vote, the Fed approved a plan that would tighten provisions meant to protect borrowers and apply them to a far larger share of home loans - whether from banks, mortgage companies or other lenders - than under current regulations.
The proposed rules underscore the more assertive role the Fed is now prepared to take in regulating lending, a big shift from the central bank's approach in the past. In general, the rules are meant to deter unscrupulous lenders from persuading people that they can afford loans that ought to be out of their reach. By extension, the rules are also intended to keep would-be buyers from deceiving themselves about the debt burdens they can shoulder.
"Our goal is to promote responsible mortgage lending, for the benefit of individual consumers and the economy," said the Fed chairman, Ben Bernanke.
"We want consumers to make decisions about home mortgage options confidently, with assurances that unscrupulous home mortgage practices will not be tolerated."
The plan includes provisions that would require more extensive disclosures, restrict advertising and make it harder to lend to borrowers with little or no documentation and a questionable ability to repay.
It would also allow borrowers, in some circumstances, to sue lenders who violated the rules.
The Fed acted under provisions of the Truth in Lending Act and the Home Ownership Equity Protection Act of 1994. In the past, it had been quite cautious about using its authority to clamp down, and the rules were last revised in 2001.
Details of the proposed rules, which could take effect next year after a period for public comment and possible revisions, can be read on the Fed's Web site,
www.federalreserve.gov.
In "four key protections," the Fed listed these:
Creditors would be barred from lending without documenting a borrower's ability to repay the loan.
Creditors would have to verify a borrower's income and assets.
Prepayment penalties would be restricted.
Creditors would have to establish escrow accounts for taxes and insurance.
"Unfair and deceptive practices have harmed consumers and the integrity of the home mortgage market," said a Fed governor, Randall Kroszner. "We have listened closely and developed a response to abuses that we believe will facilitate responsible lending."
The action puts the Fed a step ahead of the Congress, which is considering its own steps to tighten restrictions on the home loan industry. A bill put forward by Representative Barney Frank, a Massachusetts Democrat and chairman of the Financial Services Committee of the House of Representatives, would expose mortgage brokers and lenders to legal liability if borrowers are unable to repay.
The Fed did not go as far as proposals by some consumer groups, which sought, for example, an outright ban on prepayment penalties.
What the Fed has been hearing in recent months is a complex blend of personal hardship and dire news for the country as a whole, as waves of foreclosures have swamped the housing market and threatened to mire the economy in a recession.
The housing boom of the first several years seems almost as distant as the boom in technology stocks, but economists have warned that the fallout from the housing slump could be much worse than that from the dot-com bubble.
Many homebuyers whose little slice of the American dream has turned into a nightmare were undone by "teaser rates" dangled in front of "balloon mortgages." When the tempting original rates were supplanted by much higher rates built into the loan, many homeowners could not make the monthly payments.
Those personal misfortunes - whether the result of individual misjudgment, excessive optimism, shady lending or all of those - have mushroomed into a national problem.
The situation is further complicated by the subsequent packaging and reselling of subprime mortgages in ways that are so arcane that even some bankers acknowledge they are befuddled by them.
http://www.iht.com/articles/2007/12/18/business/subprime.php
