Federal Reserve to Propose New Curbs to Target Subprime Mortgages. Further Analysis and Discussion with David Wyss of S&P
Federal Reserve staff recommended that policy makers issue new restrictions on subprime mortgages, from a ban on low documentation loans to limiting penalties for borrowers who prepay their debts.
The new proposal, which the Board of Governors will vote on later today, follows months of public comment by Congress and consumer advocates, who urged the Federal Reserve to toughen consumer protections.
Finance industry officials warned that a crackdown would curtail lending in the midst of the housing recession. “Mortgage-market discipline has in some cases broken down and the incentives to follow prudent lending procedures have, at times, eroded”, Fed Chairman Ben Bernanke said in a statement.
The proposed new rules “were carefully crafted” to deter “improper lending” without “unduly restricting mortgage credit availability”, he said.
The proposed changes are the product of Central Bankings biggest regulatory initiative since Bernanke took office in February 2006.
The Fed chief is aiming to preserve the Fed’s consumer protection role after Democratic lawmakers blamed it for lax oversight and introduced legislation to set rules for mortgage lenders. The Fed proposed 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.
Lenders would be responsible for determining whether their customers can afford a loan after the initial interest rate resets.
Tags: Ben Bernanke, Board of Governors, Central Banking, Federal Reserve, Home Ownership and Equity Protection Act (HOEPA), Home Sales, Housing Market
