Fed to Study New Mortgage Lender Regulations

The Federal Reserve will consider whether new regulations could curtail mortgage lender practices that have contributed to a rise in home loan delinquencies, Fed Chairman Ben Bernanke Friday.
“With respect to the recent problems in the subprime (bad credit mortgage) market, the Board plans to consider how it might further use its rulemaking authority … to address particular lending practices,” Bernanke said in a May 18 letter to Senate Banking Committee Chairman Christopher Dodd.

At the same time, the Federal Reserve says it will tread carefully to avoid choking off home loans from those borrowers with legitimate credit, Bernanke said.

“We are mindful, however, that loan terms that may be harmful to some borrowers may provide benefits in other transactions,” Bernanke wrote.

“Accordingly, any rules should be tailored to avoid the unintended and undesirable consequences of limited credit availability in legitimate transactions,” he said.

The Fed, which has mulled mortgage regulations and whether to take action for some time, is due to hold a hearing on governing lending June 14.

A slowdown in house price gains and rising mortgage rates have led to a jump in delinquencies and foreclosures in the U.S., particularly among borrowers with bad credit who took out loans with adjustable rates.

The rise in delinquencies and the failure of numbers of lenders in the bad credit home loan sector, as the market for loans to borrowers considered greater credit risks is called, exposed loose lending practices.

Dodd, a Connecticut Democrat and presidential candidate, has criticized the Fed’s oversight of subprime mortgage lenders. The Fed is required to write rules to protect borrowers from unfair or deceptive practices, he said.

The lawmaker Friday urged the Fed to issue rules that would require lenders to fully evaluate a borrower’s ability to repay and to restrict home loan lending with little or no documentation.

Specifically, he wants to cut off loans if there is no verification or only stated income of the borrower and no proof of his or her ability to make payments.

“These protections, while not comprehensive, will stem some of the most abusive practices we see in the marketplace today,” Dodd said in a statement.

SOURCE: CNBC / Reuters