Fed Cautiously Considers Writing Rules on Lending

The Federal Reserve, accused last week of failing to head off a crisis in home mortgages, said yesterday that it is studying whether to write new rules against predatory lending. But a Fed official told lawmakers that such an effort could backfire by making even sound loans harder to get.

"Constricting the market and returning to a situation where some borrowers have very limited access to credit is not an ideal solution," Sandra F. Braunstein, director of consumer and community affairs at the Fed, said in congressional testimony.

A loosening of lending terms over the past several years has left many borrowers overextended, spurring defaults, foreclosures and allegations of deceptive marketing.

So-called subprime loans, targeted at borrowers with weaker credit histories, often required low initial payments that had the potential to ratchet up over time. Other nontraditional mortgages enabled people to buy or refinance houses with no documentation of their income or no money down.

Regulators from other agencies said yesterday that they would support tighter regulation by the Fed, which has the broadest power under current law to impose restrictions on predatory lending.

The chairman of the Federal Deposit Insurance Corp., Sheila C. Bair, said many abuses could be addressed more effectively through such regulation than through an act of Congress.

But Braunstein gave lawmakers a variety of reasons why Fed rulemaking could be difficult and counterproductive.

If the Fed used its power to write new rules, people could use the rules to sue lenders, Braunstein said. That could deter them from lending, she said. In addition, it could be difficult to write rules that separate good loan products from bad, she said.

Participants in the huge U.S. mortgage market are regulated by a patchwork of state and federal agencies.

Federal bank regulators from various agencies, acting in tandem, proposed new guidance this month for lenders on subprime mortgage practices. Mortgage companies that have been responsible for more than half of subprime loans wouldn't be covered by that guidance, Braunstein said.

Asked when the Fed would complete its review of potential rulemaking, Braunstein said she could not provide a timetable.

Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), who is running for president, last week assailed the Fed, saying the central bank had failed to exercise the authority over the mortgage market given to it by Congress and had thus allowed problems to mushroom during the recent housing boom. A Fed administrator acknowledged to Dodd that the agency, in retrospect, could have done more.