Fed to Foster Monitoring of Subprime Market

Agencies Team Up to Target Big Lenders of Risky Loans

The Federal Reserve Board and other federal and state regulators announced plans yesterday to review the practices of lenders who are significant players in the troubled subprime home mortgage market, which typically caters to borrowers with blemished credit.

The regulators did not say how they would decide which lenders to target as they prepare to launch the pilot program in the fourth quarter. The goal is to stem a rise in delinquencies and foreclosures by determining whether the lenders and the mortgage brokers they work with are complying with consumer-protection laws. Legislators and consumer groups hailed the move because it brings some coordination to the fragmented regulation of the industry.

Stronger collaboration between federal and state agencies "will help us to better weed out abuses," Federal Reserve Governor Randall S. Kroszner said in a statement.

The initiative was unveiled the day before Fed Chairman Ben S. Bernanke was to present his midyear economic forecast to Congress, where Democratic lawmakers have criticized his agency for a "pattern of neglect" that they say helped foster the unfolding subprime crisis.

"It's a step forward," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. "It won't preempt a need for legislation, but it's a move by the Federal Reserve into an area in which they were previously reluctant to be very active."

Delinquency and foreclosure problems surfaced last year as the housing market softened, driving down home prices and making it more difficult for cash-strapped borrowers to sell their homes or refinance their way out of trouble.

The troubles deepened this year, prompting legislators and regulators to weigh in with proposals on how to curb the damage. Most recently, the Fed and other regulators urged lenders to more closely assess the ability of subprime borrowers to repay adjustable-rate mortgages, which offer low introductory rates that later can rise sharply.

The Fed yesterday took the added step of coordinating with state agencies to crack down on abusive practices, with a focus on lenders that might not otherwise face federal oversight. Collaboration between the federal and state levels is key because only a quarter of subprime loans were made by federally regulated banks, thrifts and credit unions in 2005, the Fed said.

"We are trying to connect the dots so we can look at this as one industry with the shared goal of consistent application of the law," said John Ryan, executive vice president of the Conference of State Bank Supervisors, which represents state banking regulators.

Other participants in the program include the Office of Thrift Supervision, the Federal Trade Commission and the American Association of Residential Mortgage Regulators.

In a statement, the groups said they plan to share information, discuss lessons learned and "take action as appropriate." Based on the results, the groups would decide whether to continue the project.

Steve O'Connor, senior vice president for public policy at the Mortgage Bankers Association, praised the initiative and said legislators should take the added step of creating a national standard so that the same laws apply to state-regulated and federally regulated institutions.

Alys Cohen, a staff lawyer at the National Consumer Law Center, said the initiative was welcome but lamented that it would not do much to help those already in trouble. "Real humans with bad loans are just as stuck as they were before," she said.