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Fed Rules Aim to Stem Abusive Lending
In this July 10, 2008, file photo, Federal Reserve Chairman Ben Bernanke testifies on Capitol Hill in Washington, before the House Financial Services Committee hearing on systemic risk and the financial markets. Faced with record-high foreclosures, the Federal Reserve is poised to adopt new rules aimed at protecting home buyers from the types of shady lending practices that figured prominently in the current housing crisis.
(Manuel Balce Ceneta - AP)
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"There are still a number of doors open for further abusive behavior," said Jim Carr, chief operating officer of the National Community Reinvestment Coalition. "Why leave these doors open? Why not just close them?"
Consumer groups also noted that certain loans for more creditworthy borrowers are not covered by the new rules, including so-called option ARMs. Those adjustable-rate loans allow borrowers to make less-than-full payments each month. Many borrowers who have this type of loan will begin to see their payments spike in the next few years as they are forced to start paying the principal as well as interest on their loans.
If lenders violate the rules, consumers can sue or report them to federal regulators.
Steve O'Connor, senior vice president of government affairs at the Mortgage Bankers Association, said "the basic contours of the rules appear to be workable," though his group is still studying the details of the 400-plus-page document.
In that document are rules that apply to any loan secured by a borrower's principal dwelling.
For instance, lenders and mortgage brokers (who act as middlemen between borrowers and lenders) will be barred from coercing a real estate appraiser to misstate a home's value. Companies that handle mortgages will be required to credit a consumer's loans payments as of the date of receipt. For all mortgages, new advertising standards will kick in, including one that bans lenders from saying a rate is "fixed" when it can change.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, credited the Fed for coming up with rules stronger than the ones originally proposed in December. He said he was not concerned about the slow implementation, which is designed to give lenders time to comply.
"None of this has to happen right away because nobody is making those kinds of loans anymore," Frank said. "It's about keeping this from happening again."
