It may be a case of closing the barn door after the golden geese have run away, but the Federal Reserve has nevertheless approved new rules designed to protect homebuyers from predatory lending and deceptive advertising practices in the market.
Under amendments to Regulation Z (a/k/a the Truth In Lending Act), the Fed recommends four new guidelines be added to the mortgage process for buyers of "higher-priced mortgage loans," including:
• Prohibition of engaging in a pattern or practice of extending credit without considering borrowers ability to repay the loan.
• Verification of a borrower's income and assets they rely upon in making a loan.
• Limiting "prepayment penalties" on borrowers of subprime loans who pay off their mortgages early. Penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any larger payments were made.
• Lenders would have to establish escrow accounts for borrowers' taxes and insurance.
"As the mortgage market has become more segmented and as risk has become more dispersed, market discipline has in some cases broken down and the incentives to follow prudent lending procedures have, at times, eroded," said Federal Reserve chairman Ben Bernanke, referring to the subprime market. "The consequences, as we are currently seeing, can include the proliferation of unfair and deceptive practices that can be devastating to consumers and to communities."
"Creditors who cannot or will not act fairly and ethically have no place in the mortgage market. Unfair and deceptive practices harm consumers and the integrity of the home mortgage market," said Fed governor Randall Kroszner. "Responsible lending should be encouraged to continue in order to fairly meet the credit needs of consumers. But lending that is made unscrupulously or irresponsibly harms consumers and others and erodes faith in our mortgage market."
The Federal Reserve has been harshly criticized in recent years for ignoring or even enabling the conditions that led to the pop of the housing bubble and its resultant economic problems. Former Federal Reserve chair Alan Greenspan was responsible for the dramatic cutting of interest rates that predicated the spree of mortgage lending from 2000 through 2005.
Although Greenspan was quick to proclaim the boom over once he left office, Edmund Andrews of the New York Times today detailed the Fed's sluggish response to the looming problem of the housing bubble, including Greenspan ignoring warnings from consumer groups that minority borrowers were being victimized by deceptive lending tactics and expensive loans.
In response to the charges, the Fed under Bernanke has issued a flurry of recommendations and rules for tightening lending standards, creating an inter-agency task force to police non-bank subprime lenders, and advising lenders on "loss mitigation strategies" to help delinquent borrowers refinance into better loans or work out more lenient payment terms.
But with the majority of subprime lending shops already bankrupt or defunct, and delinquencies and foreclosures continuing to rise, it remains to be seen if all of these new rules will have any concrete effect.