Fed Works to Curb Corrupt Mortgage Lending Practices

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The Federal Reserve is due to unveil a plan that would give people taking out home mortgages new protections against unscrupulous lending practices. The rules are designed to protect borrowers from the kind of abusive lending that contributed to the subprime mortgage crisis.

JOHN YDSTIE, host:

NPR's Business News starts with the Fed's mortgage fix.

(Soundbite of music)

YDSTIE: The Federal Reserve today unveils a plan to prevent the kind of housing trouble now weighing down the economy. It focuses on curbing shady lending practices.

NPR's Chris Arnold reports.

CHRIS ARNOLD: The Federal Reserve has brought authority to ban unfair or deceptive lending practices by making rules that cover the entire mortgage industry. But so far, it has never actually used that power. Allen Fishbein is a director at the Consumer Federation of America.

Mr. ALLEN FISHBEIN (Director, Credit and Housing Policy, Consumer Federation of America): Had they taken this action 10 years past, perhaps it would prevented many of the abuses that are occurring in the mortgage market and have led to the foreclosure crisis now underway.

ARNOLD: One proposal the Fed's now considering is whether to ban so-called pre-payment penalties. Many borrowers got into loans where the payments went way up after two years, but if they refinance the loan to avoid that, they get hit with these big pre-payment fees.

Mr. FISHNBEIN: They have the effect of locking borrowers into more expensive loans so they can't get out of them. They have to pay as much as $5,000, $8,000 or even $10,000 to get out of their very expensive subprime loan.

ARNOLD: Also the Fed is expected to propose rules that lenders do more to document people's incomes and to make sure that they can afford to pay the loans that they get. But the industry says the Fed needs to be careful. Wayne Abernathy is an executive director with the American Bankers Association.

Mr. WAYNE ABERNATHY (Executive Director, American Bankers Association): Well, the Federal Reserve has a delicate balance to try to achieve and it's not entirely clear that they'll be able to achieve it.

ARNOLD: Abernathy says some lenders were out of control in recent years and writing loans to lots of people who couldn't afford the terms, but he says the Fed should focus on banning the practices, not the loan products that were involved in all that.

Mr. ABERNATHY: To come forward with a set of regulations that deal with abuses, but don't at the same time make credit either too expensive or harder to get and less available for credit-worthy borrowers.

ARNOLD: Abernathy says, for example, loans that don't require W2 Forms or a traditional income documents were misused in recent years, but he says those loans are still appropriate for some people who were self-employed, but who can afford to buy a home.

Chris Arnold, NPR News, Boston.

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