Closing the Barn Door Department, Fed Division

A day late and a dollar short—or many multiples thereof—the Federal Reserve went ahead anyway and issued a forceful statement today to curb predatory mortgage lending.

Its action isn't going to save the economy from its mortgage meltdown mess, but the proposed Fed rule is aimed at hindering unscrupulous lenders from preying on unqualified home buyers—and perhaps even protecting would-be home buyers from their greedier selves.

The rule, which the Federal Reserve Board embraced 5 to 0, would be adopted under the Home Ownership and Equity Protection Act, to give the Board responsibility to prohibit acts and practices in connection with mortgage loans that it finds to be unfair or deceptive.

"We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated," Federal Reserve Chairman Ben S. Bernanke said in unveiling the board's effort.

"Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and, indeed, the economy as a whole," he added.

Of course, the elephant-size question—never answered—is why the Fed over looked or ignored signs that a large number of home buyers were getting home loans even though they plainly did not have the means to repay them.

Trying—if belatedly—to put the brakes on the subprime scandal, the Fed floated four protections for higher-priced mortgage loans secured by the consumer's principal dwelling:

1. Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers' ability to repay the loan.
2. Creditors would be required to verify the income and asset they rely upon in making a loan.
3. Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least 60 days before any possible payment increase.
4. Creditors would have to establish escrow accounts for taxes and insurance.

Trying to tread in a manner that won't squelch prime market loans, the Fed said it specified changes that would cover higher-priced loans in the subprime market—generally speaking those with lower initial "teaser" rates that, often within months or a year, switched to much higher rates, causing monthly payments to double or triple.

Federal Reserve Board Governor Randall S. Kroszner said that after examining the issue, the Fed had decided to try to "protect borrowers from practices that are unfair or deceptive, but to do so without unintentionally causing responsible lending to shrink or unduly limiting consumer choice."

by Elizabeth Olson