Fed Walks 'Fine Line' in Fighting Mortgage Abuse

Board Governor Kroszner says Fed needs to weed out abuses while preserving incentives for responsible lenders.
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The Federal Reserve needs to "walk a fine line" in curtailing abusive mortgage lending practices, Board Governor Randall Kroszner said Thursday.

In prepared remarks delivered at the opening of a hearing on subprime lending, Kroszner said, "We must determine how we can help to weed out abuses while also preserving incentives for responsible lenders."

The Fed has authority to regulate mortgage lending under the Home Ownership and Equity Protection Act. Thursday's hearing came in response to a rise in foreclosures among subprime borrowers over the past year.

The percentage of subprime homeowners with adjustable-rate mortgages who entered the foreclosure process jumbed to 3.3% in the first quarter from 2.7% in the fourth quarter of 2006, according to a survey released Thursday by the Mortgage Bankers Association.

The Fed hearing focused on two of the tools the Fed has at its disposal to combat abusive lending: lender disclosure to consumers and rules that prohibit or restrict lending practices that are "unfair or deceptive."

Kroszner said the four practices most frequently cited as troublesome are prepayment penalties, lack of escrows for insurance and taxes, low-documentation lending, and failure to give adequate consideration to a borrower's ability to pay off a loan.

A day earlier, House Financial Services Committe Chairman Barney Frank reportedly threatened to strip the central bank's authority to ban certain high-risk lending practices if it did not use this power soon.

Consumer advocacy and community development groups expressed concerns about the financial harm resulting from predatory lending practices. "Our neighborhoods are being torn apart by predatory lending and foreclosures," Maude Hurd, national president of ACORN said in a press release. "How many more families have to lose their homes before the Federal Reserve will use its power and do something to stop this problem?"

But industry groups argued that expanding HOEPA to address abusive mortgage lending practices would not effectively solve the problem. "Expanding consumer knowledge and awareness, not restricting consumer choice, should be the goal of any proposed guidance, regulation, or legislation aimed at curbing abusive lending practices," Harry Dinham, president of the National Association of Mortgage Brokers, said in a press release.