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Regulators set new subprime loan standards

U.S. bank regulators issued new standards for subprime mortgage lending Friday that includes several new consumer protections.
/ Source: The Associated Press

Banking regulators on Friday completed guidelines that call on lenders to strictly evaluate borrowers’ ability to repay home loans.

The guidance issued by the Federal Reserve and the other four federal agencies that regulate banks, thrifts and credit unions, comes in response to an increasingly troubled housing market and pressure from Congress. Home prices have been falling and mortgage defaults have been rising, especially among so-called subprime mortgages given to buyers with shaky credit.

The standards, which are voluntary and only apply to federally regulated lenders, calls for verification of borrowers’ incomes in most cases. Consumers should have clear disclosures of their mortgage terms and should have at least 60 days to refinance a loan that is about to jump up to a higher rate without penalty.

In a prepared statement, Federal Reserve Governor Randall S. Kroszner said “it’s only good business sense for the lenders and it is the right thing to do for the borrowers’ sake.”

The chair of the Mortgage Bankers Association said the guidelines come with a downside — they will reduce the availability of credit for borrowers — and he urged Congress not to pass legislation that would put similar standards for borrowers into law.

Lawmakers, some of whom accuse the Fed of being lax in its oversight of the mortgage market for many years, have been urging the central bank to strengthen the guidelines. While the guidelines would not affect state-regulated mortgage companies, many state banking regulators are expected to follow suit.

In addition to the Fed, the agencies issuing guidance are the Federal Deposit Insurance Corp., the National Credit Union Administration, and the Treasury Department’s Office of the Comptroller of the Currency and Office of Thrift Supervision.

Sheila Bair, the FDIC’s chairman, said in a statement that, because the guidelines won’t affect non-bank lenders, who have been the main originators of subprime loans, it is “essential for Congress or the Federal Reserve to establish comparable principles” for all lenders.

Indeed, the Fed is weighing a crackdown on all lenders, not just those who are federally regulated, and several Democratic lawmakers are pushing for tougher standards.

In recent weeks, the mortgage market’s troubles have again sparked fears that they could impact the broader economy. Two Bear Stearns Cos. hedge funds nearly collapsed due to bad bets on mortgage securities.

Banc of America Securities said in a report last week that the troubles could signal the “tipping point of a broader fallout from subprime mortgage deterioration” that could lead to higher rates for new home loans.

Homeowners with about $515 billion in adjustable-rate home loans will see their monthly mortgage bills rise this year as rates reset to higher levels, and another $680 billion worth of mortgages will reset next year, the Banc of America report said. Of those adjustable rate loans, more than 70 percent are subprime.